- TAXPAYER RIGHTS

[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]

TAXPAYER RIGHTS

=======================================================================

WRITTEN COMMENT

and

HEARING

before the

SUBCOMMITTEE ON OVERSIGHT

of the

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

__________

Taxpayer Rights Proposals

AND

Recommendations of the National Commission on Restructuring the
Internal Revenue Service on Taxpayer Protections and Rights

SEPTEMBER 26, 1997

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Serial 105-62

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Printed for the use of the Committee on Ways and Means

U.S. GOVERNMENT PRINTING OFFICE
53-803 CC WASHINGTON : 1998
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
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COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

A.L. Singleton, Chief of Staff

Janice Mays, Minority Chief Counsel

______

Subcommittee on Oversight

NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
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C O N T E N T S

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Page

TAXPAYER RIGHTS PROPOSALS

Advisory of September 8, 1997, announcing request for written
comments....................................................... 1

______

American Society for Quality, Milwaukee, WI, statement and
attachments.................................................... 4
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RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE
INTERNAL REVENUE SERVICE ON TAXPAYER PROTECTIONS AND RIGHTS

Advisory of September 17, 1997, announcing the hearing........... 10

WITNESSES

Internal Revenue Service, Hon. Michael P. Dolan, Acting
Commissioner................................................... 23
U.S. Department of the Treasury, Hon. Donald C. Lubick, Acting
Assistant Secretary, Tax Policy................................ 49
Internal Revenue Service:
Hon. Stuart L. Brown, Chief Counsel.......................... 61
Lee R. Monks, Taxpayer Advocate.............................. 68
U.S. General Accounting Office, James White, Associate Director,
Tax Policy and Administration Issues, General Government
Division; Accompanied by Lynda Willis, Director, Tax Policy and
Administration Issues; and Tom Short, Assistant Director....... 80

______

American Bar Association, Pamela F. Olson........................ 100
American Institute of Certified Public Accountants, Michael E.
Mares.......................................................... 109
Community Tax Law Project, Nina E. Olson......................... 145
Computer Language Research, Inc., Stephen T. Winn................ 155
Kingston, Hon. Jack, a Representative in Congress from the State
of Georgia..................................................... 19
National Association of Enrolled Agents, Joseph F. Lane.......... 122
National Society of Accountants, Roger Harris.................... 139
National Taxpayers Union, Bob Kamman............................. 130
Padgett Business Services, Roger Harris.......................... 139
Software Publishers Association, Stephen T. Winn................. 155

SUBMISSIONS FOR THE RECORD

Caplin, Mortimer M., Caplin & Drysdale, statement................ 169
Christian, George, Columbia, MD, statement....................... 172
Dillon, Wallace M., Jr., Blauvelt, NY, letter and attachments.... 175
Price Waterhouse LLP, statement.................................. 181
Securities Industry Association, statement....................... 183

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
September 8, 1997
No. OV-8

Johnson Announces Request for Written

Comments on

Taxpayer Rights Proposals

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee is requesting written public comments for the record from
all parties interested in legislative proposals concerning taxpayer
rights, including those contained in H.R. 2292, the ``Internal Revenue
Service Restructuring and Reform Act of 1997,'' which implements the
June 25, 1997, Report of the National Commission on Restructuring the
Internal Revenue Service (IRS).

BACKGROUND:

Congress passed the original Taxpayer Bill of Rights in 1988 (P.L.
100-647). It expanded taxpayer safeguards further by the passage of the
Taxpayer Bill of Rights 2 (TBOR 2) in 1996 (P.L. 104-168). The Report
of the Restructuring Commission builds on this foundation of taxpayer
rights by proposing 21 additional measures to improve taxpayer rights.

The taxpayer rights proposals of the Restructuring Commission are
contained in Title III (Taxpayer Protection and Rights) of H.R. 2292.
In general the recommendations would:

1. Strengthen Taxpayer Assistance Orders by allowing the Taxpayer
Advocate to consider more factors in determining whether or not a
taxpayer is experiencing a ``significant hardship.''

2. Expand the rights of taxpayers to recoup legal expenses from the
IRS by allowing a taxpayer who prevails over the IRS to seek
reimbursement of expenses incurred after the receipt of a preliminary
notice of deficiency; i.e., the 30-day letter.

3. Allow taxpayers to recover up to $1 million from the IRS for
negligent collection actions.

4. Require the IRS to disclose to taxpayers the reasons their tax
returns were selected for audit.

5. Improve the protection of IRS records by the National Archives.

6. Direct the Joint Committee on Taxation to study the provisions
of the tax law regarding taxpayer confidentiality and third party
access to tax return information.

7. Improve public access to IRS material under the Freedom of
Information Act.

8. Direct the IRS to ensure that ``offers-in-compromise'' provide
taxpayers with an adequate means to provide for basic living expenses.

9. Eliminate the interest rate differential on overpayments and
underpayments of tax liability.

10. Eliminate the ``failure to pay'' penalty on taxpayers who enter
into installment agreements with the IRS.

11. Provide most taxpayers with an automatic right to an
installment agreement for tax liabilities of $10,000 or less.

12. Require that checks for the payment of taxes be made payable to
Treasurer, United States of America.

13. Direct the IRS to make matching grants to support low-income
taxpayer clinics.

14. Expand the jurisdiction of the U.S. Tax Court and increase the
ceiling on ``small cases'' from $10,000 to $25,000.

15. Require the IRS to establish a toll-free ``hotline'' for
taxpayers to register complaints about misconduct by IRS employees.

16. Improve the rights of taxpayers during IRS interviews.

17. Direct the IRS to establish procedures for alerting married
taxpayers about their joint and several liabilities on all tax forms,
publications, and instructions.

18. Direct the IRS to notify taxpayers of their right to refuse to
extend the statute of limitations.

19. Direct the IRS Taxpayer Advocate to report to Congress on the
administration and implementation of the tax penalty reforms contained
in the Omnibus Budget Reconciliation Act of 1989.

20. Direct the Secretary of the Treasury and the U.S. General
Accounting Office (GAO) to study the feasibility of treating
individuals separately for tax purposes, including recommendations for
eliminating the marriage penalty.

21. Direct the GAO to prepare a report for Congress on the burdens
of proof for taxpayers and the IRS for controversies under the tax law.

Title I of H.R. 2292 contains several proposed changes related to
the IRS Taxpayer Advocate. For example, it provides that the selection
of the Taxpayer Advocate be approved by the Oversight Board, that the
Taxpayer Advocate must agree not to accept further employment with the
IRS for the five-year period after he or she ceases to be Taxpayer
Advocate, and that the Taxpayer Advocate must monitor the coverage and
allocation of local taxpayer advocates. The Subcommittee on Oversight
is especially interested in receiving written comments on the 21
specific taxpayer rights proposals contained in Title III, and the
changes proposed to the operation of the Taxpayer Advocate contained in
Title I of H.R. 2292.

The Subcommittee is also interested in receiving written comments
on legislation introduced during the 105th Congress which is relevant
to the objective of improving taxpayers rights. Examples of such
legislation include H.R. 1227, the ``Internal Revenue Service
Accountability Act,'' which would provide for increased accountability
by IRS agents and other Federal officials in tax collection practices
and procedures, and H.R. 367, which would place the burden of proof on
the IRS in court proceedings and require judicial consent before the
IRS could seize a taxpayer's property by levy.

Finally, the Subcommittee is interested in receiving written
comments from the public regarding other legislative proposals
concerning taxpayer rights which it may wish to bring to the
Subcommittee's attention.

In announcing this request for comments, Chairman Johnson stated:
``There will always be a need for stronger taxpayer rights as long as
we continue to receive complaints from our constituents about their
experiences in dealing with the IRS. The Subcommittee will be exploring
various proposals in anticipation of a hearing later this month on the
Commission's taxpayer rights recommendations.''

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their name, address and comments date noted on label, by the close of
business, Monday, September 22, 1997, to A.L. Singleton, Chief of
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102
Longworth House Office Building, Washington, D.C. 20515.

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Statement of American Society for Quality

Taxpayer rights: a customer satisfaction issue

If one considers the taxpayer as a customer of the Internal
Revenue Service, then the taxpayer's most fundamental right is
to expect good management and accountability on the part of the
Internal Revenue Service. Other rights, such as the expectation
of fair and courteous treatment, flow from this basic right and
can be most reliably ensured only when this fundamental right
has been secured. The way to accomplish that is through an
effective quality system that is driven by customer
satisfaction considerations and ingrained in the culture,
management philosophies, and work processes of the
organization.
A good customer service management program goes way beyond
tracking customer satisfaction measures and responding to
complaints. It treats its customers as a valuable asset and
seeks their input and insight to drive not only continuous
improvement but also innovation.

Title III Proposals

Among the 21 specific taxpayer rights proposals contained
in Title III of HR 2292, proposal #15 offers the most
reasonable opportunity for comment by the American Society for
Quality. This proposal requires the IRS to establish a toll-
free hotline for taxpayers to register complaints about
misconduct by IRS employees.
The groundbreaking studies on complaint handling done by
TARP (Technical Assistance Research Programs) documented the
value of taking steps to increase the rate of customer contact
for any type of organization. So a proposal to make it easy for
people to complain or offer suggestions makes sense. But the
TARP studies also revealed that relying too heavily upon
complaints data is a mistake due to the high proportion of
dissatisfied customers who never complain. Furthermore, ACSI
data on the IRS indicate public dissatisfaction with the
agency's handling of a high rate of complaints. The
ineffectiveness of the IRS's complaint resolution process in
general is a major contributor to customer dissatisfaction as
revealed in the ACSI. Therefore, simply adding a new hotline
feature on to an already poorly functioning process does not
offer the prospect of any significant improvement and could
make the situation worse. Nor is it reasonable to expect that a
new, separate system for handling complaints of misconduct
would be any more effective than existing complaint handling
systems.
What would seem to be indicated is an improvement in the
overall system of dealing with complaints. In our report to the
National Commission on Restructuring the IRS, one of our
recommendations was for the IRS to undertake a new analysis of
the complaints its customers are making. While the serious
nature of a misconduct allegation might warrant special
handling (a sort of triage system for handling complaints of
varying criticality, perhaps), we do not see merit in
establishing a new, separate system for handling complaints of
this nature. Rather, fix the whole system and ensure that it is
capable of dealing with all types of complaints.
Many of the other specific taxpayer rights proposals
contained in Title III of H.R. 2292 deal with procedures that
are not within the area of expertise of the American Society
for Quality. Our observation is that these recommendations deal
with taxpayer relations at the point beyond which things have
already gone wrong. We believe that the greatest long-term
benefits from efforts to improve the IRS will be achieved when
primary attention is given at the ``things done right'' stage,
well before they reach this point.
Therefore, while we believe that the Title III proposals
will help to solve some current problems, we urge this
Committee also to advocate for fundamental upgrading in the
IRS's customer service attitude and practices and to couple the
upgrade with an organization-wide self-assessment of the IRS
quality system according to the Baldrige criteria for
performance excellence. A thorough review of this kind will
help to identify performance measurements and customer
satisfaction measurements that complement each other in order
to enhance the taxpayer's interactions with the agency.
In addition, currently available data on customer
satisfaction with the IRS from the American Customer
Satisfaction Index (ACSI) can be used as a benchmark for
overall satisfaction. Future changes in the ACSI ratings for
the IRS should be compared to currently available baseline
readings to see if there is any improvement in satisfaction
after any of the Title III proposals have been implemented.

Summary

In summary, we believe that the taxpayer rights proposals
being considered by this Committee will solve certain immediate
problems. But we believe the Oversight Subcommittee of the
House Ways and Means Committee will be missing a good
opportunity to cause more far-reaching improvement if it does
not push for more fundamental change in the processes and
management systems that play a large part in determining
customer satisfaction with the Internal Revenue Service.
Strengthen the systems that will ensure the taxpayer's basic
right to expect good management at the IRS and you will do much
to prevent problems in the future.

EXHIBIT A

Statement of Dr. Jack West, ASQC, National Commission on Restructuring
the IRS, September 10, 1996

Doing the right thing right the first time is the universal
objective for any organization with a goal of satisfying its
customers. This goal applies equally to the public sector as it
does to the private sector. My purpose is to share information
on the two components of this basic principle that should be
helpful to this Commission and the Internal Revenue Service.
The two components are doing the right thing (which addresses
the question of what to do) and doing it right the first time
(which addresses the question of how to do it well).

Doing The Right Thing

The last word in IRS is service, which implies there must
be customers for that service. Accordingly, the views of the
customers must play a big role in determining the way the
agency achieves its mission, i.e., what it does.
Organizations, including the IRS, have a powerful new tool
to help them better understand what their customers think of
them. It is the American Customer Satisfaction Index (ACSI) the
first uniform national measure of quality, which has been
operational for about three years. (The attached Appendixes
contain additional information on ACSI makeup and
methodologies.) Briefly, the key point about this measure for
this Commission's consideration is that ACSI compares customer
experience to their expectations. It does this through
thousands of interviews with customers of 200 companies and
agencies whose products and services constitute close to half
of the nation's gross domestic product. In addition to the IRS,
other agencies from the public sector included in the ACSI are
central city and suburban trash collection services, central
city and suburban police services, and the US Postal Service.

IRS Data from the American Customer Satisfaction Index
------------------------------------------------------------------------
1994 1995 1996
------------------------------------------------------------------------
ACSI Rating..................................... 55 54 50
Perceived Quality............................... 66 65 62
Expectations.................................... 57 59 56
Complaints (%).................................. 23 16 25
------------------------------------------------------------------------

ASQC and the University of Michigan Business School, co-
sponsors of the American Customer Satisfaction Index, were not
surprised when the first ACSI released in October 1994 showed
that users of the Internal Revenue Service gave that agency a
lower customer satisfaction rating than customers gave any of
the other 200 companies and government agencies in 34
industries measured in the index. On the zero to 100 scale used
by ACSI, satisfaction with the IRS registered 55, compared to a
national average of 75.
Unlike customers of the other 200 measured companies and
agencies, users of the Internal Revenue Service do not choose
the IRS as a supplier. Rather, use is required of them by law.
However, the IRS is not the only monopolistic organization US
taxpayers deal with. Other examples that the ACSI measures
include the telephone and electric utilities as well as police
and garbage collection. All of these organizations provide
better customer satisfaction than the IRS. So it is clearly
possible for organizations that customers must deal with to
provide higher levels of customer satisfaction.
IRS is included in the ACSI because it is a major federal
government agency with which the vast majority of US households
have contact. ACSI is an indicator of the quality of goods and
services available to household consumers. It is broadly
representative of the US economy; government is 13% of the
Gross Domestic Product.
While it is not surprising that IRS ranked lowest among
measured organizations--in comparison with companies producing
goods and services for which customers make brand preference
choices--the story of customer satisfaction with the IRS is not
a question of why it ranked lowest but why, after two years of
stable customer satisfaction in 1994 and 1995, did its rating
drop significantly in 1996?
In the second year of the ACSI, the IRS rated a 54, which
is statistically unchanged from the prior year. This year,
however, is markedly different. Satisfaction with the service
provided by the IRS dropped to 50, which is the lowest score
received by any measured organization in the three-year history
of the index. The root of the dissatisfaction lies in three
primary areas: low expectations, poor service quality as
perceived by the taxpayers, and ineffective handling of a high
rate of complaints.
Customer expectations affect overall satisfaction by
setting the standard against which actual performance is
measured. The IRS failed to meet even the low expectations set
by the taxpayers, which is demonstrated by the low perceived
quality score.
Customer complaints constitute the third indication of low
satisfaction. Fully one out of four taxpayers reported that
they complained either formally by phone or mail or by
informally expressing a verbal complaint to IRS personnel.
While the percentage of IRS customer complaints is not atypical
for service organizations, the ineffectiveness of the IRS's
complaint resolution process is contributing to customer
dissatisfaction.
The IRS will need more detailed customer research than that
provided by a macro indicator like the ACSI to identify
precisely which attributes of its products (such as tax forms
and instructions) and service (response to calls for
information, filing convenience) are having the greatest
effects on its decline in quality in the eyes of its users.
That the IRS is a public sector organization with no
competition is no reason to dismiss its low customer
satisfaction ratings, as the experience of other ACSI measured
organizations shows. Other organizations measured by ACSI
operate under monopolistic conditions, and all have higher ACSI
ratings.
The US Postal Service has been using customer research, and
operating on that research, to make change. USPS is succeeding,
as reflected in its rising ACSI scores for mail delivery and
counter services from 61 in 1994 to 69 in 1995 to 74 in 1996--
the most dramatic improvement of the 200 ACSI measured
companies and agencies.
To improve, the IRS will need to set a course similar to
that of the postal service in obtaining customer feedback,
prioritizing potential improvements, then taking actions to
make the prioritized changes. A first step is for the IRS to
analyze the complaints taxpayers are making.

Doing It Right The First Time

One of the most forceful messages I hope to leave with this
Commission is that the principles of quality management can
indeed be applied to a public sector agency such as the IRS.
In fact, within the quality profession we have seen
documented evidence in recent years of IRS improvement
activities and results. The Commission undoubtedly will hear
about such activities from IRS representatives, so I will not
elaborate on them. However, these efforts, reported in
professional journals and magazines and at professional
conferences, deserve to be recognized and applauded. Yet in
spite of many good efforts, customer satisfaction with the IRS
declines and we are left to wonder why.
From the viewpoint of an outside observer from the quality
profession, the visible quality improvement activity appears to
have reached a peak several years ago. It is not clear that the
laudable efforts within various IRS units--efforts aimed at
making a shift toward the encouragement of voluntary
compliance, improving customer satisfaction, reducing burdens
on taxpayers, maintaining a quality workforce, upgrading
equipment, and improving financial performance--have been
deployed throughout the organization. If there is a pattern of
improvement efforts, it seems to be one of isolated pockets of
excellence rather than a seamlessly integrated system in which
organizational learning and diffusion of success are the norms.
To achieve such a system, there is no better guide than the
criteria and the core values and concepts of the Malcolm
Baldrige National Quality Award.
One of the primary objectives of the Baldrige award is to
provide a vehicle for self-assessment. It is now widely
recognized as the benchmark for organizational assessment which
is used by many organizations as a self-assessment and
improvement tool.
Baldrige calls for a three-pronged focus: an integrated,
systematic approach; deployment throughout the organization;
and measurable results. It is grounded in the core values and
concepts of quality; it demands a systems perspective and a
process focus; and it calls for continuous refinement through
cycles of learning about organization-wide improvement. The
criteria themselves have been tested and refined and are
broadly applicable to any organization.

Baldrige Core Values and Concepts

Customer-driven quality
Leadership
Continuous improvement and learning
Employee participation and development
Fast response
Design quality and prevention
Long-range view of the future
Management by fact
Partnership development
Corporate responsibility and citizenship
Results orientation
Federal agencies find themselves facing mandates such as those
spelled out in the Government Performance and Results Act of 1993 and
the Executive Order on Setting Customer Service Standards, which aim to
promote a new focus on results, service quality, and customer
satisfaction. A Baldrige-type self-assessment could aid the agency in
complying by guiding it in building a truly integrated and effectively
deployed quality system rather than an odd mix of programs put together
in order to meet various externally imposed requirements.

Conflicting Functions: Customer Service or Compliance?

Demands placed on the Internal Revenue Service to provide
better customer service inevitably put it in conflict with its
duty to ensure taxpayer compliance with the tax laws and
regulations. From experiences in the private sector during the
last decade, as businesses have struggled with becoming more
data-driven, we have learned a simple truth: the things that
get measured are the things that get emphasized. And we have
seen that what appears most important to the managers who
devise the measurement systems is not always most important to
customers. The danger is magnified when tensions exist as a
result of conflicting functions that compete for the limited
attentions and resources of the organization. The lesson here
for the IRS and for this Commission is to examine what is
measured and determine if the things that are important to the
customers of the IRS are the things that are being measured,
monitored, and managed. Or is there an imbalance between what
is measured and what is desired?

Preliminary Recommendations

As the Commission begins its review, there are a number of
areas that we recommend be investigated and a number of
questions to be raised, based on the foregoing comments
regarding ACSI findings and the Baldrige-based model for
organizational assessment and improvement.
Performance measurements and goals currently in use. An
examination of performance measurements utilized by the IRS
should be undertaken to determine if these measurements
encourage the desired organizational behavior. Are they
balanced--that is, properly focused on requirements critical to
the agency's customers rather than being weighted toward
internal requirements of interest to agency staff and
management.?

How does the IRS set priorities?

What forms of assessment are used? Has the agency done a
Baldrige-type self-assessment?
Analysis of existing customer complaint data. What does the
IRS already know about sources of dissatisfaction? What else
needs to be learned about dissatisfiers?

Review of current improvement plans.

What improvement activities would have greatest effect on
satisfaction? In this regard, the ACSI impact model can be a
useful guide.
Review of IRS mission. A careful re-examination of the IRS
mission--and the ways in which the mission is interpreted by
both the IRS management and the legislative and/or
administrative bodies that write tax laws/regulations or have
IRS oversight--may yield valuable insights. Most organizations
have multiple constituencies and find themselves pulled in
conflicting directions by the different expectations of each.
Successful organizations are able to find a balance that
satisfies the needs of all constituencies. The IRS needs to
find that delicate balance.
Involving IRS personnel in solutions. While guidance and
constructive criticism from above or from outside the agency
are helpful in making major changes, it is necessary to ensure
that ownership of the processes and their improvement becomes
resident within the agency so that desired changes take root
initially and become institutionalized.
Learning from previous IRS quality efforts. Lessons from
both the successes and failures of previous activities
undertaken by the IRS may shed light on reasons for isolated
pockets of excellence that demonstrate accomplishments which
have not spread throughout the agency.
ASQC has a reservoir of talent that could be tapped to
assist the Internal Revenue Service in such areas as customer
satisfaction research, self-assessment, and training in
improvement techniques. We stand ready to offer this assistance
and knowledge at the request of the agency and the Commission.

EXHIBIT B

About the American Customer Satisfaction Index

The American Customer Satisfaction Index (ACSI) is based on
approximately 50,000 annual customer interviews with
respondents screened and qualified as recent customers of 200
companies and agencies. The households from which respondents
are screened are selected as random-digit-dial replicate
national samples (48 samples per year) of telephone households
in the continental United Sates. In each household, an adult
18-84 years of age is selected for screening, choosing the
adult with the birthday date closest to the date of interview.
Qualified customers are asked multiple-choice questions
about their expectations, perceptions of quality, complaints--
and for customers of private-sector companies, perceptions of
value, repurchase intentions, and price tolerance. All
customers are asked three questions about satisfaction: (1)
overall satisfaction, (2) whether goods or services met,
exceeded, or fell short of expectations, and (3) how what was
received compared to the ideal. Customer responses are modeled
using an econometric model designed at the National Quality
Research Center, University of Michigan Business School, to
produce the ACSI and the variables that are drivers of
satisfaction or are outcomes of satisfaction.
Each year 250 users are qualified for IRS interviews. This
year's screening question was, ``Did you file an income tax
return for 1995 making use of forms and instructions, or
information services of the Internal Revenue Service?''
Sampling error for the national ACSI is plus or minus 0.3
points, at the 90% confidence level, and for the IRS is plus or
minus 4 points. The ACSI for the IRS in 1996 is significantly
less than the 1994 and 1995 scores--greater than could be
caused by sampling error.

RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE
INTERNAL REVENUE SERVICE ON TAXPAYER PROTECTIONS AND RIGHTS

----------

FRIDAY, SEPTEMBER 26, 1997

House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:15 a.m., in
room 1100, Longworth House Office Building, Hon. Nancy L.
Johnson (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
September 17, 1997
No. OV-9

Johnson Announces Hearing on

the Recommendations of the National Commission

on Restructuring the Internal Revenue Service

on Taxpayer Protections and Rights

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing to examine the recommendations of the
National Commission on Restructuring the Internal Revenue Service (IRS)
with regard to taxpayer protections and rights. The hearing will take
place on Friday, September 26, 1997, in the main Committee hearing
room, 1100 Longworth House Office Building, beginning at 10:00 a.m.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include, among others officials from the U.S. Department
of the Treasury and the IRS, and representatives from tax practitioner
organizations and other stakeholders with expertise in IRS practice and
procedural issues. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing [See Advisory No. OV-8].

BACKGROUND:

The National Commission on Restructuring the IRS was established by
Public Law 104-52. Its purpose was to review the present practices of
the IRS and to make recommendations for modernizing and improving its
efficiency and taxpayer services. The Commission's June 25, 1997,
report contains recommendations relating to Executive Branch governance
and management of the IRS, Congressional oversight of the IRS,
personnel flexibilities, customer service and compliance, technology
modernization, electronic filing, tax law simplification, taxpayer
rights, and financial accountability.

The Commission's recommendations are embodied in H.R. 2292, the
``Internal Revenue Service Restructuring and Reform Act of 1997,''
which was introduced on July 30 by Reps. Rob Portman (R-OH) and Ben
Cardin (D-MD). H.R. 2292 contains a number of provisions designed to
build upon the original Taxpayer Bill of Rights passed by Congress in
1988 (P.L. 100-647), and expanded in last year's Taxpayer Bill of
Rights 2 (TBOR 2) (P.L. 104-168).

On September 8, 1997, Chairman Johnson released an Advisory
requesting written public comments on these taxpayer rights proposals
[See Advisory No. OV-8]. On September 26, 1997, the Subcommittee will
receive oral testimony on the taxpayer rights proposals contained in
Title III of H.R. 2292 from invited witnesses.

In announcing the hearing Chairman Johnson stated: ``I am
enthusiastic about exploring more ways to strengthen protections for
taxpayers in their dealings with the IRS. The combination of the
written public comments and the testimony at our hearing will help us
develop the best possible legislation to improve taxpayer rights. Our
objective is to do the groundwork on taxpayer rights issues in
anticipation of full Committee action on H.R. 2292 sometime in
October.''

FOCUS OF THE HEARING:

The Subcommittee will examine the Commission's recommendations for
taxpayer rights, which are contained in Title III of H.R. 2292. The
Subcommittee will also review other taxpayer rights initiatives which
the witnesses may offer as part of their testimony.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit at least six (6)
single-space legal-size copies of their statement, along with an IBM
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1
format only, with their name, address, and hearing date noted on a
label, by the close of business, Monday, October 6, 1997, to A.L.
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of
Representatives, 1102 Longworth House Office Building, Washington, D.C.
20515. If those filing written statements wish to have their statements
distributed to the press and interested public at the hearing, they may
deliver 200 additional copies for this purpose to the Subcommittee on
Oversight office, room 1136 Longworth House Office Building, at least
one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Note: All Committee advisories and news releases are available on
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.

The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.

Chairman Johnson. The hearing will come to order, please.
The hearing will come to order. As we convene, I am going to
recognize for an opening statement my Chairman, Chairman Archer
of Texas, and I very much appreciate his taking the time to be
here. He has held, at the Full Committee level, the hearings on
the difficult governance issues, and I am very pleased to have
him here today as we convene this hearing on the Taxpayer Bill
of Rights provisions of the reform legislation.
Chairman Archer.
Mr. Archer. Thank you, Madam Chair. And my gratitude to all
the Members of the Subcommittee on both sides of the aisle who
have spent so much time, along with the Full Committee, in
seeking a way to improve the way the IRS works.
Today's hearing marks the fourth and final hearing that our
Committee will hold this year before we act. And as the Senate
hearings have shown, the IRS does need major reform. And as
Mrs. Johnson, our Chairman, has pointed out, many people at the
agency do follow the rules and collect the Nation's revenues in
an appropriate manner; but there are too many instances in
which taxpayers are denied their fundamental rights. Money is
coerced from people who do not owe it. And the defenseless and
the weak can become IRS targets.
The time has come to get the IRS off the back of the
American people. Even with the current income tax, it makes
things hard on the IRS. I believe the IRS, its management, and
its agents can do better.
Today's hearing focuses on 21 new measures that enhance
taxpayer rights. These include making it easier for taxpayers
to sue the IRS for negligence for amounts up to $100 million,
allowing taxpayers who are wrongly accused by the IRS a greater
ability to recoup their legal costs, and forcing the IRS to
reveal to taxpayers the reasons that their tax returns were
selected for audit.
Subjective, selective auditing of taxpayers in this country
cannot be accepted. And it is our responsibility and
stewardship to assure that that does not happen.
These recommendations are contained in bipartisan
legislation offered by Congressman Portman and Senator Kerrey,
as well as by Congressman Cardin on the Democrat side of this
Committee. It should be no surprise that cosponsorship of their
bill has surged recently. I am pleased to say that, when it
comes to fixing the IRS, Congress is working for the American
people. The Senate has pointed out the problems, and the House
is working on these solutions.
Beyond these 21 steps, I believe the IRS at its most senior
level is in need of new thinking. The agency needs a breath of
fresh air. If ever there was a time to appoint a board of
directors that includes nongovernmental people to fix the IRS,
the time is now.
The Treasury Department proposal to maintain political
control of the IRS has not and will not work. If Treasury was
up to the job, the IRS would have been fixed long, long ago.
Because what has come out in these hearings has been reported
anecdotally over and over again in every congressional office
across this country for the last 15 to 20 years. It is not new.
The American people, I am sure, are not shocked by what they
have heard in the hearings that have occurred in the last week
or two.
Let me offer one final thought. When Congress pointed out
the fraud problems in Medicare, no one said we were HCFA
bashing. When we complained about $1,200 toilet seats at the
Pentagon, nobody said we were defense bashing. So why when
Congress exercises its constitutional obligation to oversee the
IRS, do some accuse us of IRS bashing?
Let me advise the defenders of the status quo, I do not
intend to yield in my determination to fix the IRS. Of course,
in the end, I think the ultimate fix is to tear the income tax
out by its roots so that there is no need for an IRS to
implement and enforce a virtually impossible Tax Code.
The American people expect no less from us, and that's why
this is my top priority for this fall. I intend to mark up
legislation as soon as the first week that we come back from
the October recess. And I have received a commitment from the
leadership that the Ways and Means bill will be considered on
the floor of the House before we adjourn. I hope the Senate can
find it in its wisdom to also take up this legislation this
year.
Madam Chairman and Members of the Subcommittee, thank you
so much for your efforts. I look forward to receiving your
recommendations in the Full Committee.
[The opening statement follows:]

Opening Statement of Chairman Bill Archer, a Representative in Congress
from the State of Texas

Good morning.
Thank you Nancy. Thanks to you and all the members of the
Oversight Subcommittee who have worked since July on improving
the Internal Revenue Service. Today's hearing marks the fourth
and final hearing our Committee will hold this year on how to
fix the IRS.
As this week's Senate hearings have shown, the IRS is in
need of major reform. As the Chairwoman pointed out, many
people at the agency follow the rules and collect the nation's
revenues in an appropriate manner, but there are too many
instances in which taxpayers are denied their fundamental
rights, money is coerced from people who do not owe, and the
defenseless and the weak become IRS targets.
The time has come to get the IRS off the backs of the
American people. Even with the current income tax that makes
things hard on the IRS, I believe the IRS, its management, and
its agents can do better.
Today's hearing focuses on twenty-one new measures that
enhance taxpayer rights. These include making it easier for
taxpayers to sue the IRS for negligence for amounts up to
$100,000 million; allowing taxpayers who are wrongly accused by
the IRS a greater ability to recoup their legal costs; and
forcing the IRS to reveal to taxpayers the reasons their tax
returns were selected for audit.
These recommendations are contained in bi-partisan
legislation offered by Congressmen Portman and Cardin. It
should be no surprise that co-sponsorship of their bill has
surged recently. I'm pleased to say that when it comes to
fixing the IRS, the Congress is working for the American
people. The Senate has pointed out the problems and the House
is working on the solutions.
Beyond these 21 steps, I believe the IRS at its most senior
level is in need of new thinking--the agency needs a breath of
fresh air. If ever there was a time to appoint a Board of
Directors that includes non-governmental people to fix the IRS,
the time is now. The Treasury Department proposal to maintain
political control of the IRS has not and will not worked. If
Treasury was up to the job, the IRS would have been fixed long
ago.
Let me offer one final thought. When Congress pointed out
the fraud problems in Medicare, no one said we were HCFA-
bashing. When we complained about $1200 toilet seats at the
Pentagon, no one said we were Defense-bashing. So why when
Congress exercises its Constitutional obligation to oversee the
IRS, do some accuse us of IRS bashing?
Let me advise the defenders of the status-quo, I won't
yield in my determination to fix the IRS. The American people
expect no less and that's why this is my top priority for this
fall. I intend to mark up legislation as soon as the first week
back from October recess and I have received a commitment from
the leadership that the Ways and Means bill will be considered
on the floor of the House before we adjourn for the year.
Madam Chairman and members of the Subcommittee, thank you
for your efforts. I look forward to receiving your
recommendations.

Chairman Johnson. Thank you very much, Mr. Chairman.
And I would now like to recognize the Ranking Member,
Congressman Rangel of New York, who also has taken the time to
join us today. We welcome you and thank you for being here.
Mr. Rangel.
Mr. Rangel. Thank you so much, Madam Chairlady, Mr.
Chairman, and the Members of the Subcommittee that have worked
so hard to oversee and try to bring some corrective measures to
the Internal Revenue Service.
I was shocked by the testimony that I heard over television
that took place in the Senate. I do hope that it is not
representative of the service that most Americans have received
over the years. I come to the table not defending the status
quo, but seriously believing that we have one of the best tax
systems in the world--where Americans acknowledge a
responsibility to their government and, in a general way, pay
their tax obligations in a voluntary way. Taxpayers must not be
subjected to the type of cruel and, indeed, inhuman treatment
as the Senate hearings demonstrated.
It would seem to me that, if I was a part of the IRS or
Treasury, I would feel the need to strongly defend the agency
and start a prosecution of those agents responsible for
treating taxpayers in the horrible ways described by the Senate
testimony.
I am very afraid that this issue might explode to become a
campaign issue. Because we have become so accustomed to the
Congress becoming the whipping boy of the Nation, it seems as
though we are trying to transfer that anger to the IRS. If
there is anyone that we all feel comfortable in taking a shot
at, it is the tax collector.
I either want to see a prosecution of the IRS employees in
these cases or some proof that that testimony that was
received--which I think really throws a wet blanket over the
hardworking IRS agents that are doing their jobs--was
inaccurate. If we have some rotten apples there, I think we
should take care of it.
Of course, if the hearings were just part of an overall
scheme to pull the IRS up by the roots, then I think we ought
to get on with that and not waste a whole lot of Federal
dollars in trying to patch something that is basically broken
and won't work.
And if it is really the complexity of the tax system, I
don't think we should blame that on the IRS. As a matter of
fact, if we were in the majority as Democrats, I wouldn't blame
it on the Congress, but we are not here. We haven't been in
charge for 3 years.
So the only answer, it would seem to me, is to simplify the
system. All it takes are votes, unless they've changed it. You
count; you get 218, and you change the system. So that everyone
can follow it, put the Federal tax return on a postcard. I like
that.
But for 3 years, we have been trying to pull this thing up
by the roots. I hear that the next thing we are going to do is
sunset the IRS. IRS employees would know that, in a few years,
there wouldn't be an IRS. I don't know which is going to come
first, elimination of the IRS, the pulling up by the roots, or
elimination of the Tax Code. But I think it is unfair, really,
for us to make the attacks and not to give people an
opportunity to defend themselves.
I want to congratulate the way the House has handled this
matter. We have done it in a civil way. Mr. Portman, Mr. Coyne
and Mr. Cardin have really tried to find out what the problems
are. They worked with the administration. And it appears to me
there are some serious differences as to whether the control
should be within the government or outside the government.
As the House debate continues, I certainly have every
reason to believe that our Chairlady will pursue the issues in
a manner that takes the heat out of the rhetoric and the effort
to generate hostility toward public servants who are just
trying to do their job. And if the process is broken, fix it.
If it ain't going to work, pull it up. If the system is not
working, change it.
I want to thank the Chairlady.
Chairman Johnson. I thank the gentleman from New York for
joining us and for his comments.
Today we will explore the recommendations of the National
Commission on Restructuring the IRS to improve the rights of
taxpayers in their dealings with the IRS. The 21 taxpayer
rights proposals embodied in title 3 of H.R. 2292, introduced
by our colleagues in the Ways and Means Committee, Rob Portman
and Ben Cardin, are the subject of this hearing.
It is sobering, and I think the Members of the
Subcommittee, especially those who have served the last session
as well as this session, would agree that it is very sobering,
after all the work we did on the Taxpayer Bill of Rights 2 and
the indepth discussions we had with the IRS during those years
and the fruitfulness of those discussions, and the clear good
will on the part of the IRS, that the kind of testimony heard
in the other body is still possible.
Clearly, we knew at the time we hadn't finished the job. We
knew at the time we were putting in place some taxpayer rights.
We asked for reports. From those reports we will draw
additional conclusions.
The Commission did an excellent job and has brought to us
21 proposals. But from the reports we asked for and the
Taxpayer Bill of Rights 2, we will draw additional conclusions.
And so this is an ongoing process.
And I would like to say that, for myself, I see the
restructuring proposal of the IRS as part of the ongoing
process of modernizing the IRS, one piece of which is making
every IRS employee out there on the frontline that deals with
the public a taxpayer service employee, not an enforcement
officer.
So there is a whole culture change for the IRS to think of
itself differently and to work differently, and that is what
the taxpayer rights initiatives have been about. And that is
what they are about.
I believe that the 21 proposals in H.R. 2292 are a good
start. We will have good testimony on them today. But I would
also say that that is not going to be the end of it, because
there are issues we are working on with the IRS that will have
a very--I think will be very helpful to us in getting at the
kinds of issues that we saw on the other side in the hearings.
I mean, who is proud of the experience that Katherine Hicks
had? Who can defend Tom Savage's treatment? Who can do anything
but anguish as Nancy Jacobs cries? And who would defend the
treatment of Monsignor Lawrence F. Ballweg?
So there is work to be done. We intend to do it. And this
hearing is a big step along that path. The hearings portrayed
an agency beset by problems, computer snafus resulting in
innocent and incorrect assessments, which taxpayers were forced
to pay because they couldn't find a single person in the IRS
who was listening and would help them.
And I am proud to say that, in my area of the country, I
have a lot of IRS employees who are very good, able folks, and
I have never been confronted with this kind of problem. So I
want to remember, we are not talking about the majority of IRS
employees; we are talking about bad apples. But they are
serious, and the problems are real: An agency dominated by
numerical performance goals that drive revenue officers and
revenue agents to improperly run up the tab on taxpayers, while
failing to consider the quality of the work performed by the
collections and examinations divisions, an agency where
accountability for misbehavior is seriously lacking.
I know from my experience as the Chairman of this
Subcommittee that the vast majority of IRS 103,000 employees
are honest and hardworking Americans who perform a difficult
public service with integrity and professionalism. But I
recognize that like all law enforcement agencies, the IRS has
attracted its share of bad apples, and fear and intimidation
are a real experience for many taxpayers in our great Nation.
Acting Commissioner Dolan made a very good first step
yesterday by acknowledging these problems directly and
announcing some significant measures that he will immediately
put in place to begin the process of reform. And I commend him.
I hope we will learn more from Mr. Dolan this morning about
those actions.
But administrative actions alone will not be enough to get
the job done. We must also take a hard look at additional
statutory changes to safeguard the rights of taxpayers.
I want to improve the tax treatment of innocent spouses who
are unfairly held liable for taxes owed by a former husband or
wife. TBOR 2 directed the Treasury Department to study this
issue and report back to Congress by January 30, 1997. Eight
months later, after repeated telephone calls, personal calls
for myself, we are still waiting for that study.
This problem is simply too important. Too many people are
abused. Too many lives are disrupted. Too many children can't
get sneakers because their mother is preoccupied with trying to
deal with the IRS and pay unmerited tax bills.
I would rather make a good faith effort to pass a partial
solution now than wait for many, many more months while the
technical experts agonize over developing some ideal or perfect
solution.
The Finance Committee's hearings strongly reinforce the
conclusions reached by the IRS Restructuring Commission during
its year-long investigation of the IRS. Thanks to the
Commission, we have a much better understanding of the problems
plaguing the agency and a roadmap for constructive solution.
The 21 provisions are a good start, a good starting point for
expanding taxpayer rights in dealing with the IRS.
This morning, we will hear from Commissioner Dolan and
Treasury officials. We will hear from organizations
representing taxpayers, to get their suggestions for additional
statutory safeguards. We will also receive testimony from the
GAO, which will report on work it is doing to evaluate the IRS
use of performance measures in the audit process.
I will now recognize my Ranking Member, Bill Coyne, for
comments before we proceed with the testimony.
Mr. Coyne. Thank you, Madam Chairman. Today we are going to
hear important public testimony, developed partially within the
Internal Revenue Service, and by Members of Congress that we
will hear from here today. And we will also hear from numerous
tax and accounting professional groups who want to improve the
taxpayers' dealings with the IRS. I welcome their testimony and
their continuing efforts to assist the Subcommittee in
reviewing the IRS administration of our tax laws.
I also look forward to receiving the Department of the
Treasury and the Internal Revenue Service's evaluation of the
numerous taxpayer rights provisions before our Subcommittee. As
the Subcommittee proceeds to discuss possible taxpayer rights
proposals for consideration by the Full Ways and Means
Committee, my hope is that we will develop a well-thought-out
and constructive package of taxpayer rights provisions.
It is important, in my opinion, that the Subcommittee's
work be directed toward addressing problems individual
taxpayers face in their efforts to comply with the Nation's tax
laws. I am particularly interested in working to address the 20
most serious problems facing taxpayers, as reported by the IRS
Taxpayer Advocate earlier this year.
Included in the Advocate's list of major taxpayer problem
areas are: Complexity of the tax law, inability to access the
IRS by telephone, erroneous and unclear IRS notices, an
inappropriate tone of IRS communications, compliance burden on
small businesses, problems with the administration of
penalties, lack of understanding of taxpayers' concerns, delays
in IRS compliance contacts, problems in maintaining taxpayers'
current addresses, problems in mailing forms and other tax
materials, mailing math error notices separate from reduced tax
refund checks, delays in the offer-in-compromise process, lack
of acknowledgment of taxpayer submissions and payments, lack of
one-stop service at the IRS, and inconvenient times and
locations for doing business with the IRS. I think these should
be our priorities.
I commend Subcommittee Chairman Johnson for holding these
hearings and look forward to working with her, the Subcommittee
Members and all Members on ways to assist taxpayers in their
interactions with the IRS. Thank you.
Chairman Johnson. Thank you, Mr. Coyne.
And I will recognize Mr. Portman, who was the House
Chairman for the Commission, for a very brief comment, and
would ask unanimous consent for all Members to insert any
opening statement they may have in the record.
Mr. Portman.
Mr. Portman. Thank you, Madam Chair. I do have a longer
statement I would like to submit for the record.
I want to thank you and commend you for holding this
hearing and for your oversight over the years. You have shown a
real commitment to oversight, which the House Ways and Means
Committee traditionally has had.
I also want to thank you for not just highlighting
problems, but also for putting the focus on solutions; and I
think this hearing today is very important in that regard. We
have heard about a lot of very serious problems at the IRS. We
have heard about it through the year-long Commission work. We
have now heard it in the last few days in the Senate Finance
Committee, which, as the Chair said a moment ago, really
reinforced and confirmed what the Commission found over a year-
long period.
Problems are much broader, of course, than just taxpayer
rights, but today's hearing is focused simply on the issue of
taxpayer rights, how to solve some of these problems, how to
level that playingfield between the taxpayer and the IRS.
H.R. 2292 which was referred to earlier, the IRS
Restructuring Reform Act that Ben Cardin and I have introduced,
addresses many of these fundamental problems, head on, from the
21 taxpayer rights provisions that are included--that we will
hear about today--in the structure reforms. It addressed really
a lot of the issues that former Commissioner Bill Coyne just
listed from the Taxpayer Advocate.
[The opening statement follows:]

Opening Statement of Hon. Rob Portman, a Representative in Congress
from the State of Ohio; and Cochairman, National Commission on
Restructuring the Internal Revenue Service

IRS Reform Bill Addresses Taxpayer Rights

At this week's Senate hearings, we all heard disturbing
stories of IRS abuses. These stories have highlighted the need
for real, substantive reform of this troubled agency. But they
come as no surprise to those of us who have worked on the IRS
Restructuring Commission for the last fifteen months.
Now that the American people better understand the real
problems at the IRS, it's time for this Congress to focus on
the real solutions. And the IRS Restructuring and Reform Act
provides long-term solutions to the very problems that the
Senate documented this week.
The goal of H.R. 2292, which I have co-sponsored with
Congressman Ben Cardin (D-MD), is to transform the IRS into an
accountable, taxpayer-friendly agency that provides twenty-
first century customer service. Increased taxpayer rights are
an essential component of this effort and an important part of
the legislation.
H.R. 2292 levels the playing field between taxpayers and
the IRS. It establishes new disincentives within the IRS for
negligent or wrongful actions by IRS personnel. It increases
the independence and powers of the Taxpayer Advocates at the
IRS. It creates a new system, including taxpayer surveys, to
evaluate IRS employees and managers on the quality of the
customer service they provide, not the amount of taxes they
collect. It allows taxpayers to receive damages for IRS
mistakes. It requires the IRS to explain to taxpayers the
reason for audits and the rights of taxpayers. And, it
implements a series of related reforms to IRS training,
workforce practices and oversight.
I commend Chairman Archer for making IRS reform a top
priority for the Ways and Means Committee this fall. And, I
commend Chairwoman Johnson for holding this timely hearing on
taxpayer rights today and for her commitment to meaningful
reform.

Mr. Portman. Again, I want to thank you, Madam Chair, for
holding the hearing, and I look forward to hearing from our
witnesses.
Chairman Johnson. Thank you. I would now like to recognize
our first witness, Hon. Jack Kingston from Georgia.
Mr. Kingston.

STATEMENT OF HON. JACK KINGSTON, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF GEORGIA

Mr. Kingston. Thank you, Madam Chair, Mr. Coyne, Mr.
Portman, Members of the Subcommittee. It is a great honor to be
with you today.
I want to testify on legislation that I am drafting, along
with Mr. McNulty and Mr. Hayworth, regarding the TRAC, our tip
reporting alternative commitment that the IRS has developed and
how it is impacting restaurants.
We have worked very carefully with your staff on it. Donna
Steele Flynn has been tremendously helpful. And we have been
trying to work through this very delicately.
But the TRAC system is a different kind of tip reporting
system, and this legislation does not seek to eliminate TRAC;
all we want to do is to make sure that, if it is, in fact, a
voluntary program, that restaurants enroll in it voluntarily.
And we have reports from many restaurants across the
country that they are being coerced into going into the TRAC
system. It appears that TRAC works for some restaurants; for
other restaurants, it does not.
I have a restaurant in my district that says the IRS
basically came and said, You will do TRAC, but if you don't, we
are going to audit you. Now, that sometimes is hard to prove.
But we actually have a couple of letters to that effect, one
from the IRS district office in Louisiana to a Texas
restaurant. And it says, and I've submitted, but I'll read it
directly, quote from the IRS letter:
``Failing to respond to this letter will be considered a
decision on your part not to participate in the Tip Income
Determination and Education Program. Nonparticipation will
result in a Notice and Demand for the taxes due on Unreported
Tip Income or a Tip Income Examination.'' In other words, we
are going to audit you.
Here is another one from New York, quote from the IRS, ``To
participate in the program, please submit the enclosed. In the
event we do not hear from you by this date, the Internal
Revenue Service will conduct reviews to determine any
additional FICA and income taxes due from you and/or your
employees.''
What our legislation is trying to do is to say, don't
necessarily--don't eliminate TRAC; I think it can be improved.
But don't coerce restaurants under the threat of an audit to
enroll in a voluntary program. And that is the gist of it,
Madam Chairman.
[The prepared statement and attachments follow:]

Statement of Hon. Jack Kingston, a Representative in Congress from the
State of Georgia

Madam Chair and Members of the Subcommittee:
Thank you for allowing me the opportunity to testify on
concerns I have raised with this committee over certain abusive
practices of the Internal Revenue Service.
I commend the committee, especially Mr. Portman, for taking
on the onerous but necessary task of restructuring the Internal
Revenue Service (IRS).
A few months ago, a restaurant owner in my district was
contacted by the IRS regarding the Tip Reporting Alternative
Commitment agreement (TRAC). As you may know, the TRAC
agreement is a voluntary agreement developed by the IRS to
improve the reporting of tip income among the restaurant
industry. Employers who sign the TRAC agree to take specific
measures including educating their employees on tip reporting,
and in turn the employers receive certain assurances by the IRS
from employer-only assessments on tips not reported by the
employees. However, the letter my constituent sent about his
conversation with an IRS agent indicated that he would be
audited if he did not sign the voluntary agreement.
I am concerned that the IRS is using the threat of an audit
to pressure more restaurateurs to sign the voluntary TRAC
agreement. And it has become evident that this practice of
intimidation is not an isolated incident.
I have a copy of a letter sent by the IRS district office
in Louisiana to a Texas restaurateur who had not yet signed the
TRAC agreement that blatantly states: ``Failing to respond to
this letter will be considered a decision on your part to NOT
PARTICIPATE...non-participation will result in a Notice and
Demand for the taxes due on the Unreported Tip Income or a Tip
Income Examination.''
I have another letter from the New York district office to
a restaurateur stating: ``to participate in the program, please
submit the enclosed....in the event we do not hear from you by
this date, the Internal Revenue Service will conduct reviews to
determine any additional FICA and income taxes due from you
and/or your employees.'' This method of compliance through
intimidation would not be acceptable in the real world and
should not be allowed to continue. The job of the IRS is to
enforce compliance with the law, not to be above the law.
At the beginning of August, I wrote a letter, signed by 56
other members of Congress, to the IRS asking Acting
Commissioner Michael Dolan to look into this practice of
intimidation. I did not receive a response until yesterday, and
aside from going into a three page explanation of the TRAC
program, nowhere in the letter does the IRS indicate that it
will address the problem or even investigate it. In fact, the
only sentence in the letter that refers to our request stated:
``(I)t is not the policy of the IRS to pressure or intimidate
any person or business with regards to any compliance.''
Certainly, if the letters I have just quoted to the members of
this committee are not threatening or intimidating, I am afraid
to find out what the IRS does consider pressure or
intimidation.
I would like to make it clear that I understand that the
IRS has the authority to perform audits for compliance with the
tax code. However, I would encourage the IRS to work with
restaurants, and other tipped-employee industries, to improve
tip reporting rather than use its authority as a means of
intimidation.
In closing, I request that this committee look into this
problem further and make certain the types of intimidation I've
cited would come to an end.

[GRAPHIC] [TIFF OMITTED] T3803.001

[GRAPHIC] [TIFF OMITTED] T3803.002

Chairman Johnson. Thank you very much for your testimony,
Jack, and for your specific example. It is, indeed, incredible
that a letter could basically say, If you don't do what we are
telling you to do, which is to take part in a ``voluntary
program,'' we will audit you. And that is exactly the kind of
agent action that we are concerned about, and why we feel the
taxpayer rights provisions have to be strengthened.
I yield to Mr. Coyne.
Mr. Coyne. I have no questions.
Chairman Johnson. Do any other Members of the Subcommittee
have questions?
Mr. Portman.
Mr. Portman. Just briefly, again, to thank you for bringing
it to the attention of the Subcommittee. And I think it is
really extortion; when you think about it, if you don't comply
with a voluntary program, you get audited. I think we will hear
later from the IRS perhaps on that issue.
There may be some even internal guidance that can be
helpful on that because I don't think that is the intent of the
program. But the fact that you do have evidence of it
occurring, and I certainly have heard from my constituent
restaurants on this issue as well, I think is something we need
to address.
Mr. Ramstad. Madam Chair.
Chairman Johnson. Excuse me. Congresswoman Thurman, and
then Mr. Ramstad.
Ms. Thurman. Mr. Kingston, in the letter, they also put in
some enclosures. Do you have those enclosures, or can you tell
us what the enclosures said?
Mr. Kingston. The letter from Texas or Louisiana? Do you
know which one? The names have been whited out for this reason.
Ms. Thurman. I am talking about the enclosures that the IRS
sent. It talks about tip facts, TEPA, some formula.
Mr. Kingston. I don't think that would be a problem to get
for you. I don't have them right now.
[The material is being retained in the Committee files.]
Ms. Thurman. I would just like to see those so I can see
what also is being sent.
Mr. Kingston. I think the gist of them is how to comply
with the law and so forth like that.
Ms. Thurman. OK. Thank you.
Chairman Johnson. Mr. Ramstad.
Mr. Ramstad. Madam Chair.
Mr. Kingston, thank you for your testimony. Be sure to
include me as a cosponsor of your bill.
Mr. Kingston. Thank you very much.
Chairman Johnson. Are there other comments or questions?
Thank you very much, Congressman Kingston. We appreciate
your testimony, and it was very much to the point.
Mr. Kingston. Thank you very much, Mrs. Johnson, for having
these hearings. And I wish you the best.
Chairman Johnson. Thank you.
Now we will start with the first panel: Hon. Donald Lubick
and Hon. Michael Dolan, Hon. Stuart Brown and Lee Monks;
including James White, the Associate Director of Tax Policy and
Administration.
As the panel assembles, we are going to hear from Mike
Dolan, the Acting Commissioner of the Internal Revenue Service,
and then we are going to question Mr. Dolan because he has
another engagement that he must leave for.
So, Mr. Dolan, if you will start, and then Members will
know that they are going to question you, and then the rest of
the panel will testify.
Mr. Dolan.

STATEMENT OF HON. MICHAEL P. DOLAN, ACTING COMMISSIONER,
INTERNAL REVENUE SERVICE

Mr. Dolan. Thank you, Madam Chair. It is a pleasure to be
back with this group. When I understood we were going to return
today, I wasn't quite clear that we would return with as much
of the texture as I return today, having been through the 3
days of hearings on the Senate side.
But I would tell you that I appreciate the way that a
number of opening comments have been made, both with respect to
your interests not only today, but sustained over the many
encounters we have had of putting the issues and the problems
in a context.
I think the Service has been very appreciative in the kind
of constructive give and take we have had with the
Subcommittee. And, clearly, I am here today not to defend the
status quo, not to ignore the problems that exist, to repeat to
this Subcommittee what I did yesterday with respect to the
acknowledgment of the errors that were made and the apologies
that were made; but also with the urging that they be looked at
in precisely the context that were described in your opening
comments, the context of the millions of transactions that year
in, year out go exactly correctly, the thousands of employees
who are competent, professional, and do precisely as we would
all be proud of them doing. And so that is not, again, to
suggest that there haven't been real serious concerns raised
the last 3 days.
What I wanted to do this morning, particularly out of
respect for the long-term interests that this Subcommittee has
had for taxpayer rights and the imminent activity that this
hearing is about, is to explore the provisions of the
restructuring bill that deal with employee rights; I thought,
in particular, I ought to come this morning and talk about the
specific announcements I made yesterday, and as you suggested,
Madam Chairman, to talk about what was behind that and what we
hope to achieve by it in the hopes that that may also inform
the thinking that you will do around the provisions that are at
issue in this bill and would be the kind of employee rights
provisions that you have been interested in.
Yesterday, as I listened and read the testimony from the 3
days, three things jumped out at me. In the Senate, there were
four very badly handled cases. And with them came the witnesses
that you mentioned, Madam Chairman, who made very graphic
presentations of the way our bad handling affected their lives.
And there is just no way in the world for me to sit here
any differently than I did over there and say anything other
than it is wrong. It shouldn't recur, and we should do
everything in our power to prevent it from recurring.
The second area that struck me that came out in the 3 days
was a general concern from a number of witnesses about the
thing called the IRS culture and whether that culture had the
right balance struck--in the terms that you mentioned in your
opening comment, Madam Chair--the balance between customer
service and the roles that Congress has asked us to play in
collecting revenue.
And then third was an issue that I would style as questions
about fairness and about the use of measures. As we went
through the 3 days of hearings, it struck me that there were
serious questions raised in all three categories.
In the first category, the case was made that those four
cases were handled badly. But behind that was the obvious
question for me and other people in the organization, how many
more of those cases are out there? How many more opportunities
are there to have taxpayers come forward and say, I have
experienced the same frustration and stress?
We, as I think you know, worked for the Senate Finance
Committee for a period of almost 8 or 9 months. We started with
a large number of cases, and ultimately came to the four cases
about which testimony was obtained in the 3 days. Those four
cases were clearly cases that were badly handled. There were a
number of other cases that, as we went through our examination,
were handled correctly or were handled in better ways. But I am
under no illusion that the four cases we saw the last 3 days
are the only four cases that could be brought forward as
evidence of this system or individuals in the process not
working correctly.
So our first reaction in the area of the cases is, we want
to take those four cases, not only the voluminous case files we
developed as we worked with the Committee over the last several
months, we want to take the individual testimony that those
taxpayers gave, because each and every one of the four gave
dramatic testimony. I want to take the video and the transcript
from the hearing that those taxpayers gave, and send those
packages back to the regional commissioners under whose
jurisdiction those four cases were worked.
And those four regional commissioners are going to take--in
some cases, multiple offices that worked on that case--and they
are going to go through that case step by step, even in the
event those cases go back 16, 17 years, and they are going to
look at, where were the various junctures that these cases
messed up?
And in addition to trying to find accountability where that
is appropriate, perhaps more importantly, where were the missed
opportunities to pick up on the signals that this thing was off
track? Where could or should somebody have earlier assumed the
responsibility to correct it? Because I think, at the end of
the day, there is no way I am ever going to sit in front of you
and assure you that we won't make another mistake. But I ought
to be able to sit in front of you and say that there is a level
of diligence and vigilance about identifying mistakes and
owning the ability to correct those mistakes.
The other thing that the case handling did for us was, we
invited the Senate Finance Committee to give us however many
other cases they have as a result of the publicity attached to
that hearing; and we are going to identify a special project
manager who will work those cases to completion, because we
don't want to have to have another hearing to come up and work
4 more or 10 more cases that are in that hopper that deserve to
be closed and closed today.
Part of what our review discovered as we went through these
cases is there were indicators upstream in these cases that, if
somebody had reacted differently, they might not have produced
the ultimate result.
And so one of the things that I have asked each of our 33
district directors to do and our 10 service center directors to
do is to get themselves personally involved in going back over
the past several months of correspondence that has come into
their district, not the correspondence that is already
controlled in problem resolution, already being worked as a
specific case, but look at the stuff that comes in there that
has the badges or the indicia of a potential problem, and pull
that stuff out, have somebody look at it, see what
opportunities are sitting in our inventory today that, if
handled correctly, won't be the kind of case that recurs 1
year, 6 months, or longer from now.
I am excited to tell you, Madam Chair, even overnight we
have also had an offer of help from other people. Yesterday,
the enrolled agents approached me last evening about trying to
help us in our pursuit of getting some of these lingering cases
up on the deck and dealt with.
And so as a result of conversations we had last night, we
intend to work with the enrolled agents, who said they would
put a pro bono together to create an opportunity for people who
might want to come forward--some set of practitioners for some
help in getting these things resolved. And we will try to
create an opportunity for the work that comes through that pro
bono effort to come in and be effectively handled by our
problem resolution program.
Another thing we said we would do in order to, I think more
than anything, deal with this question about culture, deal with
whether our emphasis was right as we balance the mission you
have assigned to us to raise revenue and the mission you have
assigned to us to treat the taxpayer concerns appropriately,
is, we have had, in two or three parts of the country
particularly, good results when the district directors have
gone out and consciously called for, within their States, the
people to come forward with problem cases. We have had--this
has worked particularly well in the Carolinas.
We just recently, 2 or 3 weeks ago, had all the
practitioners serviced by the Ogden Service Center essentially
come in, spend a couple of days, bring their problematic cases,
and had special attention applied to that.
What I have done as of yesterday is require every district
director to spend 1 day a month somewhere in their district
with this form of problem identification day, so that, be it an
individual taxpayer or practitioner, anybody who has got one of
these cases that has thus far alluded resolution, to bring that
in, and the directors and their key staff, capable of solving
that will make themselves available in that setting.
In an instance where systems don't work right in an
organization, you typically have to attribute accountability to
management.
The management of an organization is the one that sets the
tone. The management of the organization is the one that sets
expectations for what is expected for frontline employees.
And so one of the things we have also said we were going to
do is, in the next 45 days, we will assemble in Washington all
of our key compliance, senior leaders, again with an eye toward
working these cases, identifying for this group in very graphic
terms what kind of pain and suffering were documented over the
last 3 days, and what it is in their operations that ought to
change in order to preclude this in the future.
The other thing that I think you have had fairly
significant interest in, as a Subcommittee, is how well
understood is the Advocate's role. In the first instance, what
you have been very careful about is giving the Advocate the
power to intervene appropriately, the power to really intervene
in cases where things are off the track.
And I think--I hope, Madam Chairman--that other Members who
have had an experience similar to yours, that when a case gets
put into the hands of the professionals, the Problem Resolution
Office, it gets dealt with and dealt with effectively.
But the question that is always out there is, do enough
people know about the problem resolution program? Do enough
people know about the Advocate's availability to assist them?
So one of the things that we will revisit again as a result of
some of the testimony is, have we done the job to get the
Advocate and the problem resolution program well enough
understood so that the citizen who is having these kinds of
troubles knows that, by law, we have created the capacity to
help them.
Do you care if I continue?
Chairman Johnson. Please continue.
Mr. Dolan. The third area----
Chairman Johnson. Just to let you know, we have about 10
minutes, and then there is a series of three votes, two 5-
minute votes following the current vote. So there will be a
recess of probably 20 minutes.
Mr. Dolan. OK. Let me try to bring to a reasonably quick
close the last area that I noted in several of the opening
comments, and I specifically noted in the earlier conversation
with Chairman Archer, a concern about some of the testimony.
And in this case, a lot of the concern arose from the
employees--current employees' testimony about the way measures,
goals, quotas might impact currently on the organization. And,
I know I don't have to tell this Subcommittee, there has been
long established as a result of, certainly, the 1988 passage of
the Taxpayer Bill of Rights 1, but 10, 12 years prior to that,
the initiation of a policy in the IRS that says that
enforcement statistics cannot be used to set goals and quotas
for frontline people and their managers and should not be used
as an evaluative tool that affects their evaluation standing,
promotion, or awards.
What we heard in some of the testimony over the last 3 days
is, while that is indeed a policy that we have done a pretty
good job of monitoring over the years, and policing using the
quarterly certification process that this Subcommittee held
right into law, we heard testimony from people that said that
might be the case, but there are numbers out there, there are
other measures, there are other goal-setting processes that
have been used higher in the organization that have, in the
eyes of some, become surrogates for the goals or the quotas
that the laws were purposely designed to avoid.
One of the things that I have done, having heard that, is
try to create some insulation. One of the things that our
internal management processes historically have done over the
last couple of years has put relative rankings on field
offices, based on a whole amalgam of measures. Based on the
testimony not only that I heard yesterday, but others that
commented inside, that that has produced some dysfunctional
reaction. People worried too much, where do I fit on a relative
ranking? So I discontinued those.
The other message I heard was, to the extent you talk about
measures of money in the organization, it is very easy for
somebody to extrapolate from that down at the frontline and
infer that, if this is a goal for my district, then I should
take some percentage of that and assume it is mine as a group
or mine as an individual.
That is not what was intended as we deployed our GPRA,
Government Performance and Results Act, goals. But in point of
fact what we heard was testimony that said, intended or not,
that is what is happening in some places.
So what we have done is, we have said we will not move any
dollar base goals down to the district level. We will continue
to do as we have done in past budgets, make commitments to the
Congress as to what the investment of the resource that you
give us in the budget will produce by way of dollar outcomes.
But we will only deploy that with respect to the four regions
at the national office. We will not deploy it down into the
districts or the centers, again so as to avoid the potential
that that kind of a breakdown of the revenue goal shows up as a
quota or a goal in a way that is not intended.
Last what I would say is, there are two other things that
we heard. One was, the way that we have collected information
about penalties in the past and collected the dollar value of
penalties and put those into our reports suggested to some
that, again, there was an incentive for somebody to go out and
establish a penalty and collect a penalty for its revenue
potential, as opposed to the behavior direction that is written
into the penalty legislation.
So we will in the future not include penalty revenues in
any way that we report on the dollar achievements either in the
examination program or the collection program. Again, to be
clear that there are no mixed messages about Congress
authorizing penalties for a discrete purpose, they don't
authorize it as a way of generating revenue.
And the fourth area is one that we have talked a little bit
about before. And this is part of a general move in the
organization that has been under way now for some months, to
gain more input from the actual taxpayer, the customer, in our
various interactions.
We have had the experience thus far in appeals and in our
general examination program of soliciting customer satisfaction
at the end of an audit, at the end of an appeals process. And
what we will do in the next 6 months is extend the same
approach to the collection process inasmuch as that was the
process that was highlighted and so much of the concern of the
testimony that came out in the last 3 days.
So we hope at the end of the period what we will have is
not only the productivity and performance data that we have,
but we will have customer--taxpayer feedback about the way I
was treated, the professionalism that I saw exhibited or
nonexhibited in my audit, in my collection, or appeals.
And so with these steps, Madam Chairman, I am hopeful
that--we have not taken the last action by any means, but taken
a series of actions that respond immediately to the kind of
concerns raised, not only in the Senate, but are embodied in
the kind of work this Subcommittee has done. And I would look
forward to the opportunity to both report to you about how
these measures work, but also use them for further discussion
in things we might do beyond this as we attempt, not only to
react to 3 days of hearings, but as we attempt to move forward
along the path of protection of taxpayer rights at the same
time that the organization modernizes so many of its other
customer service capacities.
[The prepared statement follows:]
Statement of Hon. Michael P. Dolan, Acting Commissioner, Internal
Revenue Service

Chairman Johnson and distinguished Members of the
Subcommittee:
I appreciate the opportunity to appear before you today as
I did before the Senate Finance Committee yesterday.
Before I proceed, I want to say right up front how troubled
I am by much of what I heard in the last three days. The
Finance Committee has heard from taxpayers whose cases we
handled very badly, and for that I am extraordinarily sorry.
As I listened to the statements that the Members of that
Committee made on the first day and the testimony of this
week's witnesses, several important themes were sounded:
1. First, as I said at the outset, individual cases were
badly handled causing taxpayers to suffer significant distress
and disruption of their lives. This is wrong--there is no
excuse for it and we want to do everything we can to prevent
other such cases.
2. The IRS ``culture'' has been mentioned prompting the
question of whether the IRS approach to dealing with taxpayers
is callous, overaggressive or something even more serious.
3. Witnesses have also raised questions about the fairness
with which the IRS does its job, specifically alleging that we
prioritize enforcement actions against ``small'' taxpayers and
we use quotas and goals in ways which violate the law and
compromise the rights of taxpayers.
These three themes may not cover all the testimony
presented, but I believe they represent the most crucial issues
and I would like to directly address each of them. Prior to
doing so, however, let me tell you something you may already
know. Secretary Rubin and Deputy Secretary Summers are vitally
interested in these cases. In their oversight of the IRS during
the last several years, both the Secretary and Deputy have
focused on improving customer service as a central priority. I
will be providing them both with an accounting for not only the
corrective case actions required, but an overall plan of
improvement warranted by their investigation.

Specific Cases:

We heard from four taxpayers who were legitimately
frustrated by the way the IRS dealt with them. These taxpayers
did not receive the treatment they deserved. While each case
was different, the end result is indisputable: we were wrong in
the way that we handled many aspects of their cases. I fully
appreciate that an apology is little consolation when it comes
at the end of the stress and obvious frustration these men and
women have experienced. Nevertheless, I do apologize to each of
them. They deserved far better treatment from the IRS than they
received. Perhaps they will take some small measure of
satisfaction in knowing that the unacceptable outcomes of their
cases will result in keeping others from experiencing similar
frustrations.
In all fairness to the workforce of the IRS who succeed at
doing a very complex job well, these hearings should be placed
in the larger context of the millions of successful taxpayer
interactions that IRS has each year, as many of you urged in
your opening statements. Notwithstanding that fact, we must
immediately take specific actions to prevent the recurrence of
these kind of circumstances.
In preparing for these hearings, many of us have seen first
hand the frustration and stress our agency caused for the
involved taxpayers. I believe I have to find some way to engage
the entire organization in understanding the impact of our
mistakes. Consequently:
I am requiring that the Regional Commissioners who
have jurisdiction for the four specific taxpayer cases
discussed yesterday take the taxpayers' testimony, the hearing
record and the case files we have assembled and in coordination
with the responsible office(s), perform a complete review.
Their review will be done to understand each of the errors in
the case, the reason and accountability for the error, the
missed opportunities that existed to correct the error and the
actions necessary to eliminate the possibility of recurrence;
I will appoint a special project manager to
control and oversee the resolution of all other cases that have
been identified as problematic by the committee in connection
with this hearing and report back to the committee staff every
thirty days until all the cases are correctly resolved;
I am directing each of our 43 District and Center
Directors to immediately review all complaint correspondence
that has been received by their office during the last several
months. They will be required to confirm, with the Taxpayer
Advocate, that the cases have been resolved properly and that
the taxpayer has no outstanding issues. They will also identify
areas which appear to be causing repeat problems.
By these actions we will not only learn from the cases we
have botched, but that we will also dramatically reinforce
within the organization the high quality, professional and
courteous standard of individual and organizational performance
expected of the IRS; standards to which I know the vast
majority of my colleagues are committed.

Culture

The second area of concern, the question of the IRS
culture, is a far more complex issue. Bad cases have happened.
This is not acceptable and everything possible should be done
to prevent their recurrence. This is, however, not the
systematic and pervasive way taxpayers are treated by the IRS.
The vast majority of taxpayers meet their tax obligations.
In most cases they encounter the IRS only when they file their
return and either receive one of the 85 million refunds that
are issued or pay the additional tax which they owe. For those
people our goal is to make it as easy as possible to stay in
compliance and we have implemented many initiatives which make
it easier for these taxpayers to meet their obligations. Some
examples include:
electronic filing and payment including enabling
over 25 million taxpayers to file their tax return with a ten
minute phone call;
most tax information, forms and publications are
now available on the Web; and
expanded telephone access and automation have been
added to better answer the 100 million calls fielded each year.
For taxpayers who do not file and pay as they are required,
the IRS takes enforcement action. As a matter of basic fairness
for those who meet their obligations, the additional moneys
owed but not voluntarily paid should be collected through
enforcement. Responsible and appropriate enforcement action
results in a smaller financial burden on the taxpayers who pay
voluntarily.
We have heard testimony and concerns expressed this week
about the extent to which some employees may have used
enforcement tools to abuse the rights of taxpayers. To the
extent such abuse happens, it is wrong and it is unacceptable
and the Service has in place a number of things designed to
prevent such abuse.
Our rules of conduct are explicit ...... ``Any employee who
has information indicating that another employee engaged in any
criminal conduct or violated any of the rules of the Standards
of Conduct shall promptly convey such information to the
Inspector General or to the IRS Inspection.'' During the last
three years 475 employees have been disciplined for
mistreatment of taxpayers. While any incidence of this conduct
is unacceptable, I do believe our referral and investigative
processes effectively reinforce both the behavior that is
expected and the consequences for misconduct.
Beyond enforcement of the code of conduct there are a
number of other processes designed to protect taxpayers'
rights. The Taxpayer Advocate and the Problem Resolution
Program are probably the most obvious examples of IRS
commitment to protecting taxpayer rights. The Service worked
closely with Congress to formulate Taxpayer Bill of Rights II--
in fact much of the bill was implemented administratively prior
to enactment. The Advocate offices throughout the Service do an
excellent job of finding cases that are ``off track'' and
getting them into the hands of employees who can solve the
problems. As you are aware, the taxpayer Advocatee also has the
authority to intervene in cases in order to review the
appropriateness of a particular action and or mitigate
hardships. We have also implemented the Taxpayer Complaint
Process called for under TBOR II and are using it as a key
monitor of organizational performance.
The formal appeals process is also an effective avenue for
taxpayers who seek independent review of the way an IRS
employee has applied the law in a tax audit and some collection
issues. Last year we created an additional right for taxpayers
to appeal the issuance of a lien, levy or seizure actions when
they think they have been used inappropriately.
Despite the existence of these systems, I have heard many
concerns during the last three days which disturb me greatly.
The outcomes that I saw in some of the taxpayer cases violate
the standard of professional performance to which I know the
vast majority of my colleagues are committed. Regardless of how
small a minority of employees may have misused their authority
or judgment--it is no less offensive. I believe it is my
responsibility to sound an alarm within the organization. These
kinds of instances erode confidence in the entire system. As a
means to engage the organization's leadership and employees in
changing the impression and, where it exists, the reality that
we are callous, overly aggressive or worse:
I am requiring each of the 33 District Directors
to dedicate one day a month to forums held throughout their
districts for the exclusive purpose of giving taxpayers and
practitioners the ability to surface and solve problem cases;
Every executive and senior Compliance manager will
be convened in Washington in the next forty five days to review
the findings of the Senate Finance Committee hearings and
review our expectations in the area of responsiveness to
taxpayers and protecting taxpayers' rights.
I will personally remind every IRS employee of the
requirement they have to identify cases that belong in the
Problem Resolution Program and seek their commitment to use the
Problem Resolution process to identify and resolve problematic
cases;.
I have asked the National Treasury Employees Union
and its leader, Bob Tobias, to partner with us in designing a
national meeting of front line employees who will help identify
ways in which to respond to the serious concerns raised in the
hearings;
We will begin the capture of customer satisfaction
feedback on collection actions following the model that has
been recently implemented in the examination general program.

Fairness and Measures

Nothing is more important to the health of the tax system
than a sense that it is administered fairly. The IRS Management
Board recently reviewed all the IRS performance measures and a
central conclusion reached was that we need to strengthen the
measures of customer satisfaction. Already over the last year
we have instituted processes in the Appeals and Examination
activities to obtain taxpayer feedback upon the completion of
the appeal or the audit. These results will provide crucial
baselines from which we can design improvements. During the
next six months we will institute a similar process to cover
collection activities. We realize that if we are to focus on
improving our customer service it is absolutely essential that
we measure customer satisfaction.
Beyond this, I am extremely concerned about allegations
that have been made during the hearings. In addition to the
testimony we heard, I have received allegations directly--no
doubt prompted by the media coverage of the hearing. Some of
these allegations have been referred to our Chief Inspector.
I intend to further examine the claim that we concentrate
disproportionate attention on small taxpayers, but I am quite
confident that most of the concern expressed was misplaced. Our
audit activity results which would give the clearest picture of
this issue reflect that the higher the income level of a
taxpayer the greater likelihood of an audit. I offered to
provide detailed audit data to the Committee, and I offer the
same to you. I think it will satisfy any concerns. I am very
aware that Ms. Long gave testimony before the Finance committee
that contradicts my assessment. I have referred her allegations
to the Chief Inspector and Inspector General and should they be
substantiated I will take appropriate action.
The other important concern raised this week is about the
use of quotas and goals. Using records of tax enforcement
results to evaluate employees directly involved in compliance
activities or to produce specific goals or quotas for those
employees is forbidden. There has been an administrative policy
to this effect in place well before it was included in the 1988
Taxpayer Bill of Rights (TBOR). Our managerial and technical
training reinforce this prohibition and a quarterly review and
certification process that was implemented with TBOR monitors
conformance with this requirement.
In connection with these hearings I have received
allegations that the policy and the law may have been violated.
I have referred these allegations to the Chief Inspector and
will see that the correct discipline occurs if violations are
substantiated. In the meantime, these and other indicators
cause me to take a number of actions that are designed to
reduce the likelihood that measures or statistics will be used
incorrectly. The Government Performance and Results Act (GPRA)
requires a number of accountability measures on our performance
as an agency. However, effective for FY 98 we will make the
following adjustments to our measurement system.
We will no longer comparatively rank our 33
district offices on their results.
We will suspend the distribution of any goals
relating to revenue production to our field offices. While the
goal will be established and tracked nationally to conform with
GPRA requirements, there will be no expectation of a local
office having a ``share'' of a national goal. We will continue
to distribute expectations relating to national goals aimed at
quality improvement and burden reduction for the taxpayer.
Some have said that the Service accumulates
statistics on penalty results in a way that encourages
assessments of additional penalties as a revenue raising
technique. Therefore we will no longer include the penalty
amount in our statistical results concerning audit
recommendations, assessments or collection.
Because of the breadth of concerns raised about
enforcement of the policy which precludes enforcement goals and
our dependence on the current quarterly certification process,
I will ask the Government Accounting Office to validate the
effectiveness of this self certification program.
I have tried to address the critical questions the hearings
have raised. I know you will have questions and I look forward
to answering them. Before I do so, however, I would like to
offer a couple of closing points.
As a civil servant who has spent 26 years working in the
IRS, this has been a very painful week. I am disappointed that
we handled some of the taxpayer cases as poorly as we did and I
am concerned that there are as many worries about our
professionalism as have been expressed. I think it is important
to recognize when we have erred and where we need to improve.
I have spent very little time talking about the millions of
things that--week in and week out--go exactly as they should.
You would probably be as impressed and gratified as I am to see
how many citizens write the Commissioner's office to thank and
compliment our employees. No one is more committed to serve the
taxpayers of this country well than the men and women of the
IRS.
We are an organization that is in the midst of a huge
modernization. With the recent publication of the Modernization
Blueprint I believe the Treasury and the IRS are on a path to
bring the modernized technology to bear that the tax system so
badly needs. Likewise, numerous customer service initiatives
have been brought on line in the last couple of years and the
joint IRS/Treasury/National Performance Review that will
complete its work next month holds even more promise for
dramatically improved service to the U.S. taxpayer.
We have heard the concerns expressed this week and will
improve in areas where we have stumbled. We understand how
crucial it is to this country's well being that our tax system
be administered professionally and fairly.

Chairman Johnson. Mr. Dolan, I thank you very much for your
testimony. As usual, it was thorough and indepth. You have
thought a lot about the testimony that was given in the Senate.
I think it isn't clear--it hasn't been clear to the public that
your people worked closely with the Senators for many months in
looking at problem cases. And I think that was the right thing
for you to do. And it is the right thing for all of us to
confront the enormity of the injustice imposed on those who
testified in the Senate yesterday and, I guess, the day before.
As one who is sometimes too passionate, I can tell you
that, as we hear cases like that, it is indeed hard to keep
that balance between outrage and respect for the many really
excellent IRS employees, that is so important to good
governance. I am very pleased to hear of these numerous steps,
which show a real sensitivity to the challenge that faces us
not only to change the law, but to change the culture that has
allowed such abuses to occur.
Now, I know you have a tough schedule. We will have to
recess for 20 minutes. Can you stay for questions thereafter or
not?
Mr. Dolan. I will, Madam Chair.
Chairman Johnson. All right. Well, we will adjourn. And the
last vote, folks, if you can vote early, come right back. We
are going to start as soon after that last vote as we possibly
can. Thank you.
[Recess.]
Chairman Johnson. The hearing will reconvene.
Mr. Dolan, I just want to pursue a couple of brief things
and let other Members have an opportunity. First of all, may I
just suggest, as you send the tape of the hearings and the
transcripts out to the regional offices where problems evolved,
that you encourage the whole staff to take time to watch them,
I mean everybody from the janitor right on up. Because when you
work with companies where total quality management started,
they got the continuous improvement. If everybody sees these
tapes and--it is really required to confront the personal agony
imposed on these people and the total unfairness of it all, I
think; what would be those points be then search for solutions
and the effort to see, where along the way could we stop this;
where we didn't notice where it will be more fruitful?
Then at the end, when that is made, everyone--again,
janitors right on up--everybody on the team needs to be there
to see what in hindsight could have been done. Ultimately, as
important as changing the law is, changing the team's ability
to work together and notice those points early on is equally
important.
I had a hospital, during the height of the explosion in
malpractice and insurance costs, self-insure. And the different
relationship it developed among the doctors was spectacular,
because they said they were going to be liable if they saw one
of their colleagues do something stupid or overlooking
something or being casual or insensitive or whatever.
Big mistakes are results of teeny, tiny slips over and over
again accumulating generally. I think it is important to look
at this from a systems perspective and help everyone to
understand how truly agonizing wrong decisions can be made and
how destructive to people's lives. I would just make that one
small recommendation.
Mr. Dolan. Madam Chair, if I might, I don't think you can
be more correct. I know that I spent several hours on those
cases, and some of the folks behind me spent days and weeks,
and we all came out believing we had felt at the capillary
level some of that distress. And part of our objective is to
have others confronted at that level. Because I don't think--
when you do, you come away far different about wanting to see
these things not recur. So I think your suggestion is right on
the money, and we will take it.
Chairman Johnson. I also commend you on your encouragement
of your directors to get out there, to go to Rotary meetings,
give talks, have press conferences, attend small business
events, reach out so that people know that if they have a
problem with something that is going on, they can call someone
and talk to them about it. Because one of the real problems in
all of this is that someone will come to me, and then my
intervention will make it worse and not better. And the fear of
that out there is very, very real. I personally have not found
that to be the case, but the fear is enormous.
In a sense, I think, I certainly have had that experience
with justice, ironically in environmental enforcement and
health and safety issues, where just the inquiry by a Member
has actually made the bureaucracy more intractable and
exacerbated the unfairness. I have some real horror stories
along that line.
You do have to tend to this issue of customer satisfaction.
If we can have the customers rate professors in the classroom,
if we can have users rate their physicians, if we can require
HMOs--not every one of those judgments is informed, but
cumulatively they give a cumulative view--maybe everybody who
comes into the IRS or deals with the IRS ought to have a chance
to fill out a customer satisfaction form. Everywhere you go
now--restaurants, hotels, every place--there is this
opportunity. I think we have to think through this differently.
I think one of the things that is interesting about what
you are doing and it does in my mind demonstrate a need for a
board with outsiders on it where these things have become
routine in the last 10 years; and maybe if we moved more
rapidly 5 years ago in this direction, we wouldn't be sitting
here today.
I would invite you, although I am not going to ask you
this, but you do in your testimony dedicate your comments to
addressing the problems that were raised by taxpayers who have
suffered at the hands of the IRS, and you do not address
yourself to the recommendations of the Commission in regard to
taxpayer rights. I imagine the others will.
Mr. Dolan. They will.
Chairman Johnson. But I am going to yield to my Ranking
Member, Bill Coyne, and then the others for questions at this
time.
Thank you.
Mr. Coyne. Thank you, Madam Chairman.
Mr. Dolan, in your testimony before the Senate Finance
Committee yesterday, you cited four cases that were very poorly
handled. And I wonder if we can assume that what was testified
to there yesterday, those accusations are true and correct.
Mr. Dolan. Mr. Coyne, one of the things that I would like
to remind the Subcommittee is, I had--yesterday I had the
authority by virtue of the releases that those taxpayers
executed to speak in the open hearing about those cases. I
don't have such authority today. I could do that in executive
session or if that is something that the Subcommittee wanted to
do. But I am precluded from being specific about those cases in
the open session here today.
Mr. Coyne. I see. The other thing that you mentioned in
your testimony was that, for the last 7 or 8 months, you worked
with the Senate Finance Committee to be able to bring these
cases forward in yesterday's testimony. Is that a fair
statement?
Mr. Dolan. That is correct.
Mr. Coyne. So it probably would have been difficult,
without the cooperation of your office, for the Senate Finance
Committee to come up with those four specific cases. Is that
fair?
Mr. Dolan. I think that is a fair statement, Mr. Coyne.
Mr. Coyne. You state in your testimony that all the
problematic cases identified by the Committee will be handled
with a report within 30 days. Is that your testimony?
Mr. Dolan. Yes. The Committee has some additional number of
cases that they would still see as problematic beyond the four.
And what I invited the Chairman to do yesterday is to give me
those cases, and I will put those under a control and, while
they are still open, report back on the status of those, so
that the Committee knows that followthrough has occurred.
Mr. Coyne. Would you be able to give our constituent cases
the same kind of treatment?
Mr. Dolan. Well, what I am hoping is in many cases, you
find your constituent cases are given that kind of treatment.
One of the things that Mrs. Johnson said, I also heard
yesterday. One of the Senators asked that when a constituent
case came, was there a negative reaction? And I said, I think
just the opposite. I have quite often given the feedback that
we headquarters types don't always do as the Congress would
suggest we should; but that, please don't mess with my problem
resolution, because for the most part I think the problem
resolution program does a pretty good job of taking the
constituent case and getting it worked. I would certainly want
to hear from a Member if there was some breakdown in that.
So I would hope that those normal processes, the control
processes and the proper resolution processes, would get that
kind of attention paid to your constituent cases. If not,
please tell me, and I will give you at least as good service of
what we are trying to do with these problematic cases.
Mr. Coyne. How many returns, tax returns, both individual
and business, does the IRS handle in 1 year's time?
Mr. Dolan. It is in excess of 200 million, Mr. Coyne.
Mr. Coyne. Two hundred million. And I would guess that the
vast majority are those returns that present no immediate
problem either for the IRS or for the individual. What
percentage do have problems?
Mr. Dolan. Well, I don't want to give a specific percentage
on the returns. Of course, we talk about the 83, 85-percent
compliance level. And if you put that alongside what is a
routine transaction for millions of Americans, which is--I file
my return when it is due, and I either get one of the 85 to 90
million refunds that are issued on time, or I pay what is
owed--the vast majority of the taxpayers have that as the
experience.
Of course, the last conversation we had in here was, our
goal for those compliant taxpayers is to make it easier to
comply, to give them incentives to stay compliant. And so,
without being able to put an absolute percentage on the
population that fits in that category, it is a very high
percentage of the American taxpayers that fit into that
category.
Mr. Coyne. So it is pretty safe to say, then, that the very
badly handled cases that you referred to in your testimony have
to come from that 16 or 17 percent of noncompliant taxpayers?
Mr. Dolan. It doesn't have to. You can be somebody who is--
who has been or was trying to be compliant, and we made a
mistake. I would say, even from that percentage of
noncompliance, I would hope that in the vast majority of our
transactions, where we are enforcing the law or where we are
using one of these sensitive collection tools that the Congress
has authorized day in and day out, that it is done in a way
that the taxpayer feels is professional, feels is respectful to
their rights.
So I think the mistakes could come anywhere. And the
standard of our conduct should be equally good, whether it is
for the compliant or the noncompliant.
Mr. Coyne. And there is no problem claimed by the taxpayer?
Mr. Dolan. I am sorry?
Mr. Coyne. The vast majority of them, there is no problem
with----
Mr. Dolan. The vast majority; that is correct.
Mr. Coyne. Thank you.
Chairman Johnson. Mr. Portman.
Mr. Portman. Thank you, Madam Chair. Having watched those
hearings, I think those taxpayers were all compliant taxpayers,
just to make that point.
Eighty percent of taxpayers pay their taxes and have no
interaction at all with IRS other than filling out the form and
having withholding. But I understand the point my colleague was
trying to make.
Is that true, Mr. Dolan, the taxpayers we saw this week at
the Senate Finance Committee would be taxpayers trying to
comply with the system, not part of the 16 percent? Is that
your understanding?
Mr. Dolan. I would rather not run afoul of the disclosure
provisions.
Mr. Portman. OK. Well, I will just sort of stipulate that,
at least from having watched those hearings for several hours.
Thank you for being here. I have to commend you for surviving
this last week. You look pretty good, no worse for wear.
Mr. Dolan. I feel worse from the wear.
Mr. Portman. Sometimes appearances are deceptive.
Mr. Dolan. That is right.
Mr. Portman. I also want to commend you for taking a lot of
immediate actions. I think a number of them are absolutely
necessary. And of course I believe that these are deeper
problems, as I think you do, too, that we also need to take a
longer range look at. But I do want to commend you for your
actions this week.
In hearing your testimony, it was very interesting. I think
you acknowledged that these cases and generally the concerns
that have been raised over the last year with the Commission do
illustrate some deeper problems.
You talked about culture. You talked about management and
so on. I find, as I listened to your testimony, in fact, that
management really is one of the issues you come up against
again and again.
You mentioned upstream problems. The inference I drew from
that was that this contributed then to the downstream costs in
the sense that there was an upstream problem and notice was
sent to the wrong person, some administrative mishandling that
didn't create it, and then it was a larger problem. And I think
that again is consistent and reinforces what we found over the
last year in looking at the IRS.
Administrative problems, management problems really aren't
going to be solved by more taxpayer rights. I think it is very
important we have this hearing today. It is very important that
we do have a Taxpayer Bill of Rights 3 to build on TBOR 2, but
I don't think that will solve the larger problems.
Do you agree with that? Aren't there some larger structural
problems you are talking about?
Mr. Dolan. I think what I would prefer to do is say, any
organization that has got a mission as complex as you all have
assigned us and as many people doing it and as many customers
involved in the interactions, there are countless processes and
systems involved in that. Some of ours work a whole lot better
than others.
And to the extent that those processes don't work as they
should, they are rarely the fault of the person on the
frontline, but almost always the fault of one of us who sits in
the management process. And that could obviously include, in a
setting like this, the interaction with us and the Congress
when we do the systems right.
Mr. Portman. I will take you off the hook even further.
Often these are not the problems of an individual manager;
these are the problem of the system. There is a computer system
that is not working, so notices go out to the wrong person.
Mr. Dolan. Sure.
Mr. Portman. These are problems that are systemic and need
to be solved. If you are going to get at taxpayer rights
problems, obviously you need to change the law and put in some
statutory protections, but you also need to change the system.
You just mentioned the interaction with Congress; I want to
just build on that because Congress is to blame here, also. I
think you get mixed signals from the Congress because of the
diffusion of responsibility and authority and oversight over
the IRS, seven different Committees telling you what to do and
what not to do.
Do you feel that you do get mixed signals in terms of your
management responsibilities? To the extent there is a
management issue, is that partly because you are not getting
consistent direction?
Mr. Dolan. I think we all agreed in the context of the
restructuring work that there could be a lot more cogent way to
reconcile the various Committees' interests. I think the short
answer is yes. There are different signals.
Mr. Portman. Do you think having more stability and
continuity in the directions you get from downtown, being
Treasury and Congress, would be helpful in your doing your job,
solving some of these management problems you've identified
today?
Mr. Dolan. Stability would be a great asset, from wherever
it came.
Mr. Portman. Let me make one comment. My friend, Mr.
Lubick, who is a tax policy expert and has a great deal to add
on that front, is here. Mr. Lubick, you don't have management
responsibilities at the IRS; is that correct?
Mr. Lubick. That is correct, Mr. Portman. Our work with the
IRS is primarily integrating policy and administration.
Mr. Portman. OK. I would just make the point, again
building on your testimony this morning, which I found
intriguing, that here we have the IRS going through a grueling
week of hearings highlighting the potential for serious
mistreatment of taxpayers and a lot of administrative and
management problems that you have talked about this morning,
probably the most significant hearings in a generation for the
IRS leading probably to what will be the most significant
reforms of the IRS since 1952.
And I would ask: Where's Treasury? Where's the Deputy
Secretary this week? Where is the Secretary this week? Are you
getting direction? Are you getting stability and continuity in
your direction from the top, from Congress or from downtown?
Obviously, my view is you are not. And I just think it is an
important point for us to make here this morning.
We are talking about taxpayer rights. But it is the people
at the bottom, the taxpayers and the employees at the IRS, who
are suffering from more systemic problems that have to do with
oversight management. If we don't solve that problem, all the
taxpayer rights in the world are not going to solve the
ultimate problem.
Mr. Dolan, do you have any comments on that issue?
My time is up. I don't want to indulge the Chair very much.
Mr. Dolan. Just to this effect, Mr. Portman. Clearly the
Treasury Department has been deeply involved as we prepared for
the hearings yesterday, the Secretary and the Deputy both, the
staff in the sense of understanding both what were the
underlying issues, those that were anticipated and those that
came out in the 3 days. And they worked very closely with us in
trying to be sure that the kind of the corrective actions, not
only that I announced yesterday, but that will qualify so
that----
Mr. Portman. Again, I am commending you for the corrective
actions the IRS is taking. I would just ask a further question
if I might, Madam Chair.
Have you seen any press accounts holding the Secretary or
the Treasury responsible for the taxpayer rights abuses that we
saw illustrated this week?
Mr. Dolan. I have been so busy responding this week, I
don't know that I could tell you.
Mr. Portman. I know you have been held accountable. I have
seen you be held accountable. And you talked about the lack of
stability and continuity and direction that you are getting,
and a lot of these are related directly to administrative
problems. That is where they all start.
And I would just again make the point here this morning
that it is important what we are doing here, and I can't wait
to hear from Mr. Lubick on the tax policy idea. He has a lot to
add. And Treasury should be doing what they were doing. They
should be giving us good tax policy advice. And, frankly, I
think the Treasury Department should be involved with fast
track and with international trade agreements and with whatever
else the Treasury is focused on this week. I think that is
appropriate. It is probably more important than anything else.
But I would say that you need help; you need assistance to be
able to solve these deeper systemic problems.
Thank you, Madam Chair.
Mr. Lubick. Mr. Portman, Secretary Rubin has been deeply
involved in this matter.
Mr. Portman. Deeply involved in----
Mr. Lubick. In the matters that were the subject of the
hearings in the Finance Committee this week.
Mr. Portman. You mean the taxpayer problems?
Mr. Lubick. The taxpayer problems. He has asked for a
report. He is trying to make sure that where disciplinary
action is appropriate that it is taken. He is trying to make
sure that where there are lessons to be learned from this to
make changes in the system, that they are taken into account.
Let me assure you that I know of no issue since I have been
here, June 1996, where the Secretary has devoted himself with
such attention to detail and with such deep interest as getting
this matter behind us and getting changes made; and that is
true of the Deputy Secretary as well. I----
Mr. Portman. I have to move on.
Mr. Lubick. They are deeply involved.
Mr. Portman. The Chair has to go on.
You have heard me publicly compliment him for his focus in
the last year on the IRS. I think this is a structural flaw in
the system. I don't think it is personal to him, as you know,
but I wish he were here this morning.
Thank you, Madam Chair.
Chairman Johnson. Thank you, Mr. Portman.
Mr. Ramstad.
Mr. Ramstad. Thank you, Madam Chair. And like my
colleagues, Commissioner Dolan, I commend you for not being in
denial that there are serious problems within the Internal
Revenue Service and for admitting the problems like you did
yesterday and again today. I think that is a major
breakthrough, a major first step in reforming and changing some
of the procedures and the practices of the agency. And I really
do commend you for your leadership. In fact, I, as one Member,
wish that the ``Acting'' in front of your title were to be
removed, but I guess that is not in the cards, given the
nomination.
To get to a more substantive issue, that is, the issue of
interest netting, as you know, Commissioner, last year's
Taxpayer Bill of Rights 2 required both the IRS and Treasury to
study the issue of interest netting on tax overpayments and
underpayments. Every taxpayer who has been hit by this doesn't
understand why the IRS penalizes taxpayers at a higher interest
rate for underpayment, than they compensate taxpayers who
overpay.
Now, Treasury's report concluded that legislation is
required to implement netting procedures and offered a
legislative fix to the problem in its tax simplification
proposal. And that was certainly encouraging, but it doesn't go
nearly far enough. It is prospective only, first of all, and
would permit the IRS to continue its 10-year policy of charging
taxpayers excessive interest until legislation puts an absolute
stop to this unfair practice. And what I don't understand is
why legislation is necessary to fix the interest netting
problem when Congress has clearly given the IRS and Treasury a
clear mandate, clear authority to net underpayments and
overpayments before applying differential interest rates.
I have a letter that Chairman Archer has written to
Secretary Rubin. I mean, as far as I am concerned, it is an
issue of fairness. We have given IRS, Treasury, the authority.
Why not do it?
Mr. Dolan. With your permission, I would like to ask for
some help from my colleagues on this, Mr. Ramstad. Both Mr.
Lubick and Mr. Brown, our Chief Counsel, have been quite
heavily involved in this.
Mr. Ramstad. I had the same question subsequently, after
Mr. Lubick's testimony, but that is fine, if you defer.
Mr. Lubick. Mr. Ramstad, we have gone as far as we believe
we can go. Court decisions in Northern States' case limited our
authority; and therefore, when we released our simplification
proposals, which Mr. Portman endorsed--thank you, sir--last
April, this was one of our proposals. And this would have
solved the bulk of the problem.
If we change it and go back to the old method where there
is a single interest rate, that is going to make some rather
serious policy problems in terms of various taxpayers. There is
going to be a greater burden on smaller taxpayers because if
you want to at least make it revenue neutral, you are going to
have to have a higher interest rate in some cases and a lower
one in others to come out the same. And that is going to cause
some very serious problems.
Mr. Ramstad. So, Mr. Lubick, you are arguing for the
practice of charging--of compensating less for taxpayers that
overpay than penalize taxpayers that underpay?
Mr. Lubick. Yes. I think that is appropriate. It is
appropriate for enforcement, as a matter of fact. In my
practice, I know very many cases where taxpayers deliberately
had overpayments because that was a better investment for them
on the rate of interest they were getting on the ultimate
refund.
Mr. Ramstad. My time is waning and I just want to ask a
simple question. Then, you don't support the provision in H.R.
2292 to provide for interest netting--Mr. Lubick, first, and
then Commissioner Dolan?
Mr. Lubick. We support the proposal that we make, Mr.
Ramstad, which we think provides an appropriate amount of
netting so that at the----
Mr. Ramstad. But my question was, do you support section
309 of H.R. 2292, the tax reform bill before this Subcommittee,
that would limit interest differential altogether.
Mr. Lubick. No, we do not support that.
Mr. Ramstad. Commissioner Dolan, you do not support that?
Mr. Lubick. That is not netting, Mr. Ramstad; that is
eliminating the differential. It goes further than netting. We
do support netting.
Mr. Ramstad. You do support netting, but you do not support
eliminating the differential totally?
Mr. Lubick. That is correct, sir.
Mr. Dolan. That is correct.
Chairman Johnson. Thank you, Mr. Ramstad.
Just--Mr. Tanner.
Mr. Ramstad. May I have one more question--if I may, with
the Chairman's indulgence, just a civil, straightforward
question whether Treasury and the IRS would be willing to work
with us to clear up this matter once and for all. This has been
here ever since I have been on this Subcommittee, which--this
is my third year, and we have the same dialog every time you
come up here, and nothing happens.
Would you be willing to work with us once and for all to
remedy this problem in this legislation, the context of this
legislation?
Mr. Lubick. We are always willing to work with you, and it
is a pleasure.
Chairman Johnson. The fact that the recommendation is
before us with the force of the bipartisan commission's
endorsement assures that we will take action on this matter
this year, Mr. Ramstad, and we will certainly have you involved
in it.
Mr. Ramstad. I am counting on your leadership. Thank you,
Madam Chair.
Chairman Johnson. Mr. Tanner.
Mr. Tanner. Thank you, Madam Chairman. I will be brief.
The problems in the enforcement of a sometimes
unintelligible Code I understand and fully appreciate. It seems
to me that until the Congress can simplify--which is, I guess,
in the eye of the beholder--simply identify the Code from,
sometimes, as I said, an unintelligible jumble of words, with
all of that going on, it seems to me the vast majority of
taxpayers have a cordial relationship with the Internal Revenue
Service.
The problems that we see come up from time to time,
Commissioner, I think are because there has not been enough
attention given to the problem resolution area of your
organization. I know, and we, as Members of Congress, get
involved from time to time with people who have had very
unpleasant, unsatisfactory experiences that frankly oftentimes
are the result of either inattention or negligence or something
from whoever is assigned to that case in the Service. It seems
to me that if you gave much more attention to that part of it
and had, as problems arise, competent, official help to bring
these matters to resolution, that would go a long way, as the
testimony has indicated in the last 3 days. I hope you will do
that.
I would like to ask you, what are you doing? You identified
in your statement that problem resolution had been an area that
needed some improvement. I would like to know what your plans
are there.
Mr. Dolan. Thank you, Mr. Tanner. I wholeheartedly agree
with you that the numbers of people available, the skill with
which they approach the job, and then the commitment to solve
the problem are all three things that can be worked on to
improve on where we are today.
The other part of that, though, I think is, and I think it
is a reason why you wrote into the Taxpayer Bill of Rights
these reports on the larger problems, hopefully, at the end of
the day, you don't have a Problem Resolution Officer that just
keeps working this same problem in the form of different
taxpayers.
I am quite hopeful that in the middle of October, when we
are able to receive a body of work that has been done over the
last 3 or 4 months by a joint Treasury-IRS national performance
review team, that is looking at the entire suite of our
customer service activities, looking at the way our notices go
out, how the flow of notices and our capacity to answer people
when those notices go out can be managed better.
And then you move to what is on the notice, how
understandable it is, so that people don't have to contact us
as much. So not only does the individual aberrant case need to
be handled exactly as you say, with more attention; I think we
have to learn better from those cases, fix some of the things
further upstream that will keep fewer people from falling into
that category.
Mr. Tanner. All of these reports are due in the middle of
October that you will take and compile?
Mr. Dolan. There are a series of things that I talked about
at the outset. Many of those will be in place starting next
week. The October report I talked about will be a whole new
body of work that will help in many of these areas and that we
will be happy to make available to the Subcommittee, probably
toward the end of October.
Mr. Tanner. Good. Maybe we can help with that. Thank you.
Thank you, Madam Chairman.
[The information is being retained in the Committee files.
It can be accessed at http://www.access.gpo.gov]
Chairman Johnson. Thank you. I am going to go now to Mr.
Hulshof, who has an engagement that requires him to leave
shortly.
Mr. Hulshof.
Mr. Hulshof. Thank you, Madam Chair.
Chairman Johnson. And I thank the other Members of the
Subcommittee for allowing this.
Mr. Hulshof. As do I. Thank you, Madam Chairman.
Mr. Dolan, it is good to see you again. I sincerely respect
the fact that you are here facing us as you did with the Senate
Finance Committee to take personal responsibility. I respect
that very much.
And I also note, as you have in your statement, that as a
civil servant who has spent 26 years working for the IRS, for
you, this has been ``a very painful week,'' I think you wrote.
But I would have to say to you that 1,000 mea culpas won't
soften the sting suffered by those individual taxpayers, many
of whom were trying to do their best to comply.
Now, I want to follow up on a point that Chairman Archer
made at the beginning of this hearing, and something that I
have heard. I am extremely concerned when I hear that through
our responsibility of oversight, somehow we are piling--or
somehow we are bashing your agency. As the most junior Member
of this Subcommittee and as a newly elected Member of Congress,
let me just briefly address some of the things or go back to
some of the things that you have come before this Subcommittee
on.
Early this year, individual IRS agents committed
unauthorized inspections of individual taxpayer records. And we
responded with legislation, the Taxpayer Browsing Protection
Act, but it took an act of Congress to try to put some more
space between your agency and taxpayers across this country.
We have had discussions about electronic filing of payroll
taxes and the fact that apparently IRS didn't get on the ball
as far as notifying businesses that they were going to have to
comply with the mandate. And then again we go to the rescue of
business by providing a grace period to allow businesses more
time to get out from underneath this strong-armed tactic that
many of them felt was an additional mandate.
We have had hearings on the 21-percent error and fraud rate
in the earned income credit. Mr. Lubick, quite frankly, a
Member of Treasury that was here, a young man with a very
aggressive attitude when we began, in our oversight
responsibility became very defensive that we would point out
the fact that there is a 21-percent error rate in the earned
income credit.
And I don't have the time to go into the Tax Systems
Modernization problem.
So, Mr. Dolan, again I respect very much the fact that you
are willing to take responsibility for your agency; but
something Mr. Portman talked about earlier, and it is just a
very simple question, why didn't the current set of taxpayer
rights prevent these abuses from happening? And as a followup,
does it not show that the current set of taxpayer rights is
weak and they should be strengthened?
Mr. Dolan. That is the simple question you were going to
ask me? It is real hard for me, Mr. Hulshof. Let me go back to
your starting point.
I understand exactly your point that I can sit here and mea
culpa all day long and it doesn't take away 1 second of the
pain of those four cases or any other cases messed up. You and
I aren't in any disagreement on that.
It is hard for me though, to generalize from those cases or
others and say--I won't say it is hard for me. I don't think it
is appropriate for me to sit here and generalize and say, I
think the Taxpayer Bill of Rights doesn't work or that the
taxpayer rights are, in general, not protected. I believe that,
in the main, they are.
I think to the extent that one of those cases can exist is
a serious problem, certainly for me, and a problem for us
collectively. So I think this kind of inquiry about where next
is legitimate--and you have never heard from me this week nor
will you hear next week that any of the things you ticked off
as matters of oversight between this Subcommittee and the IRS
are inappropriate. They are perfectly appropriate.
So you have no argument from me about it being a venue for
this kind of an interaction to talk about--does either one of
the current rights need to be strengthened, or do rights not
yet enacted need to be there? So we are not here in any way to
resist the notion of using these cases, or current performance,
to look at strengthening the rights.
Mr. Lubick. Mr. Hulshof, I think what you pointed to, in
large part, were violations of taxpayer rights. And I think--as
Mr. Portman and Mr. Tanner have stated, I think it is not so
much legislation that is needed, but it is getting the system
right and having problem resolution remedies, persons involved
in it. And I certainly agree with both of them in what they
said.
Mr. Hulshof. Well, I appreciate your being here.
Thanks, Madam Chair.
Chairman Johnson. Thank you very much.
Mr. English.
Mr. English. Thank you, Madam Chair.
Mr. Dolan, welcome. I was intrigued by Congressman
Kingston's testimony earlier. Did you have the opportunity to
listen to his testimony?
Mr. Dolan. I did.
Mr. English. His reference to the coercion of supposedly
voluntary tip monitoring agreements from restaurateurs is
similar to comments and anecdotal evidence that I have received
from very many of my own constituents. Mr. Kingston's district
is not contiguous to mine, as I think anyone listening to the
two of us speak would conclude.
Let me ask you, is there a policy within the Internal
Revenue Service with regard to targeting restaurants, to coerce
them into these voluntary agreements under threat of an audit?
Mr. Dolan. There certainly is a policy, and the policy is
not to do either--not to target and not to coerce.
Mr. English. Do you have any plans to investigate this
apparently widespread practice?
Mr. Dolan. Well, I think I was struck by Mr. Kingston's
comments this morning, and I also have come to understand that
there have been some discussions already between the staff of
this Subcommittee and our examination personnel about how some
of the apparent issues that exist on this could be--either we
need to clarify to our frontline agent or, collectively, there
are some gaps out there.
I think this is an eminently solvable issue. This whole
process grew out of an effort to take burden out of something
that was historically a very intensive, manually intensive
process for both the restaurants and for us. So to the extent
it is being viewed as some kind of a threat, that is not its
design; and we will work to rectify that.
Mr. English. And I am gratified at that response.
I appreciated Mr. Tanner's comments. Mr. Tanner, my
colleague, said that the vast majority of taxpayers have a
cordial relationship with the IRS. I am struck by the fact that
at least in our neighborhood, most neighbors have a cordial
relationship with the local pit bull, even though only a few of
them have had one clamp onto their hindquarters; and I guess
what I am getting at is, for years the IRS has cultivated a
public image of fear and intimidation among taxpayers. I have
always sensed it as a way of increasing compliance.
Why now should we believe that the IRS wants to change its
cultural attitude, become taxpayer friendly? Wouldn't it be
best to guarantee that taxpayers won't be victimized any longer
by the IRS by passing a strong taxpayer rights package? Your
response?
Mr. Dolan. Well, Mr. English, ultimately Congress has got
to decide about the law. I am real disappointed that you would
use the analogy, or metaphor, of a pit bull. I think that is
not the relationship that the average American experiences with
the Internal Revenue Service. And I darn well am sure that is
not the way the typical Internal Revenue Service employee sees
his responsibility and obligation to the taxpayer nor the way
they practice it.
Now, do we have a considerable responsibility to enforce?
We do. You have given it to us. We do our darnedest to balance
that with the other side of our responsibilities to the extent
we can--by all means, I am here to say we will do it. But I
think that maybe that is a more colorful description than I
would be willing to put on it.
Mr. English. Well, I appreciate that, Mr. Dolan.
Final question, how does the IRS define the term ``tax
protester'' or an ``illegal tax protester''? And how does a
person get to be labeled a ``tax protester'' by the IRS?
Mr. Dolan. A ``tax protester,'' Mr. English, is generally
someone who has filed a tax return using one of the several
statements or legends or theories, sometimes written across the
tax return, sometimes submitted as a part of the tax return,
sometimes submitted in lieu of a tax return, that claims some--
either other authority than the Tax Code, some exemption from
the Tax Code. Typically, it is that manifestation on the part
of the taxpayer that would have it designated as a ``tax
protester.''
Mr. English. Quick followup, who attaches that label to a
person? And can a system IRS employee have a person labeled as
a ``tax protester''?
Mr. Dolan. It is not so much a label, Mr. English, as it
is--to the extent a tax return is filed and is processed into
the system as a tax protester return, a designation will go on
that person's account for purposes of ensuring that people who
will look at that will understand that, on the face of the
return, the taxpayer has done something quite a lot different
than you or I have done. They have not filled out the return.
They have put some statement or evidence that they do not
intend to fill out the return, as it is designed, or do not
intend to follow the instructions as you or I would.
Mr. English. Thank you.
Thank you, Madam Chair.
Chairman Johnson. Thank you.
Mr. Weller.
Mr. Weller. Thank you, Madam Chair.
Mr. Dolan, I want to thank you for being before our
Subcommittee today and for holding yourself accountable over
the last few days with the hearings that have been held both
before the Senate Finance Committee, as well as the House Ways
and Means Committee.
I have two questions I would like to bring to you. And the
first one is, you kind of listen--as I listen to the folks back
home, the folks I represent, whether I am at the Union Hall or
the VFW or grain elevator or White's Cafe, Liberty Street in
downtown Morris, of course the IRS is often a subject--of
course, this week, something more, probably more obviously
discussed than it has been over the last few weeks.
I also listen to the common complaints that I hear from
folks who contact my office seeking help with dealings with
Federal agencies; and one of the complaints that I hear deals
with the case where a--someone is divorced and their former
spouse has disappeared, and the IRS decides to pursue the
former marriage partner that they can identify. In many cases,
this is a single mom with a couple of kids; and in many of
those same cases, the taxpayer deadbeat is also a child support
deadbeat.
And so this poor mom is struggling to make ends meet and
then along comes the friendly IRS saying, We want you to pay
your former husband's tax bills. Now the Taxpayer Bill of
Rights previously passed and signed into law directed the
Treasury Department to submit a report to Congress by January
of this year--now we are in September, almost to October--10
months ago to submit a report studying this situation
particularly, which affects working single moms, with kids,
that are being dunned for their deadbeat husbands' taxes. And
apparently your agency has failed to submit that report.
Can you explain why you did not comply with Taxpayer Bill
of Rights 2 in that direction.
Mr. Lubick. I think that onus is on us, Mr. Weller, not on
the Internal Revenue Service. Indeed, we received a draft in
June from the Internal Revenue Service on this subject. It is--
it is a very long draft. It is about 55, 60 pages. We believe
that the draft needs serious further work, because there are
some very different problems and very difficult choices to make
on it.
And I know the Chairman is very interested in this, too,
and unfortunately, I--if it is a day of apologies, we had a
fairly rough summer. We are turning to it immediately to see
what we can do. But it requires a lot of study.
We have talked with a number of the bar associations. They
have wrestled with the problems. And I can assure you that
there are--there are not any easy solutions that jump out. And
we are----
Mr. Weller. But you are saying, though, that the IRS gave
you the report 6 months after the deadline, and that was the
draft, and you are still working on it?
Mr. Lubick. Yes, sir.
Mr. Weller. How soon can we expect it?
Mr. Lubick. I think in the next couple of months we should
be able to come to some conclusion, get it up here. And then
work with you to try and let you wrestle with some of these
same problems, and make some decisions as well.
Mr. Weller. It is an important issue, affecting a lot of
working women in particular. And we will try to----
Mr. Lubick. I do not downplay the significance. I started
working on this problem in 1963, when it first came to the
attention of the Treasury Department, and----
Mr. Weller. Let me--and I am anxious to see that report. I
am anxious to work with you, as I know a number of my
colleagues are on this Subcommittee.
The second question I want to direct to Mr. Dolan is pretty
fundamental, I believe; and it is clearly the number one issue
when we talk about the IRS and the way the IRS operates when I
have town meetings and talk about our tax system. And that is
the--you know, when we talk about the rights that a taxpayer
has and--of course, under our laws.
But the biggest complaint that the folks back home have
with the IRS is, if they are one of the fortunate number who
are audited by the IRS, the IRS operates as if those taxpayers
are guilty until the taxpayer can prove themselves innocent.
Now, if that taxpayer was charged with a crime, in a court of
law, they would be innocent until proven guilty.
Now, Mr. Dolan can you justify why the IRS should treat a
taxpayer differently than someone charged with a crime, why the
IRS feels that a taxpayer is guilty until they are proven
innocent?
Mr. Dolan. Well, I don't think the IRS does believe
somebody is guilty until they are proven innocent. I think the
nature of the system we have, however, is that you and I file a
tax return and we assert that this is the amount of income that
we have received, these are the deductions, exemptions to which
we are entitled. The tax return is processed and filed as we
say it should be.
Now, along comes a 1099, a W-2, some information that says,
Gee, this says Mike Dolan was paid twice as much as he claimed
on his return. Along comes some other information that says,
this deduction was half of what he claimed. At that point in
time, the way our process works is it is incumbent on the IRS
to ask the taxpayer, what is the support for the self-
assessment for the claim that you made on your return?
That is the way the examination process works. For it to be
otherwise, for it to be styled in a way that the IRS went out
and proved categorically what Mike Dolan's income was or what
his deductions or exemptions were would be a process that would
be so extraordinarily intrusive and cumbersome that I don't
think any of us would be satisfied.
So I think sometimes the dynamic of asking a taxpayer to
support what he or she has said on a tax return is thought by
some to be guilty until proven innocent. But that is clearly
neither the intent nor the policy.
Mr. Lubick. Mr. Weller, there is no crime involved here,
with rare exceptions where there is a criminal investigation.
And in that case, indeed the IRS has the burden of proving a
crime beyond a reasonable doubt. But the ordinary tax
proceeding is a civil proceeding. There is no question of guilt
or innocence. It is a question of an accounting. That is the
beauty of our system in this country.
I worked in Central and Eastern Europe, where the
government was the adversary. This is a question where we rely
upon taxpayers to self-assess themselves. They tote up the
bill. Congress has passed a law. There is an obligation that is
owing. It is up to the IRS to be--to honor that law. It is up
to the taxpayer to honor that law. This is an accounting, and
the person that has the facts has a duty to lay out the facts
and determine what he owes. That is the only way our system
works, if taxpayers are cooperative; and as you have seen, it
only works if the IRS plays by the rules.
But we all have a common set of rules. If you go into a
supermarket and you pick up a lot of groceries, you add up the
bill and you--I assume you wouldn't want to pay any more or any
less than you owe. And that is what we are asking of taxpayers,
and that is what--we are asking that of the IRS.
Mr. Weller. My time has expired. And let me just say that,
you know, in a court of law, information is used as well; and
that information is then used to determine whether someone has
made a mistake or broken the law. You--do you honestly feel
that the way that the IRS has operated when auditing a
taxpayer--that they have treated every taxpayer as innocent
until proven guilty?
Mr. Lubick. Obviously not 100 percent. We have heard some
cases. Generally speaking, it is--it has been my experience
that the IRS, if it determines there has been an error in its
favor, is very forthcoming in squaring accounts with the
taxpayer. I come from a part of the country very close to Mrs.
Johnson's, and the revenue agents I dealt with, I think, are
the fine, high quality that they are in her district. I think,
by and large, they have been fair to taxpayers. And I think
if--to the extent they are not, we have to accommodate two
things.
We have to accommodate the--that the IRS is customer
friendly. And if you--and if--but that calls for a recognition
that those persons who make out their own tax returns, as I am
sure you do, account honestly and fairly for what you owe. And
if that system breaks down, if the 83 percent of the people
that are currently accounting fairly and honestly start to feel
that there is not a sanction--how many people would observe the
traffic laws if they didn't----
Chairman Johnson. Thank you, Mr. Lubick.
Mr. Lubick [continuing]. Know there were policemen around.
Chairman Johnson. Thank you, Mr. Lubick. That is the
difficult balance we draw.
Thank you, Mr. Weller.
Mr. Watkins.
Mr. Watkins. Thank you, Madam Chair and Mr. Dolan, members
of the panel. I appreciate the opportunity.
I don't have any major revelations. I sit here, though, and
try to think, how do we solve some of these problems. And, you
know, I think about you, though humans are more of a social
science and not an absolute science, I also know in my office I
spend untold hours trying to get them to understand how I would
like for them to handle cases and handle problems, and try to
go through that so we don't have foul-ups and mess-ups and
things of that nature. And inevitably there are always a few
that happen.
And I know, I think, as I look in your face, your agonizing
over this past week's revelations. And let me say, there is a
general, not only feeling, but there is a mindset that there is
a culture there that has set in in the IRS. And I know you are
probably wondering how you can overcome that, how you can find
some solutions, how you can find some way, and a constructive
way, to overcome it. And I--I have been trying to think that
through, also.
And I want to ask a couple of elementary things that--you
know 40, 50 years ago, by far the majority of the people in
this country trusted their government; and today, it is down in
the single digits. And that kind of concerns me because we are
all in this together.
Then we start talking about trying to serve people. But,
you know, WalMart, I have been told in talking to some
individuals there, every single person they hire takes a test.
I mean, that test is more aptitude in how they relate to other
people; they are concerned about marketing.
I don't know if there is anything such as tests that are
given early in life. I see a lady I have a lot of respect for
nodding, yes, that takes place.
But I know in marketing, you have to do it nearly every--
any business today of any size to try to hopefully prevent a
lot of the problems that are occurring out there. Do you--do
you analyze those tests? And do you analyze those that you get
complaints from, that person that is--you have received several
complaints by your customers or the taxpayers? Do you analyze,
see what category they fit in? I mean, several variables there,
like the number of years of service, how long they have been in
that job. You know, there are certain things that cause some of
the things to--reactions that we get.
Mr. Dolan. Mr. Watkins, we use tests today in some limited
way. I will tell you that one of the things that we have had
under way for the better part of the last year is an entire
competency-based process that will attempt to base everything
from the initial hiring on through the advancement, the
promotion and the training processes on what we have called the
competency model. And what that has been doing for us is
helping identify the competencies. In the past, we may have
focused exclusively on what somebody's technical understanding
is, how do they need to understand law and accounting? What
this is doing is focusing into our customer service industry,
into the communications capability.
We have recently done an experimental training class of all
of our collection personnel that takes some of what is out in
the private sector, the communications and conflict resolution
approaches, and building that into a training capability for
our collection personnel.
Mr. Watkins. Would it be too much to ask you to provide the
Subcommittee a copy of that, and I would ask for a copy of it
personally.
Mr. Dolan. Certainly. We will be happy to put it together
for you.
[The information is being retained in the Committee files.]
Mr. Watkins. I have tried to do some analysis of various
tests along the way professionally over the years, and I would
like to look at that one also, because it is a real problem.
You know, I don't know if it is the beginning agents, where
this is a major problem, or is there more in the greatest
number of years of service? But it is a concern, I think, of
this Subcommittee.
I know it is--it has got to be a concern of yours, the
unrest among the people about the problems they are
encountering with the IRS. And I know, as I have indicated, by
far the majority of the agents are committed, dedicated, trying
to do a good job. And probably it is like my staff, probably
they do an excellent job in their public relations work. But
there are those that have created a lot of problems.
We get those. We get those. We don't usually get a lot of
those that are satisfied; we always get those that are not
satisfied.
So I look forward to getting that. And I would like to try
to sit down and look at that and some other things to see if
there are any places we could help.
Mr. Dolan. Thank you, sir. I appreciate it, sir.
Chairman Johnson. Thank you very much, Mr. Dolan, for
staying with us, for people to have a chance to complete their
questions. I know you have to leave now.
The plan for the Subcommittee, in view of the fact that
there are no more votes, is to work right through lunch. We
will take testimony from Mr. Lubick, Mr. Brown, and Mr. Monks,
have questions on that testimony, hear the testimony of the
next panel and take questions. So we intend to have no break
for lunch.
And, Mr. Dolan, thank you very much.
Mr. Dolan. Thank you, Madam Chair.
Chairman Johnson. Mr. Lubick.

STATEMENT OF HON. DONALD C. LUBICK, ACTING ASSISTANT SECRETARY,
TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

Mr. Lubick. Thank you, Madam Chair, Members of the
Subcommittee. If you like, I have delivered to you a written
statement in length. And I might perhaps give you a table of
contents, very briefly, as to what is in it and then submit to
your questions----
Chairman Johnson. That will be fine.
Mr. Lubick [continuing]. So as not to be unduly repetitive.
In our written statement, we emphasize the importance of
maintaining the integrity and smooth functioning of the
voluntary self-assessment tax system which, as I stated a few
minutes ago, turns on two things--continued confidence of the
American people in the fairness of the IRS and, at the same
time, the IRS having the tools to exercise its function of
ensuring compliance in a fair and reasonable way. And I want to
assure you that we do want to work with you in improving the
fairness of the tax law and securing those objectives which I
am sure all of us share together. We outline the major
initiatives.
I think this administration has probably been more active
than any previously in the last few years.
Chairman Johnson. Actually, Mr. Lubick, if I may, your
testimony is very complete on past accomplishments----
Mr. Lubick. Right.
Chairman Johnson [continuing]. And the administrative
things you have done. But you do have some interesting comments
on the specific proposals of H.R. 2292.
Mr. Lubick. Correct.
Chairman Johnson. In view of time, I would appreciate it if
you would go directly to those.
I do appreciate your review in the earlier part of your
testimony of both what we did in TBOR 1 and 2 and the
administrative actions that you have taken to enhance taxpayer
rights.
Mr. Lubick. There is a complete statement appended to
Stuart Brown's testimony, which goes through, article by
article, the joint position that the Internal Revenue Service
and the Office of Tax Policy agree upon completely and
cooperatively, and I would just like to mention a very few
items of major concern.
First, the proposals dealing with the Taxpayer Advocate, we
agree that the strengthening of the--that office is very
important. We have listed the particular items in the
Restructuring Commission's bill that we endorse, and some that
we think are inappropriate.
On the question of taxpayer privacy and the disclosure to
the archives, again, we do not object to that, but we think
there must be a clear statement in the law that sets forth the
conditions under which there can be proper redisclosure.
There are a number of other positive provisions that we
have endorsed, as you will see. There are a few areas of
concern that I would like to mention.
On the attorney's fees, we strongly endorse the proposal to
allow them in pro bono cases. And we think that the three
circuit loss provision with some safeguards is appropriate
also. Any others, we find wanting and inappropriate, for
reasons which we will be glad to elaborate on if you wish.
On the question of civil remedies against the United
States, we think it is important to maintain the recklessly or
intentionally disregards test, rather than the negligence. This
question has been reviewed by Congress. And Congress has not
adopted this test of negligence in order, presumably in order
to discourage wasteful litigation over footfalls or good faith
but erroneous actions.
We think, rather than broadening the current provision to--
in a way that we think would encourage a lot of litigation over
a very murky standard, it should be broadened in another way,
which is to make the remedy for reckless or intentional actions
available to victims other than the taxpayer. For example, if
property is seized and that property is someone else's, that
person should have the remedy, even though not a taxpayer.
Basically, we are worried very much about a requirement
that we disclose in detail all sorts of criteria by which
returns are selected for audit. We think it is--it is a big
mistake to give a potential roadmap to the least risky avenues
of tax avoidance.
We--I just want to repeat, in concluding, that we do stand
ready. This is an area where we have been very active. We
appreciate working with you over the past several years. It has
been very successful. And we want to continue that
relationship, and hopefully, will be able to work out an
agreement on the enhancement of taxpayer rights.
[The prepared statement and attachment follow:]

Statement of Hon. Donald C. Lubick, Acting Assistant Secretary, Tax
Policy, U.S. Department of the Treasury

Madam Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss recent legislative
and administrative initiatives to enhance the procedural rights
and remedies that taxpayers have in their dealings with the
Internal Revenue Service (``IRS'') under various provisions of
the Internal Revenue Code of 1986 (``Code''). In particular, I
will be discussing certain taxpayer rights proposals considered
by the National Commission on Restructuring the Internal
Revenue Service, which are included in the Commission's Report
dated June 25, 1997 and in legislation (H.R. 2292) that was
recently introduced by Representatives Portman and Cardin. As
you know, Secretary Rubin and I have previously testified
concerning other portions of the legislation, in particular the
governance and electronic tax administration provisions.

The Importance of Taxpayer Rights

Let me begin by emphasizing that this Administration,
including the leadership of the Department of the Treasury and
the Internal Revenue Service, is thoroughly dedicated to
improving taxpayer services, protecting taxpayer rights, and
enhancing the public's understanding of our system. We believe
that this Administration has an exceptionally strong record in
enacting taxpayer protections and implementing them
administratively. At the Administration's urging, Congress has
passed two separate sets of significant taxpayer rights
provisions in just the past 15 months, including the Taxpayer
Bill of Rights 2, which President Clinton signed into law on
July 30, 1996, and many provisions from the Taxpayer Bill of
Rights 3 and Tax Simplification Proposals that the
Administration announced in April, 1997 and that were enacted
this summer as part of the Taxpayer Relief Act of 1997. We
expect to be offering additional legislative proposals
concerning taxpayer protections in the course of our next
budget cycle early next year. We believe that there should be
regular and comprehensive re-examination of the tax procedures
and taxpayer remedies in the Code. The Treasury Department and
the IRS regularly work together to develop new programs to ease
taxpayers' contacts with our tax system. This is an area in
which sound tax policy and fair and effective tax
administration are closely intertwined.
This Administration has also undertaken a number of
administrative efforts, such as our Administrative Taxpayer
Bill of Rights initiative in January, 1996, and the updating of
Publication 1 to include the ``Declaration of Taxpayer Rights''
in April, 1996. We have stepped up Treasury oversight and
management of the IRS, and these efforts have resulted in more
resources being devoted to customer service, a new
``blueprint'' for modernizing the IRS's antiquated computer
systems, and our recent request for proposals as to how we can
best increase electronic tax administration. Finally, the
Administration's proposals for institutionalizing enhanced
Executive Branch oversight and outside management advice have
been introduced as legislation, H.R. 2428, by Representatives
Rangel, Coyne, Matsui, Hoyer, and Waxman, and we would urge you
to adopt those proposals.
This Administration's commitment to taxpayer service and
procedural protections stems from our belief that treating
taxpayers fairly is of paramount importance to our self-
assessment system of tax compliance. Our system relies, in
large part, on taxpayers' belief that our tax laws are
equitable and on their confidence in the fair and impartial
administration of the tax laws. That confidence in the fair and
impartial administration of the tax laws in turn depends on how
taxpayers are treated on an everyday basis by the IRS. Poor
taxpayer service can foster taxpayers' discontent, with a
resulting adverse effect on their willingness to pay taxes
voluntarily. Consequently, guaranteeing the fair and uniform
application of our tax laws is absolutely critical to good tax
administration. As responsible government officials, the
members of Congress and the Executive Branch must maintain the
continued success of our self-assessment approach to taxation
and the ongoing viability of the Governmental functions that it
supports.
Although we believe that most IRS employees perform the
difficult job of administering our complex tax code in a fair
and impartial manner, we also recognize that some IRS employees
do not serve taxpayers as well as they expect and deserve. Such
lapses are unacceptable to all of us. This week Acting
Commissioner Dolan apologized to abused taxpayers whose cases
have come to our attention. And Secretary Rubin has personally
instructed the IRS to provide him information on the steps IRS
plans to take in light of these cases, including possible
disciplinary actions, and how we can use these cases as a
teaching and prevention tool for the future.
We should recognize, however, that the IRS in fact serves
most taxpayers very well and very successfully. For millions of
Americans, the payment of taxes is straightforward. For many,
contact with the IRS consists of nothing more than an amount
withheld from their weekly or monthly paycheck and the once-a-
year filing of a simple Form 1040EZ or 1040A, frequently
followed by the receipt of a refund check a few weeks later.
Through such withholding and self-assessment, we receive
approximately 84 percent of what we believe is the proper
amount of taxes due, and another 3.5 percent is obtained
through the IRS's collection efforts. Each year, the IRS
examines the returns of only one or two percent of individual
American taxpayers.
As a result, our tax administration system is very highly
regarded by other nations--indeed, Kenneth Kies, Chief of Staff
of the Joint Committee on Taxation, recently described it as
``the envy of countries and governments'' around the world--and
the Department of the Treasury and IRS are frequently called
upon to provide advice to other countries about improvements
that they can make in their systems. I served as Director of
Treasury's Tax Advisory Program for almost two years, advising
the countries of Eastern Europe and the former Soviet Union
concerning their tax systems as part of their transition to
market economies and free societies. This experience left me
with a heightened appreciation for the truly ``world class''
fairness and effectiveness of our own system of taxation. It
embodies some fundamental features--such as periodic self-
reporting and self-assessment, withholding, information
reporting, and collections strictly in accordance with
statutory and constitutional protections--that many nations are
struggling to copy.
Along with Americans' historic respect for democratic
values and the rule of law, our system has given us a high
level of tax compliance at a relatively low cost. While we must
continually renew our commitment to improve efficiency and
maintain correct and fair treatment of all taxpayers, we should
be very careful not to discredit unfairly the efforts of the
many dedicated public servants who administer and enforce our
revenue laws in an independent and non-partisan fashion. We
should work together in a constructive dialog and do our utmost
to ensure that taxpayers' rights are protected.

Recent Taxpayer Rights Initiatives

The past decade has seen a series of significant
Congressional and Executive Branch actions to maintain and
enhance the rights of taxpayers in their dealings with the IRS.
I will review this history briefly, in order to illustrate how
far we have come in a short while.

Omnibus Taxpayer Bill of Rights (``TBOR 1'').

After years of thorough study and hard work by many
dedicated Representatives and Senators, including Members of
this Subcommittee, Congress enacted the first Omnibus Taxpayer
Bill of Rights in 1988. Among its many important provisions,
TBOR 1:
created the Office of Ombudsman and the Taxpayer
Assistance Order procedure;
required written notice to taxpayers of their
rights; prescribed procedures for taxpayer interviews;
specified the content of tax due, deficiency, and
other notices;
revised the levy and jeopardy assessment
procedures;
expanded the Tax Court's jurisdiction;
created new administrative appeal remedies,
enhanced taxpayers' ability to collect attorneys' fees, and
instituted new civil causes of action for failure to release a
lien and for certain unauthorized collection actions; and
prohibited use of tax enforcement results to
evaluate collection employees and their supervisors, or to
impose or suggest production quotas or goals for them.
These provisions substantially increased the protections
taxpayers have in their dealings with the IRS, and we believe
that they have operated successfully. I would note, however,
that a few of the proposals in H.R. 2292, which I will discuss
in a moment, were considered by Congress but after thorough
bipartisan study were not included in TBOR 1.

``Administrative TBOR''.

In 1995, Treasury and the IRS worked to develop proposals
for a Taxpayer Bill of Rights 2 (``TBOR 2'') in a bipartisan,
cooperative effort with the staff and Members of the Committee
on Ways and Means, in particular this Subcommittee on
Oversight, and the Senate Committee on Finance and Joint
Committee on Taxation. Many of those proposals were ultimately
included in the Revenue Reconciliation Act of 1995, which as
you know was vetoed for other reasons. Nonetheless, the IRS
announced on January 4, 1996, over two dozen administrative
proposals to improve taxpayer rights. Through administrative
actions such as revenue procedures, delegation orders, formal
announcements, Internal Revenue Manual provisions, and similar
vehicles, the IRS was able to implement roughly one-third of
the TBOR 2 proposals without new legislation. These included,
for example:
several enhancements of the authority and power of
the Taxpayer Ombudsman;
new procedures to allow taxpayers to appeal liens,
levies, and seizures;
additional notice rules for overpayment
situations, section 6672 ``responsible person'' cases, and
cases involving divorced or separated spouses; and
voluntary limits on certain investigative
techniques such as the use of designated summonses and the
investigation of disputed information returns.
The Administration also announced a number of further
initiatives, including new administrative appeals processes,
electronic filing and storage rules, a procedure for obtaining
advance valuations of art, and new relief provisions for
obtaining automatic extensions of time for payment or for
changes in methods of accounting. The appendix to my testimony
contains a complete list of these Administrative TBOR
initiatives.
Also in January, 1996, the Administration directed the IRS
to develop a new, concise statement of the rights that
taxpayers have under our system. In April, 1996, we released a
simple and straightforward 8-paragraph ``Declaration of
Taxpayer Rights,'' which is now included at the front of
Publication 1. Publication 1 is the pamphlet that goes to all
taxpayers who are audited or have other controversies with the
IRS. Thus, every taxpayer subject to a potential dispute with
the IRS is now reminded in writing, at the outset of contacts
with the IRS, of the fundamental rights and remedies that are
available under the Internal Revenue Code and Treasury
Regulations. The Administration wants citizens to understand
that they are entitled to fair treatment by the IRS, and to
recognize that we are committed to operating the tax system in
an equitable and impartial fashion.

Taxpayer Bill of Rights 2.

With the strong support of the Administration, a bipartisan
TBOR 2 containing over 40 taxpayer rights provisions was
eventually enacted as separate legislation by Congress and
signed by President Clinton on July 30, 1996. In addition to
codifying the administrative TBOR actions that the IRS had
already taken, TBOR 2 made many other procedural changes, such
as:
changing the title of the Ombudsman to Taxpayer
Advocate and statutorily enhancing that office's powers;
providing additional statutory authority to abate
interest and some penalties, to withdraw notices of federal tax
lien, and to return seized property;
increasing, and indexing for inflation, the
amounts of certain property exempt from levy and the amount of
attorneys' fees that can be recovered, as well as making
several other changes in the attorneys' fees procedure; and
creating or amending several causes of action,
including remedies for unauthorized collection actions, for
fraudulent information returns, and for contribution between
persons responsible for withholding taxes.
The appendix contains a full list of these provisions.
Again, it should be noted that in developing TBOR 2, Congress
considered but rejected some of the same proposals that are now
contained in H.R. 2292.
Immediately after TBOR 2's enactment, Treasury and the IRS
began implementing those new taxpayer rights provisions that
had not already been effected administratively. We proposed the
simplest regulatory changes before year-end in 1996, and we
included ten TBOR 2-related projects on our 1997 Treasury-IRS
Priority Guidance Plan. The completion of these important
implementation projects is underway.

Taxpayer Bill of Rights 3.

Most recently, in April, 1997, the Administration announced
a package of 59 additional Taxpayer Bill of Rights 3 (``TBOR
3'') and Tax Simplification Proposals. We were pleased that
Congress adopted most of these proposals in the Taxpayer Relief
Act of 1997 this summer. Two of our TBOR 3 proposals--to
enhance the rights of disabled persons by providing for
equitable tolling of the statutes of limitation on refunds, and
to treat taxpayers more fairly by allowing ``global'' interest
netting on under- and overpayments--have not been enacted,
however. We would urge this Subcommittee to include our global
netting and equitable tolling proposals in your recommendations
to the full Committee. Both proposals would benefit taxpayers
by relaxing some unnecessarily rigid rules in the Code in an
administratively feasible manner. Some of our other proposals
that would significantly enhance the efficiency and fair
operation of our system, such as our proposed legislation
authorizing federal and state tax authorities to streamline
their contacts with taxpayers, also await Congressional action.
As this brief history shows, this Administration remains
deeply committed to enhancing taxpayer rights and remedies
through legislative and administrative actions. These actions,
along with the passage of the original TBOR 1 legislation, have
already had a profound and lasting impact on the IRS's
administration of the tax law. In reviewing this record, the
Restructuring Commission stated as follows:
The Commission found that the passage of the Omnibus
Taxpayer Bill of Rights and Taxpayer Bill of Rights 2 have had
an important effect on changing the culture of the IRS. The
agency spends significant resources educating personnel to
treat taxpayers fairly, and the Commission found very few
examples of IRS personnel abusing power.
Report page 43 (emphasis added).

Policy Criteria for Further Action

Our efforts to maintain and improve the treatment of
taxpayers under our system cannot stop with these prior
initiatives. Because we are all working toward the common goal
of a fairer and more efficient tax system, the Administration
is pleased to join with Congress and this Subcommittee in
considering and developing additional taxpayer rights
proposals. Let me discuss for a moment what I believe to be the
sound tax policy criteria against which each proposal should be
evaluated.
First, new proposals in the area of taxpayer rights and
remedies should be subject to the same rigorous analysis we
apply to all tax proposals. We should not forget the other many
considerations that go into making good tax policy. Certainly
maintaining and enhancing taxpayer protections is an essential
element of sound tax policy. For the important reasons I
discussed above, taxpayers must be treated fairly, courteously,
and consistently by the IRS, and they must have legal and
administrative remedies readily available to them to ensure
such fair, courteous, and consistent treatment.
Another element of sound tax policy is that everyone should
pay his or her fair share of taxes due. This requires the IRS
to have the strong legal and administrative tools it needs to
enforce and collect the correct amount of taxes from those
taxpayers who, unfortunately, choose not to comply voluntarily.
Responsible and appropriate enforcement action also results in
a smaller financial burden on those taxpayers who do pay
voluntarily. Thus, voluntary compliance and adequate
enforcement mechanisms go hand in hand.
Thus, in evaluating taxpayer rights proposals, we must
balance the rights and remedies available to taxpayers with the
need for fair yet efficient IRS enforcement mechanisms. Each
proposal must be evaluated separately in such a balancing
process.
Specific Proposals in H.R. 2292

Many, but not all, of the proposals in H.R. 2292 meet these
criteria. Many of these provisions need some drafting
improvements, and Treasury wants to work with the Members and
staffs of the tax-writing committees to improve them. I will
focus my remarks in this testimony on only a few of the more
significant proposals.

Taxpayer Advocate.

With the Administration's support, Congress just last year
enacted several enhancements to the Taxpayer Advocate's powers,
including adding the power to use a Taxpayer Assistance Order
(``TAO'') to direct the IRS to take affirmative actions and
limiting the IRS officials who can overrule the Advocate to
only the Commissioner and Deputy Commissioner. TBOR 2 also
added new requirements for the Taxpayer Advocate to make
independent reports to Congress, and we look forward to
analyzing and discussing with this Committee the
recommendations that the Advocate will make in his report due
in December, 1997, the first full year of the new requirements.
Under the statute, the Taxpayer Advocate's office has
authority to issue TAOs in cases of ``significant hardship.''
The Restructuring Commission's report (page 45) criticized the
IRS for interpreting the statutory term ``significant
hardship'' ``so narrowly'' that ``very few cases are eligible
for relief.'' We believe this criticism is unfair, and that the
regulation promulgated by Treasury and the IRS interprets the
term in close accordance with the legislative history of the
provision in which it was enacted. Nonetheless, we believe the
Taxpayer Advocate should find some additional substantive
standards useful in determining whether a TAO is appropriate.
Therefore, Treasury supports enacting some additional defining
criteria to the determination of whether a taxpayer is
suffering a ``significant hardship.''
Section 301 of the bill proposes several such criteria,
namely:
1) whether the IRS is following ``applicable published
guidance, including the Internal Revenue Manual'';
2) whether there is an immediate threat of adverse action;
3) whether there has been a delay of more than 30 days in
resolving taxpayer account problems; and
4) the prospect that the taxpayer will have to pay
significant professional fees for representation.
We will suggest certain modifications in the wording of
these standards. In particular, however, the first should be
deleted. It would require the Taxpayer Advocate to interpret
the substantive tax law to determine whether the IRS employee
is acting appropriately, which arguably is irrelevant to the
amount or ``significance'' of the hardship the taxpayer is
allegedly suffering. Moreover, including reference to the
Internal Revenue Manual is inappropriate and might be viewed as
elevating the Manual to the status of binding legal authority
in the interpretation of Congressional intent, contrary to the
uniform holdings of the courts.

Taxpayer privacy.

Several provisions of H.R. 2292 address the taxpayer
privacy and confidentiality policy that is embodied in section
6103 of the Internal Revenue Code. As you know, Treasury and
the IRS have strongly supported this policy, and we continue to
do so, even when that provision unavoidably restricts our
ability to respond publicly to inquiries concerning particular
taxpayers or allegations of taxpayer abuse. In general, we
believe that the Code should continue to provide for strict
confidentiality of taxpayer returns and return information.
Section 305 of H.R. 2292 would provide an exception to
section 6103 that would clearly authorize the disclosure of IRS
records to the National Archives and Records Administration for
archival purposes. We do not oppose clarifying section 6103
this way. However, returns and return information should remain
private; they should never be published in the New York Times,
as occurred last year when some records containing such
information were released by the Archives. We would urge
Congress to eliminate the sentence authorizing the Archives to
re-disclose information with the Secretary's consent and
instead to add appropriate safeguards on the ultimate
disposition of the records. These could include a permanent ban
on re-disclosure of returns or return information by the
Archives, non-disclosure for a specified period of years, or
other safeguard terms in accordance with the remainder of
section 6103's confidentiality policy. This might be an
appropriate subject for the Joint Committee on Taxation's study
of section 6103 that is proposed in section 306 of the bill.
Other positive provisions.

Other provisions of H.R. 2292 that we believe generally
reflect sound tax policy, and which we support subject to some
drafting changes, include:
section 306, providing for a study by the Joint
Committee on Taxation of the general policy of confidentiality
inherent in section 6103;
section 308, relating to allowances for offers-in-
compromise;
section 312, providing for payment of taxes to the
``Treasurer, United States of America'';
section 314, relating to Tax Court jurisdiction
(although provisions similar to subsections (a) and (b) were
proposed by the Administration in April, 1997 and have already
been enacted in the Taxpayer Relief Act of 1997);
section 315, relating to taxpayer complaints; and
sections 319, 320, and 321, requiring studies of,
respectively, penalty administration, separate filing for
married taxpayers, and burden of proof issues.
We believe that our respective staffs should be able to
reach agreement on the technical drafting issues relating to
these provisions relatively quickly and easily.

Areas of concern.

In our judgment, however, some of the proposals that the
Restructuring Commission considered and that are incorporated
into H.R. 2292 raise serious concerns and need closer scrutiny.
Many of these proposals reflect prior ideas that Congress has
already fully and carefully considered and chosen not to adopt
in the course of enacting TBOR 1 or TBOR 2. Again, I will focus
my testimony principally on those provisions that in our view
are most clearly contrary to sound tax policy.
One provision of great concern to Treasury is section 302,
which would further amend the attorneys' fees provision in the
Code, section 7430, that Congress just amended last year in
TBOR 2 and this year in the Taxpayer Relief Act. This provision
would: allow higher fees because of difficult issues or the
local availability of tax expertise; allow attorneys' fees
during proceedings before the IRS Office of Appeals; authorize
fees in cases where the attorney has been paid only a
``nominal'' fee (essentially pro bono cases); increase the
``net worth'' caps to $5 million for individuals and $35
million for corporations; and provide automatic attorneys' fees
for taxpayers who prevail on an issue that the IRS has already
lost in three circuit courts of appeal. We strongly support the
pro bono proposal, and we could support the three-circuit rule,
if certain important modifications were made.
We cannot support some of the other provisions. In
particular, proposals to make attorneys' fees available during
the Appeals process have repeatedly failed to receive approval
from Congress, and have been opposed by Treasury and the IRS in
both this and previous Administrations, because the Appeals
process should not be considered an adversary proceeding like a
court case. Appeals is supposed to be a forum for the
compromise of disputes between taxpayers and the IRS, and it is
the first stage within the IRS at which proposed adjustments
are fully reviewed, expressly taking into account the hazards
of litigation. The informal process of Appeals contrasts with
formal litigation, in which the parties must thoroughly develop
their legal cases and conduct discovery to ascertain the full
facts. Payment of attorneys' fees at the Appeals stage, before
the IRS had taken a final position on an issue, could
jeopardize open communications between taxpayers and Revenue
Agents, for taxpayers might withhold material favorable to
their position until they commence an appeal (at which
attorneys' fees would be available). We likewise believe that
enhanced fees for certain issues or areas would be extremely
difficult to administer fairly and consistently, and, like the
increased net worth caps, would direct tax dollars to upper-
income taxpayers and their representatives.
Section 303 of H.R. 2292 would amend section 7433 of the
Code, which provides a civil remedy against the United States
for certain unauthorized collection actions by IRS agents.
Claims currently may be sustained only if an IRS officer or
employee ``recklessly or intentionally disregards'' applicable
statutory or regulatory provisions. This proposal would add
``negligence'' as grounds for relief. Treasury's serious
concerns about this provision have consistently led us to
strongly oppose this proposal, for it could seriously
jeopardize IRS collections and subject the United States to
numerous frivolous lawsuits. The ``reckless or intentional''
standard was consciously chosen by Congress in TBOR 1 in order
to discourage wasteful litigation over ``foot faults'' or good-
faith, but erroneous, actions by Revenue Officers in the course
of collection activities. Similar proposals to relax these
rules were considered, and rejected, just last year in
connection with TBOR 2, which instead increased the maximum
damages from $100,000 to $1 million. Treasury concurred in that
approach, and we continue to believe that taxpayers have
adequate remedies available to them without clogging the courts
with allegations of negligence. As the IRS has suggested,
however, it might be appropriate to broaden the current
provision in another way, to make the remedy for ``reckless or
intentional'' actions available to affected persons other than
the taxpayer. We would prefer to work with the Subcommittee on
this approach. It might be appropriate to broaden the current
provision in another way, to make the remedy for ``reckless or
intentional'' actions available to affected persons other than
the taxpayer. We would prefer to work with the Subcommittee on
this approach.
Another provision of H.R. 2292, section 304, would require
adding to Publication 1 an explanation ``in simple and
nontechnical terms'' of the ``criteria and procedures for
selecting taxpayers for examination.'' Section 7521 of the
Code, which was enacted by TBOR 1, already requires
explanations of the audit or collection processes and the
taxpayer's rights. We agree that the IRS could insert in
Publication 1 some further discussion, in general terms, of the
its examination processes, and we would support the intent of
this provision. We have concerns, however, about the harm that
might result to our overall tax system from disclosing to
taxpayers detailed information concerning the sorts of return
positions or items of income, deduction, credit, etc. that may
trigger an examination--in effect, giving taxpayers a potential
road map to the least risky avenues of tax avoidance or
evasion. We are unaware of any other Federal law enforcement
agency that promulgates its enforcement criteria in a detailed
fashion. We would like to work with you to develop a suitable
formulation for these disclosures.
Treasury is similarly concerned about section 316 of the
bill, which would set out new procedures for taxpayer
interviews, and we recommend further study. These new
procedures would require:
1) A Miranda-type warning that the taxpayer is permitted a
representative--which Publication 1 already contains--and an
automatic suspension of the interview if the desired
representative is not present;
2) An explanation that the taxpayer has the right to have
an interview at a ``reasonable place''--which, again, the
regulations already require--and that it need not be the
taxpayer's home;
3) An explanation of why the taxpayer's return has been
selected for examination;
4) An explanation of applicable burdens of proof.
Most of this information is already included in Publication
1, and, although these explanations sound innocuous, they may
in some cases hinder IRS investigations of non-compliant
taxpayers. For example, the third requirement could lead to
disclosure of examination methods or criteria or the existence
of informants, and the first provision might make taxpayers
perceive every contact to be a hostile, adversary proceeding.
Comparable procedures were passed over for similar reasons in
connection with TBOR 1, and section 7521 was enacted instead,
which already permits a taxpayer to suspend an interview by
asking for representation. We have heard no reason for adding
these new requirements to the existing carefully balanced
scheme that was only recently enacted and seems to be working
well for all parties. (The text of the Restructuring
Commission's Report does not discuss any taxpayer concerns in
this area, relegating this proposal to the appendix.)

Conclusion

As demonstrated by the history of taxpayer rights
provisions that I discussed earlier, Congress, Treasury, and
the IRS all share a commitment to treat taxpayers fairly in our
administration of the internal revenue laws. In the past we
have cooperated to develop important procedural remedies and
guarantees in the context of sound tax policy and efficient
administration. We are confident that we can again work with
you and your staff regarding the important issue of taxpayer
rights and needed improvements in the tax law in respect of
this issue. The Administration will be making additional
taxpayer rights proposals in our next budget, and we look
forward to working with you on those as well. Our common goal
is to ensure that American taxpayers get the best tax service
in the world.
I would be happy to entertain questions or discuss
particular provisions with you.

APPENDIX--RECENT TAXPAYER RIGHTS INITIATIVES

``Administrative TBOR'' initiatives.

These are measures that the Administration implemented
administratively, without the need for legislation, in 1996.
1. Increased Taxpayer Ombudsman Authority to Address
Taxpayer Concerns. This was initially accomplished via
additional Delegation Orders from the Commissioner.
2. Commissioner's Directive to Track IRS Response to
Taxpayer Ombudsman Annual Reports. This was also accomplished
through a Delegation Order.
3. Greater Protection for Taxpayer Assistance Orders. A
temporary Delegation Order, and regulations proposed in 1996,
voluntarily limited the IRS officials who can overturn TAOs.
4. Increased Stature of Taxpayer Ombudsman Within the IRS.
The salary and grade level of the Ombudsman (now the Taxpayer
Advocate) were enhanced administratively.
5. Greater Participation of Ombudsman in Selection of Local
Problem Resolution Officers. This was accomplished through a
Commissioner's Directive.
6. New Procedures to Allow Taxpayers to Appeal Liens,
Levies, and Seizures. A new appeals process was created, and
IRS forms, publications, and the Internal Revenue Manual were
updated to reflect it.
7. Notification of Collection Activity to Divorced and
Separated Spouses. The Internal Revenue Manual now provides for
such notice, subject to privacy concerns in this particularly
sensitive area.
8. Prohibition on Compromising Informant's Tax Liability.
The Internal Revenue Manual was amended to prohibit
compromising an informant's liability in exchange for
information about another taxpayer.
9. Voluntary Payor Telephone Numbers on Forms 1099. The IRS
began asking payors in 1996 to include a telephone contact on
the Forms 1099 that they provided to taxpayers.
10. Study of Interest Netting. This study was completed and
released in April, 1997. It resulted in the Administration's
global interest netting legislative proposal in TBOR 3.
11. Study of Joint Return Issues for Divorced and Separated
Spouses. The information-gathering stage of this study was
completed in late 1996, but a draft is still undergoing review
within Treasury. This is the only uncompleted item from this
list.
12. Increased IRS Investigation of Disputed Information
Returns. The Internal Revenue Manual was amended to increase
efforts to investigate information that a taxpayer challenges.
13. 30-Day Notice Before Terminating or Modifying
Installment Agreements. This was accomplished through
regulations.
14. Penalty for Trust Fund Taxes Under 6672. Internal
Revenue Manual changes required that taxpayers get 60 days
notice before the penalty is assessed, and an IRS policy
statement prohibited penalties against honorary or volunteer
trustees of an organization in most circumstances.
15. Annual Reminders of Outstanding Delinquent Accounts.
The Internal Revenue Manual was amended to direct IRS personnel
to provide annual, and sometimes semiannual, reminders to
taxpayers.
16. Notice of Overpayments. The Internal Revenue Manual was
changed to require a reasonable attempt to notify a taxpayer as
soon as possible if the IRS receives a payment that cannot be
matched to a taxpayer account.
17. Limitations on the Use of a Designated Summons. A
policy statement was issued, requiring Regional Counsel to
approve all designated summonses and in most cases limiting
their use to audits of large corporations in the Coordinated
Examination Program (``CEP'').
18. Early Appeal of Certain Issues. A revenue procedure was
issued to provide a mechanism for employers to obtain appeal of
employment tax issues while an examination is still in
progress.
19. Appeals Mediation Procedure. A test of an Appeals
mediation procedure began in 1995 and has been continued
through 1997.
20. Obtaining Advance Valuation of Art Works. Under a new
revenue procedure, taxpayers can obtain an IRS expert's
valuation in advance of filing the return in which the
valuation is reported.
21. Making Taxpayer Identification Numbers Available.
Regulations proposed in 1996 provide a method for taxpayers who
are not eligible to obtain Social Security Numbers to still
obtain Taxpayer Identification Numbers.
22. Obtaining Section 9100 Relief. The revenue procedure
for granting taxpayers relief when the make certain requests
for changes of accounting method or period was revised.
23. Allow Automatic Extensions Without Payment. Proposed
regulations eliminate the requirement that the tax be fully
paid with the application for an automatic 4-month extension.
24. Permit Use of Imaging Systems to Store Tax Records.
This was accomplished by updating the revenue procedures on
storing such records.
25. Electronic Filing of Form 941. A revenue procedure was
issued setting forth the procedures to be used by taxpayers who
wish to file Form 941 electronically.
26. Simultaneous Appeals/Competent Authority Procedure. A
revenue procedure authorizes simultaneous Appeals/Competent
Authority procedure.

TBOR 2 provisions.

The Administration worked with Congress in developing this
legislation, which was signed by President Clinton on July 30,
1996.
Sec. 101. Taxpayer Advocate. This provision changed the
``Taxpayer Ombudsman'' to the ``Taxpayer Advocate'' and
increased his authority in several respects.
Sec. 102. Taxpayer Assistance orders. This provision
restricted the individuals who can overturn TAOs to the
Taxpayer Advocate, Commissioner, or Deputy Commissioner.
Sec. 201. Notice of termination or modification of
installment agreements. This provision required IRS to give 30-
day notice before terminating or modifying installment
agreements entered with taxpayers.
Sec. 202. Administrative review of termination of
installment agreements. This provided an administrative review
process or appeal if the IRS terminates an installment payment
agreement.
Sec. 301. Expanded authority to abate interest. The Service
was given authority to abate interest in more situations under
this provision.
Sec. 302. Judicial review of failures to abate interest.
The Tax Court can now review the Service's failure to abate
interest, under an abuse of discretion standard.
Sec. 303. Extension of interest-free period. The period of
time after taxpayers receive a bill from the IRS in which they
can pay before interest starts to accrue was extended.
Sec. 304. Abatement of payroll deposit penalty. This
provision lets the IRS waive the penalty for failure to make a
timely deposit of payroll taxes in certain circumstances.
Sec. 401. Study of joint return issues. This study
addresses several issues arising out of the joint and several
liability that taxpayers incur when they file joint returns but
later separate or divorce. It has not been completed.
Sec. 402. Joint return after separate return without full
payment. Married taxpayers who file separately, but later
determine that their tax would be less if they filed jointly,
may now amend their return without fully paying the amount of
joint tax due.
Sec. 403. Disclosure of collection activities with respect
to joint returns. The IRS may now disclose to divorced or
separated spouse the collection activities it has undertaken
with respect to the other spouse, consistent with privacy
concerns.
Sec. 501a. Withdrawal of notice of lien. The IRS can now
withdraw a recorded tax lien in additional circumstances, e.g.
when a taxpayer has made an installment payment agreement.
Sec. 501b. Return of levied property. This provision
permits the IRS to return property it has seized in some
additional circumstances, e.g. after an installment agreement
is entered.
Sec. 502. Modification to levy exemption amounts. The
amounts of certain property that is exempt from levy were
increased and indexed for inflation.
Sec. 503. Offers in compromise. The amount of tax that can
be compromised without an opinion from the IRS Chief Counsel's
office was increased by this provision.
Sec. 601. Civil damages for fraudulent information returns.
This provision creates a federal cause of action against a
payor who has filed a ``fraudulent'' information return.
Sec. 602. Reasonable investigations of information returns.
This provision requires the IRS to investigate and prove the
accuracy of information returns that the taxpayer contests, so
long as the taxpayer fully cooperates in the investigation.
Sec. 701. Attorneys fees--burden of proof on
``substantially justified.'' The IRS must show that its
position was ``substantially justified'' in the attorneys' fees
stage of a case.
Sec. 702. Increase and index attorneys' fees dollar amount.
The hourly amount of attorneys' fees that can be collected from
the Government was raised and indexed for inflation.
Sec. 703. Failure to extend statute of limitations. Under
this provision, the failure to extend the statute is irrelevant
to whether the taxpayer exhausted administrative remedies for
purposes of the attorneys' fees determination.
Sec. 704. Attorneys' fees in declaratory judgment actions.
This provision made attorneys' fees and costs available in
declaratory relief actions.
Sec. 801. Increase civil damages for unauthorized
collection actions. The maximum damages for reckless or
intentional IRS misdeeds went from $100,000 to $1 million.
Sec. 802. Discretion to award damages for unauthorized
collection actions where administrative remedies not exhausted.
This replaced the previous automatic bar if remedies were not
exhausted.
Sec. 901. Preliminary notice of proposed 6672 penalty. This
provision applies when corporate officers responsible for
collecting employment taxes are penalized for failing to do so.
Sec. 902. Disclosure to other responsible persons. In
certain circumstances, the IRS must advise such persons of its
actions to collect the penalty from other responsible persons.
Sec. 903. Contribution between responsible persons. This
provision created a federal right of contribution between
persons who are jointly and severally liable for the penalty.
Sec. 904. 6672 penalty for tax exempt organizations. This
proposal gave volunteer, unpaid board members of tax-exempt
organizations some safe-harbors from the penalty.
Sec. 1001. Enrolled agents as 3rd-party recordkeepers.
``Enrolled agents'' get the same treatment as banks, brokerage
houses, attorneys, and accountants for IRS summons purposes
under this provision.
Sec. 1002. Safeguards related to designated summons. This
provision limits use of the ``designated summons'' to the
largest corporations and requires higher-level IRS review
approval.
Sec. 1003. Annual report regarding designated summons. The
IRS must provide Congress with an annual report concerning the
uses of the designated summons procedure.
Sec. 1101. Retroactive regulations. This provision
generally prohibits Treasury from issuing retroactive tax
regulations, but contains a number of exceptions we requested.
Sec. 1201. Phone numbers on payee statements. This
provision requires a telephone number of a contact person on
payee statements.
Sec. 1202. Required notice for certain payments. This
provision requires the IRS to make reasonable efforts to notify
taxpayers who submit a payment that the IRS cannot associate
with an outstanding liability.
Sec. 1203. Unauthorized ``enticement'' of information
disclosures. This prohibits IRS agents from ``trading'' an
informant's tax liability for information about the liabilities
of others.
Sec. 1204. Annual reminders of delinquent taxes. IRS must
send annual reminders to persons with outstanding tax accounts.
Sec. 1205. 5-year extension of authority for undercover
operations. This provision allows the IRS to use amounts
recovered in undercover operations to fund ongoing operations.
Sec. 1206. Disclosure of Form 8300 information. Information
on Form 8300 (regarding cash transactions of $10,000 or more)
can be disclosed to the same extent as the very similar
information on Currency Transaction Reports.
Sec. 1207. Disclosure to designee of taxpayer. Under this
IRS initiative, the IRS may, but need not necessarily, obtain
written consent from the taxpayer before it can disclose
information to the taxpayer's representative.
Sec. 1208. Study of interest netting. This study of the
interest rate differential between overpayment and underpayment
rates was completed in April 1997 and resulted in our ``global
interest netting'' legislative proposal.
Sec. 1209. Expenses of detection of underpayments and
fraud. This provision gave IRS authority to pay rewards out of
amounts collected.
Sec. 1210. Use of private delivery services. Under this
provision, a taxpayer who uses an approved private delivery
service gets the benefit of the tax Code's ``mailbox rule.''
Sec. 1211. Reports on misconduct by IRS employees. This
provision requires the IRS to provide an annual report
concerning employee misconduct and disciplinary actions.
Sec. 1301. Treatment of substitute returns for purposes of
failure to pay penalty. Under this provision, the failure to
pay penalty runs from the original due date of the return even
when the IRS prepares a substitute return.

TBOR 3 provisions.

The Administration announced these proposals in April,
1997. All but global interest netting and equitable tolling
were enacted this year, mostly in the Taxpayer Relief Act.
1. Uniform ``reasonable cause'' exception for penalties.
This provides a ``reasonable cause'' exception for all
penalties that relate to failure to file a return, information
statement, or similar document, or failure to pay or deposit
required taxes.
2. Global interest netting of under- and over-payments.
This proposal, which was the result of our interest netting
study, would require the IRS to ``net'' tax balances in
computing interest even if the balances have already been paid
at the time of the interest computation.
3. Amend limitations period for refunds in Tax Court. This
provision, which was a response to the Supreme Court's result
in the Lundy case, corrects a technical defect in the
limitations periods.
4. Repeal authority to disclose whether a prospective juror
has been audited. The repealed provision was of little utility
but caused unnecessary delays and confusion in both civil and
criminal tax litigation.
5. Clarify statute of limitations for pass-through
entities. This provision codified the result in Bufferd v.
Commissioner, 113 S.Ct. 927 (1993), that the period for
assessing tax against a partner or S corporation shareholder
runs from the date the individual's return is filed, not the
entity's filing date.
6. Clarify procedures for administrative cost awards. This
provision clarified several ambiguities in the rules and makes
the procedures for claiming such costs more uniform.
7. Equitable tolling. This provision would change the rule
reached by the Supreme Court in Brockamp to provide that the
statutes of limitations on refund claims may be ``tolled,'' or
extended, in certain particularly equitable cases.
8. Clarify prohibition on ``browsing'' of returns and
return information. This provision provides criminal penalties
for ``browsing'' and a civil remedy for taxpayers whose returns
have been ``browsed.''

Chairman Johnson. Mr. Brown.

STATEMENT OF HON. STUART L. BROWN, CHIEF COUNSEL, INTERNAL
REVENUE SERVICE

Mr. Brown. Thank you, Madam Chairman. In the interest of
time, I am happy to let my prepared written statement take the
place of extended oral discussion here.
I do think, however, that in light of the extraordinary
events of this week, I want to just say something on behalf of
the people at the IRS, such as myself who--I have been in the
Service for 6 years now, 3 years in a career position, 3 years
in my present position as a Chief Counsel, politically
appointed. Before that I was--I spent 2 years with the Joint
Committee staff. Before that I practiced tax law with a law
firm in Washington for 12 years.
This has been a very disturbing week for all of us. We have
a tremendous amount of respect and interest in making the tax
system work as well as it possibly can.
I have spent the last 6 years stressing one major theme
with all of the people at the Service I have talked to, with
all the taxpayer groups that I have talked to, every time I
have had a chance. And that theme is that our objective, from
the perspective of the Chief Counsel's Office, is to get the
right legal answer. We don't care whether the answer favors the
government or favors the taxpayer. We want to interpret the law
impartially, the way you wrote it, as well as we can. And it is
very disturbing to me personally, it is very disturbing to all
of the people that I work with, when we see things that are
inconsistent with that, but--with that approach to the tax
administration.
I think we appreciate Mr. Dolan's willingness to step
forward and take responsibility, and on behalf of the people
who work with him, I want to assure you that we will do
everything we can to make his efforts successful and to make
sure that we don't have continuing problems of the kind that
you have heard about this week.
Beyond that, I am prepared to answer questions about any
specific provisions. But my testimony does largely track
Secretary Lubick's testimony, and so I think in the interest of
time, I am happy to let it stand there.
[The prepared statement and attachment follow:]

Statement of Hon. Stuart L. Brown, Chief Counsel, Internal Revenue
Service

Madam Chairman and Distinguished Members of the
Subcommittee:
I am pleased to join Acting Assistant Secretary Lubick,
Acting Commissioner Dolan, and IRS Taxpayer Advocate Monks
today to provide IRS comments on the proposals concerning
taxpayer rights that are included in H.R. 2292, the ``Internal
Revenue Service Restructuring and Reform Act of 1997.''
I want to begin today by stating that the Internal Revenue
Service is committed to respecting the rights of all taxpayers.
This commitment is reflected in the IRS Mission statement:
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve the
public by continually improving the quality of products and
services; and perform in a manner warranting the highest degree
of public confidence in our integrity, efficiency and fairness.
As the Mission statement makes clear, the goal of the
Service is to collect the amount prescribed by law--no more, no
less. Our self-assessment tax system depends on taxpayers to
determine their own liability as accurately as they can, and to
pay what they owe without any enforcement action by the IRS. To
maintain this system, the Service is committed to ensuring that
all taxpayers are treated fairly, courteously, and with respect
and dignity in their dealings with us.
The IRS invests considerable time and effort educating both
our employees and the taxpaying public about their rights and
obligations. Given the size and scope of IRS operations, the
complexity of the tax law, and the inherent law enforcement
aspect of many IRS responsibilities, there will probably always
be mistakes by IRS employees, and cases in which some
individuals do not live up to the ideals of our Mission. We
deeply regret these mistakes and welcome any constructive
criticism about how to minimize the number of mistakes and
mitigate the harm they cause taxpayers. Nevertheless, to put
the issue in perspective, I note that the National Commission
on Restructuring the Internal Revenue Service reached the
following overall conclusion about the Service's efforts to
protect taxpayer rights:
The Commission found that the passage of the Omnibus
Taxpayer Bill of Rights and Taxpayer Bill of Rights 2 have had
an important effect on changing the culture of the IRS. The
agency spends significant resources educating personnel to
treat taxpayers fairly, and the Commission found very few
examples of IRS personnel abusing power.
Report of the National Commission on Restructuring the
Internal Revenue Service, p. 43 (1997).
One aspect of our commitment to protecting taxpayer rights
is a particular concern of the Chief Counsel's Office--our
approach to litigation. Before providing comments on the
specific taxpayer rights proposals in H.R. 2292, I would like
to take a few minutes to discuss that here today.
In order to understand the Government's approach to tax
litigation, it is important to understand how tax litigation
fits into our overall system of tax administration. There are
three basic messages:
First, the dollars we collect directly from cases in
litigation represent an extremely small percentage of total
federal revenues--approximately 0.1% of total collections.
Second, considering the size and complexity of our tax
system, there is relatively little controversy between the IRS
and taxpayers, and almost all of this controversy is resolved
without litigation.
More than 120 million individual and corporate tax
returns are filed each year, and over 2 million returns are
examined annually.
Yet there are only 25,000 to 30,000 Tax Court
petitions and fewer than 1000 refund suits filed each year. The
vast majority of these disputes are settled, even while they
are pending in court, so that the Tax Court tries and decides
only about 1,200 to 1,500 cases each year. The District Courts
and Court of Federal Claims add another 160 opinions and 800
closings.
The universe of appellate litigation is even
smaller, with only about 300-325 Tax Court and refund
litigation appeals, of which only about 50 are government
appeals. And, of course, only a few of these cases end up in
the Supreme Court in any year.
Third, the Service's strategic approach to enhancing
compliance in the future envisions continuing efforts to
increase revenue from self-assessment, to reduce the number of
controversies, to resolve controversies earlier in the
administrative process, and to ensure that litigation is
pursued only where that is the most appropriate approach to
resolving an issue. To illustrate how these principles have
been applied in practice, listed below are some of the
controversy resolution techniques that are available now but
that did not exist before 1990:
In Exam: The IRS has developed the procedures for
Accelerated Issue Resolution and has also expanded Examination
settlement authority. This expanded settlement authority has
been made applicable with respect to issues previously resolved
by Appeals, with respect to issues that are the subject of ISP
Coordinated Issue Papers and Settlement Guidelines, and in
connection with the Worker Classification Settlement Program.
The Service has likewise promoted the use of Market Segment
Understandings in several industries as a mechanism to enhance
compliance by groups of working taxpayers, through the joint
outreach efforts of their employers and the Service.
In Appeals: The IRS has instituted procedures for
the Early Referral of certain issues to Appeals while the
remaining issues in the case remain in Exam. It has also
expanded Appeals involvement in both Competent Authority
proceedings and Collection cases. And, Appeals is continuing
its test of mediation as a means of resolving certain cases and
beginning a test to expeditiously settle Service Center
generated issues.
In Counsel: The Advanced Pricing Agreement program
for transfer pricing issues has been one of the Service's most
notable successes in recent years to finding a new approach to
resolving controversies in specific cases. The proposed
procedures announced in Notice 97-7 for letter rulings dealing
with environmental remediation expenditures is an effort to
build on the APA experience. These procedures envision a letter
ruling process that could cover both past and future years and
would involve both the Field and National Office.
I want to emphasize the fundamental principle that guides
how we handle cases in court: We only advocate positions that
we believe to be legally correct.
The principle of seeking the correct legal answer starts
with the IRS Mission: to collect the ``proper'' amount of tax
revenue. Consistent with this objective, the first directive of
the Chief Counsel Mission Statement is to ``provide the correct
legal interpretation of the internal revenue laws.'' This is
more fully explained by the Statement of Principles of Tax
Administration that appears at the front of every Internal
Revenue Cumulative Bulletin. These principles emphasize the
Service's obligation to ``correctly'' apply the laws and ``to
find the true meaning'' of the statute, fairly and impartially,
``with neither a government nor a taxpayer point of view.''
We do not insist on 100 % certainty before we will take a
case to litigation. It is not always easy to find the correct
interpretation of the tax law. While we are looking for the
answer that is more likely right than wrong, we are often
called upon to take a position where there are good arguments
on both sides of an issue. In those situations, the IRS and its
Counsel have to be willing to take a position that we believe
is correct, even though there is a chance that the courts may
disagree with us. The important thing is that we apply our best
legal analysis and impartial judgment to ensure the position we
advance represents what we believe is the best interpretation
of the law.
I think it is worth noting that the standards that govern
taxpayers and their representatives are very different from the
standards that apply to counsel for the IRS. The penalty
provisions of the Code set forth a host of standards that
describe for taxpayers and their advisers just how wrong they
are allowed to be, in a variety of different situations,
without incurring penalties. These standards range from
``substantial authority'' to ``not frivolous;'' and include
``realistic possibility of success'' and ``reasonable basis.''
The standards of practice of the ABA and other professional
organizations, as well as the Tax Court Rules, and Circular
230, provide roughly comparable rules governing the
professional conduct of those who represent taxpayers at
various stages of the tax process--whether filing returns or
claims for refund, or in controversies before the IRS and the
courts.
Because the Service's primary concern in litigation is the
systemic impact of any given case, our goal is to advocate only
those positions that we believe make sense for the system as a
whole. We make every effort to avoid arguments that might help
us win a particular case, but would leave us with a decision
that creates problems in other situations. The Tax Division of
the Department of Justice shares this same approach. As former
Assistant Attorney General Shirley Peterson told the Federal
Bar in 1991, ``[Tax Division attorneys are directed to
advocate] the interpretation which makes the maximum
contribution to a sound, wise tax system, not only immediately
but over the long run.''
Although much of our litigation focuses on the significant
legal issues that most frequently occur in large cases, in the
context of this hearing on taxpayer rights, it may be more
relevant to focus on the role of the Tax Court in providing a
forum for taxpayers with much smaller amounts at stake, but who
feel strongly that they need an independent decisionmaker to
resolve their disputes with the Government. Indeed, if you look
at the statistics, somewhat over 80% of the Tax Court's
inventory involves cases of less than $100,000 and pro se
petitioners.
We stress how important it is for the attorneys handling
these cases to show appropriate sensitivity to the needs of
these taxpayers. In many instances, our attorneys are called
upon to provide advice to these taxpayers, assist them in
gathering the facts they need to support their position, and
provide an understandable explanation of the applicable legal
authorities. We took two steps last year to ensure that we are
fulfilling that aspect of our responsibility as representatives
of the Government:
We issued manual instructions to our field offices
in April 1996 that modified our procedures for dealing with
cases involving a claim for relief based on either the innocent
spouse provisions of section 6013(e) or the doctrine of duress.
These procedures recognize the special sensitivity needed to
deal with taxpayer claims for relief based on allegations of
family disfunction, ranging from emotional disorders, to
substance abuse, to domestic violence. While the instructions
do not change the legal standard for dealing with these issues,
we believe they ensure appropriate management oversight of
cases involving these sensitive issues.
In addition to these new instructions for handling
innocent spouse issues, we have also reminded all of our field
attorneys of the special procedures that we adopted some years
ago for dealing with Tax Court cases involving pro se
taxpayers. These procedures emphasize the need to handle pro se
cases in a way that will avoid even the appearance that our
lawyers are trying to gain an unfair advantage. They stress
that communications should be as informal and nontechnical as
possible in order to promote a more relaxed and cooperative
environment.
We want these taxpayers to understand that our goal in
every case is to reach the proper tax result. If the taxpayers
can substantiate their facts, or persuade us that their
arguments are legally correct, we will be more than ready to
accept their position. Of course, we must also try to explain
to them that it is our job to ensure that the tax law is
applied even-handedly to all taxpayers.
In addition to its overall commitment to protecting
taxpayer rights, both in the administrative and litigation
contexts, I think the Service also has a good track record as a
constructive participant in the legislative process in the
consideration of proposals to enhance taxpayer rights. The
Service worked with the Congress and Treasury in developing
both the original Taxpayer Bill of Rights in 1988, the Taxpayer
Bill of Rights 2 in 1996, and the Taxpayer Protection
provisions that were enacted as part of the Taxpayer Relief Act
of 1997. I would hope that a similar level of cooperation would
attend the consideration of any new legislation in this area.
The appendix to my testimony provides our comments with
respect to each of the sections of Title III of H.R. 2292. As a
general matter, I would endorse the approach set forth in
Secretary Lubick's testimony. Each proposal should be evaluated
based on whether it strikes an appropriate balance in providing
taxpayers with the legal rights they need while not unduly
hampering the ability of the IRS to carry out its tax
collection mission.
I would like to highlight here several of the most
important items:
Two provisions of H.R. 2292 are intended to provide
enhanced access to legal representation by taxpayers served by
law school clinics or other pro bono associations. Section
302(c) would permit the recovery of attorney's fees for the
efforts of these entities, even though the taxpayer would not
otherwise be charged a fee. Section 313 would establish a
program to provide funding to certain clinics that provide
legal assistance to low-income taxpayers.
We strongly support the goals of these provisions. We
believe that law school clinics and pro bono associations
perform a very important service to tax administration by
representing low income or indigent taxpayers. The Internal
Revenue Service has a program to support college and university
sponsored student tax clinics. This includes soliciting
interest from schools in creating such programs, assisting
schools in setting up a tax clinic and notifying taxpayers of
the availability of such programs. This year, through the end
of June 1997, 164 volunteers in the student tax clinic programs
assisted 1,065 taxpayers at 20 sites across the United States.
Our experience with other tax clinics (some sponsored by Bar
Associations or tax-exempt entities who provide pro bono
representation of taxpayers) has also been positive.
With only two small modifications, we support section
302(c): we believe the payment of fees should go directly to
the clinic, and the statute should clarify the tax consequences
of the payment to both the taxpayer and the clinic.
While we also support the concept of providing additional
funding to tax clinics, we have somewhat greater concerns about
section 313 as currently drafted. First, we do not think it is
appropriate for the IRS or any other Treasury function to
control the funding for entities whose purpose is to litigate
against us. There is an inescapable appearance of a conflict of
interest and we strongly suggest that some alternative funding
mechanism be developed. Secondly, we are concerned that the
current proposal contains numerous specific conditions that do
not seem to be clearly related to achieving its intended
purpose; we suggest that simpler guidelines would be more
appropriate for a program of this magnitude.
The next two provisions of H.R. 2292 that I want to mention
today deal with installment agreements. Section 310 would
eliminate the failure to pay penalty for taxpayers who enter
installment agreements; section 311 would create a statutory
right for taxpayers to enter installment agreements with the
IRS in cases where the liability is $10,000 or less. I want to
comment on these provisions because the installment agreement
program is a very important aspect of IRS tax collection
efforts.
Installment agreements offer the IRS a unique opportunity
to keep taxpayers in the tax system who would otherwise not be
able to meet their full tax obligations. As a result of IRS
efforts to expand the use of this technique, the number of
installment agreements entered into increased from 1.52 million
in FY 1992 to 2.67 million in FY 1996; approximately 2.3
million of these agreements involved amounts of less than
$10,000. The Service collected approximately $5 billion from
installment agreements in the first 11 months of FY 1997.
Section 311 generally reflects current IRS practice with
respect to installment agreements. Accordingly, we would
support its enactment, provided certain conditions are
specified in the statute. We think it is important that the
automatic availability of installment agreements be limited to
individual taxpayers with respect to income taxes--and that it
not be extended to employment or trust fund taxes of
businesses. Moreover, we believe the statute should include
conditions that will make it possible for the IRS to
effectively manage this program (e.g., there should be a 36
month time limit for the installment agreements; direct debit
arrangements should be established by taxpayers who desire an
automatic agreement; and there must be appropriate protection
for the statute of limitations). Finally, we suggest that the
effect of the provision be made subject to review after a
reasonable period of time.
The failure to pay penalty is intended to impose an
appropriate cost on taxpayers who do not pay their taxes when
they are due. The penalty is not imposed if the failure to pay
is due to reasonable cause. Because we believe it is
appropriate to maintain some differential (in addition to
normal deficiency interest) between taxpayers who pay in full
on time and taxpayers who pay late, we cannot support section
310 in its present form. At the same time, we would like an
opportunity to work with the Committee to evaluate whether some
modifications to the existing failure to pay penalty would be
appropriate in light of other changes to the installment
agreement program.
The final provision I would like to mention is section 303,
which would expand the current statutory remedy for taxpayers
to recover damages they suffer as a result of legally incorrect
IRS collection actions. Section 7433 of the Code permits a
taxpayer to recover up to $1 million of damages caused by an
IRS collection action that recklessly or intentionally
disregards the Code or regulations. Section 303 of H.R. 2292
would allow a taxpayer to recover up to $100,000 of damages
caused by negligence in a collection action (even without a
finding of reckless or intentional disregard).
We oppose this provision as drafted. We would, however,
like to work with the Committee to explore the possibility of
expanding the relief available under section 7433 in other
ways. We would suggest that consideration be given to
broadening the statute to allow parties other than the taxpayer
to recover damages in appropriate circumstances. For example,
as section 7433 is currently drafted, if the IRS levies on
property of a person who is not the taxpayer liable for the
tax, the person may recover the property and attorney's fees,
but not damages.
Thank you, Madam Chairman. I would be pleased to respond to
any questions you may have.

APPENDIX

Section by Section Discussion of Title III of H.R. 2292

Section 301--Expansion of Authority to Issue Taxpayer Advocate Orders

Section 301 would add to the statute four specific factors that the
Taxpayer Advocate should consider in deciding whether a taxpayer faces
a ``significant hardship'' sufficient to justify issuance of a TAO.
While we have concerns about some of the criteria in proposed section
301, if the Taxpayer Advocate would find some additional guidance
helpful in determining what constitutes a ``significant hardship,'' we
would support adding appropriate factors to the statute.

Section 302--Expansion of Authority to Award Costs and Certain Fees

Section 302 proposes five separate amendments to the administrative
and litigation costs provisions of I.R.C. 7430. We note that
section 7430 was amended in 1996 as part of TBOR 2 and again in August
of this year in the Taxpayer Relief Act of 1997. Wholly apart from the
merits of any of the changes proposed by H.R. 2292, we think it would
be desirable to gain some additional experience with the newly amended
provision before making further changes.
In addition to this general concern, we have some specific concerns
about several of the proposed additional changes:
We oppose the provision that would allow for costs in
excess of the stated statutory amounts under certain circumstances, for
example, where the case is a difficult one. The Service supported the
legislation that set fees at $110 per hour, indexed for future years.
This rate established parity between section 7430 and the Equal Access
to Justice Act and also was expected to eliminate a great deal of
litigation over the consideration of additional factors to justify
higher rates. The proposal would reintroduce this potential for
litigation over the special factors.
We oppose the provision that would move the starting point
for the award of damages to an earlier stage of the administrative
process because we believe this could tend to undermine taxpayers'
incentive to cooperate with examination personnel prior to the issuance
of the 30-day letter.
We support the proposal to allow fees to be paid in cases
where a taxpayer is represented by a student tax clinic or other pro
bono organization. We suggest the tax consequences of such payments be
clarified for both the taxpayer and the recipient organization.
We oppose the proposal to increase the net worth limits on
persons who may recover costs because we believe the limits that apply
in tax matters should be the same as apply in other contexts under the
Equal Access to Justice Act.
With appropriate clarifications, we would support the
proposal to create a presumption that Service position in litigation is
not substantially justified if we lose an issue in a fourth circuit
after having lost previously in three other circuits. The proposal
should be clarified to exclude situations in which there is a split in
the circuits and in which the litigation in the different circuits
arises out of the same transaction or at approximately the same time.

Section 303--Civil Damages for Negligence in Collection Actions

Discussed in text.

Section 304--Disclosure of Criteria For Examination Selection

Section 304 would require the Service to provide the public with
additional information about the criteria and procedures used to select
returns for examination. We agree with the general intent of this
provision--the public has the right to know generally how its Internal
Revenue Service selects returns for examination, and has the right to
know specifically that no such audits are undertaken based on improper
motivations. As the Committee is aware, this past February,
Commissioner Richardson offered to provide Chairman Archer and Chairman
Roth with any information they might request to investigate allegations
that audits of certain individuals or organizations were based on
improper political factors. We are confident that investigation will
find those allegations were totally unfounded.
Apart from responding to the particular questions that have been
raised this year, we support the intent of Section 304 because we
believe that providing more information about our audit program would
enhance public confidence in the integrity, efficiency and fairness of
the IRS as a whole. We would like to work with the Committee to
determine the most appropriate mechanism to provide this information;
we are concerned that a meaningful description might be too long for
Publication 1 and that there should be no disclosure of law enforcement
tolerances or confidential informants.

Section 305--Archival of Records of Internal Revenue Service

Section 305 proposes rules governing the transfer of confidential
taxpayer information to the National Archives. We do not oppose
clarifying section 6103 in this way; however, we believe Congress
should provide rules for the ultimate disposition of the records either
after the expiration of a specified period of time or upon the
satisfaction of other specified criteria.

Section 306--Tax Return Information

We support the study required by section 306. We would, however,
recommend that the study be conducted by the Joint Committee Staff
itself, with such outside assistance as it may require. We think it is
desirable for the study to be directed by individuals who have
experience dealing with taxpayer information, and who would have access
to such information during the course of their work.

Section 307--Freedom of Information

Section 307 would require the IRS to adopt procedures to expedite
handling of Freedom of Information Act requests submitted by the media.
We oppose this proposal because it is inconsistent with the rules
enacted by Congress last year as part of the Electronic Freedom of
Information Act (``EFOIA''). The EFOIA rules become effective October
2, 1997, and will apply to the IRS as well as other Federal agencies.
We believe it is highly desirable that there be a uniform set of rules
for handling media FOIA requests.

Section 308--Offers-in-compromise

We support Section 308.

Section 309--Elimination of Interest Differential on Overpayments and
Underpayments

We recognize that the equalization of interest rates on
underpayments and overpayments would have substantial benefits in terms
of administrative simplification. However, we also recognize that
serious policy and revenue concerns support the several Congressional
decisions over the past 10 years to establish, maintain and expand the
differential interest rates. We are also concerned that the blended
rate of proposed section 309 might be difficult to establish.
Therefore, we recommend enactment of the interest netting proposal
contained in the Administration's April 1997 simplification proposals.

Section 310--Elimination of Application of Failure to Pay Penalty
During Period of Installment Agreement

Discussed in text.

Section 311--Safe Harbor for Qualification for Installment Agreements

Discussed in text.

Section 312--Payment of Taxes

We support this proposal.

Section 313--Low Income Taxpayer Clinics

Discussed in text.

Section 314--Jurisdiction of the Tax Court

Section 314(a) and (b) were enacted as section 505 and section 1452
of the Taxpayer Relief Act of 1997.
We support section 314(c), which would make the small case
procedures of the Tax Court available in cases involving up to $25,000.

Section 315--Cataloging Complaints

We support this proposal.

Section 316--Procedures Involving Taxpayer Interviews

We are concerned that certain aspects of proposed section 316 will
undermine the effectiveness of the IRS examination program. In
particular, we strongly oppose the provision that would require a
taxpayer to be informed of the reason for selection of the taxpayer's
return for examination. The taxpayer will, of course, be informed of
the items of income, deduction or credit that are the subject of the
examination. However, requiring the Service to disclose the reason for
selection of the return for examination has a high potential to
disclose law enforcement criteria or other sensitive information.
We support the principle that taxpayers should be informed of their
right to be represented at any interview with the IRS. This right is
reflected in current law at Code section 7521(b), and is explained to
taxpayers in Publication 1 which is sent to all taxpayers who are to be
interviewed by the IRS. Under the Heading of ``Declaration of Taxpayer
Rights,'' Publication 1 lists ``IV. Representation'' as follows:
You may either represent yourself, or with proper written
authorization, have someone else represent you in your place. You can
have someone accompany you at an interview.
We believe it is preferable to provide taxpayers with this
information in writing, on a uniform basis, rather than orally at the
time of a scheduled interview.

Section 317--Explanation of Joint and Several Liability

We support the intent of section 317 insofar as it would require
additional explanations of joint and several liability. Given the
complexity of these rules, we believe the statute should provide the
IRS some degree of flexibility in determining the most appropriate
forms and publications to communicate this information.

Section 318--Procedures Relating to Extensions of Statute of
Limitations By Agreement

Section 318 generally codifies current IRS practice by which
taxpayers are provided a copy of Publication 1035 ``Extending the Tax
Assessment Period.'' We support this provision.

Section 319--Review of Penalty Administration

We support this provision.

Section 320--Study of Treatment of All Taxpayers As Separate Filing
Units

We support this provision.

Section 321--Study of Burden of Proof

We support this provision.

Chairman Johnson. Mr. Monks.

STATEMENT OF LEE R. MONKS, TAXPAYER ADVOCATE, INTERNAL REVENUE
SERVICE

Mr. Monks. Thank you, Madam Chairman and other Members of
the Subcommittee. I, too, will briefly go through my testimony
in the interest of time so that we can get to the questions.
As you are well aware, the original Taxpayer Bill of Rights
and the Taxpayer Bill of Rights 2 did much to elevate the issue
of taxpayer rights and put in place specific protections for
taxpayers. And I guess the question is: Were those protections
adequate? And I think to some degree, there is some more work
that needs to be done, and I commend the work of the
Subcommittee in that regard.
Obviously, one of the things that the Congress has charged
me with as the Taxpayer Advocate is to serve as an independent
representative for taxpayers within the Service.
Another responsibility that we have, and this is probably
the most visible aspect of our program, is to work with
taxpayers to assist them in resolving ongoing problems that
they experience with the IRS. And Mr. Dolan, I think, has made
it very clear to our field offices and executives and employees
alike that we need to be more attentive to the kinds of
problems that were raised in the hearings this past week and
ensure that those problems are identified quickly and, where
appropriate, getting them in the hands of the proper resolution
program and the local Taxpayer Advocate so that we can take
specific actions on those cases.
We work approximately 300,000 cases a year in the problem
resolution program, and we also handle approximately 32,000
requests for hardship assistance. And a field executive--field
people working in our program, I think, do an excellent job in
serving taxpayers in that regard.
In response to your questions for comments on H.R. 2292, I
do have a couple of specific comments. Section 301 attempts to
expand the Taxpayer Advocate's authority to issue a taxpayer
assistance order. One of the concerns we have is that this
effort may actually have somewhat of a limiting effect.
Taxpayer Advocates in the field currently have fairly broad
discretion in determining whether hardship exists, including
the ability to overwrite procedures where necessary and provide
relief as appropriate, and it is not clear if this provision is
intended to require an Advocate to effect a taxpayer assistance
order if one of the specified conditions exist or to only take
that into consideration in their decisionmaking process.
One of the things that I feel strongly about is it is
important that the field Advocates continue to have broad
discretion in this area, and we would like to work with the
Subcommittee to structure the language in the bill to ensure
that the Advocates have full authority to consider all relevant
issues in determining if hardship exists and where relief is
appropriate.
Section 308 directs the IRS to ensure that taxpayers are
provided with an adequate living expense allowance and offers
some compromise cases. I support this provision and would
further suggest, since this concern has been expressed by a
number of practitioner groups in a variety of settings, many of
which I have attended, that the process for determining what
constitutes adequate means be jointly developed by the IRS and
a representative number of stakeholders, possibly from the
Commissioner's Advisory Group, the CAG.
Section 309, as was previously discussed, proposes the
elimination of the interest rate differential on the payment of
tax liabilities, and as an advocate for taxpayers and also one
for simplification, I would be in favor of this proposal, but
would point out the obvious in that there is a potential
revenue impact depending upon how this is resolved.
I want to cut this short because I know we are looking to
save some time here. I did want to point out that the
protection of taxpayer rights is certainly an important matter,
both to the Congress and to the IRS, and for those of us who
work in the problem resolution program. Having just gone
through the hearing before the Senate Finance Committee with
Mr. Dolan and others, this is one of the important challenges
that we have, both within the IRS and within the Congress, to
ensure that taxpayer rights are protected.
Where problems linger or where they are not being solved,
it is important that we identify those problems quickly and,
where appropriate, refer them to the problem resolution program
so that we can handle those cases. That is the role that we
have within this organization, and it is one that we take very
seriously. Thank you.
[The prepared statement and attachments follow:]

Statement of Lee R. Monks, Taxpayer Advocate, Internal Revenue Service

Madame Chairman and Distinguished Members of the
Subcommittee:
I'm pleased to be here today to discuss the important issue
of taxpayer rights and actions that might be taken by both the
Congress and the Service to ensure that the protection of
taxpayer rights is accorded the same high priority as the
important task of collecting the nation's revenue.
The original Taxpayer Bill of Rights and the second
Taxpayer Bill of Rights--often referred to as TBOR1 and TBOR2--
did much to elevate the issue of taxpayer rights and to put in
place specific protections for taxpayers. It was obvious to
most of us that more work still needed to be done in this area.
I welcome the opportunity to share with you my views on the
taxpayer rights proposals contained in H.R. 2292, which
contains the recommendations of the National Commission on
Restructuring the Internal Revenue Service. First, I want to
note that the Congress has specifically charged the Taxpayer
Advocate to serve as an independent representative for
taxpayers within the Service. In that capacity, the Advocate is
required to issue an annual report to the Congress on the most
significant problems affecting taxpayers, what recommendations
the Advocate has made to reduce those problems and what actions
are being taken by the Service to implement solutions to those
problems. The first Taxpayer Advocate Report to the Congress
was issued this past January and the next report is due to be
issued in just a little over 90 days. This Subcommittee,
through the hearings process and other feedback, has made it
clear that one of the key responsibilities of the Advocate is
to produce administrative and legislative proposals to ensure
improvement of IRS systems that produce unintended negative
consequences for taxpayers. These proposals may, in turn, be
used to assist the Congress in considering and developing
subsequent taxpayer rights legislation. That is a very
significant responsibility and one in which my staff and I have
been highly involved over the past year.
To fulfil that responsibility, I have engaged our four
Regional Advocacy Councils and my headquarters staff in the
review of systemic problems encountered by taxpayers as
identified by our casework analysis and our Problem Resolution
Program (PRP) management information system, or PROMIS for
short. We currently track 55 issues on the PROMIS system that
focus on the primary problems experienced by taxpayers that
make their way into our program. Although the majority of the
casework is accomplished by our field advocates, much of the
analysis and identification of systemic problems and resulting
recommendations for potential solutions is the result of work
conducted by my staff and our Advocacy Councils.
Another responsibility of the Taxpayer Advocate and our
field advocates in districts and service centers--perhaps the
most visible part of our program--is to work with taxpayers to
assist them in resolving ongoing problems with the IRS. These
problems may be systemic in nature or may involve taxpayers who
are experiencing a significant hardship as a result of IRS
action or who require IRS assistance in relieving a hardship.
In FY 1996, we received about 300,000 cases from taxpayers that
involved systemic issues and over 32,000 requests for hardship
assistance through the Taxpayer Assistance Order program, which
was established by TBOR1. In the vast majority of these cases,
we were able to provide the taxpayers with assistance in
resolving their case or were able to provide relief on their
hardship request. I have provided a statistical breakout of our
casework activity as attachments to my testimony.
In response to your request for comment on H.R. 2292--which
is viewed by some as a TBOR3--there are several provisions
about which I want to comment. Section 301 attempts to expand
the Taxpayer Advocate's authority to issue a TAO. However, the
expansion may actually have a limiting effect. Taxpayer
Advocates currently have broad discretion in determining
whether hardship exists, including the ability to override
procedures, where necessary, and provide relief as appropriate.
It is not clear if this provision is intended to require an
advocate to effect a TAO if one of the specified conditions
exists or to only take that into consideration as part of their
decision making process. I believe it is important that the
advocates continue to have broad discretion in this area and
would like to work with the committee to structure the language
in the bill to ensure that advocates have full authority to
consider all relevant issues in determining if hardship exists
and when relief is appropriate.
Section 308 directs IRS to ensure that taxpayers are
provided with an adequate living expense allowance in ``offers-
in-compromise'' cases. I support this provision and would
further suggest, since this concern has been expressed by a
number of practitioner groups in a variety of settings, that
the process for determining ``adequate means'' be jointly
developed by the IRS and a representative number of
stakeholders, possibly from the Commissioner's Advisory Group.
Section 309 proposes the elimination of the interest rate
differential on over and under-payments of tax liability. I
would be in favor of this proposal but would point out the
obvious in that there could be a potential revenue impact
depending on how this was resolved.
Section 310 proposes the elimination of ``failure to pay''
penalty on taxpayers who enter into and stay current on
installment agreements with the IRS. While I generally support
the concept of reducing penalties on taxpayers who agree to pay
their delinquent taxes in installments, this could encourage
some taxpayers not to full pay their full liability when they
file, particularly if Section 311, which provides taxpayers an
automatic right to an installment agreement is taken into
account. The Committee might want to consider a 50% reduction
in the ``failure to pay'' penalty for those entering into an
installment agreement. Though reduced, the penalty would still
serve as an incentive to pay the full amount at the time the
tax is due.
I am also in support of Section 311, which would generally
provide taxpayers with an automatic right to an installment
agreement for income tax liabilities of $10,000 or less.
I am strongly in favor of Section 313 which would direct
the IRS to establish grants supporting low income tax clinics
since I am firmly of the belief that we should do everything
within our power to ensure low income taxpayers are provided
with additional assistance beyond what IRS has to offer in
meeting their tax obligations.
Finally, I want to also comment on Section 319 of the bill.
This provision requires the Taxpayer Advocate to report to the
Congress on the administration and implementation of the tax
penalty reforms contained in the Omnibus Budget Reconciliation
Act of 1989. While I do not oppose this provision, we actually
see very few of the penalties covered by this Act in PRP cases.
Having said that, I do see this as a good advocacy initiative
and would suggest the need for participation in this effort of
the Office of Penalty Administration within the Chief,
Compliance area at IRS.
In closing, I would like to emphasize that the protection
of taxpayer rights is an important matter, both to the Congress
and to the IRS. We have just completed a hearing before the
Senate Finance Committee on possible violations of taxpayer
rights, among other things. One of the important challenges
that we have within the IRS is to ensure our employees are
continually aware of the concerns that taxpayers have in
dealing with the IRS. And, when problems linger or are not
being solved, to recognize that these cases should be referred
to the Problem Resolution Program and the local Taxpayer
Advocate for special handling. That is our role and we take it
very seriously.
This is the end of my prepared remarks. I invite any
questions you may have.

Regular PRP Closures and the Top 10 Major Issues
FY 1996
------------------------------------------------------------------------
Volume Percent
------------------------------------------------------------------------
Total Closures 296,527 100
1) Audit Reconsiderations......................... 22,501 7.6
2) Refund Inquiry/Request......................... 21,120 7.1
3) Lost/Misapplied Payments....................... 20,933 7.1
4) Processing IMF Returns......................... 18,990 6.4
5) Processing Claims or Amended Returns........... 17,749 6.0
6) Other Penalties................................ 16,292 5.5
7) FTD Penalties.................................. 14,091 4.8
8) Earned Income Credit Issues.................... 14,070 4.7
9) Revenue Protection (RPS)Issues................. 12,592 4.2
10) Installment Agreements........................ 11,974 4.0
--------------------
Subtotal Top Ten Major Issues.................. 170,312 57.4
------------------------------------------------------------------------

TAO PROGRAM ACTIVITY
FY 1996
------------------------------------------------------------------------
Volume Percentage
------------------------------------------------------------------------
ASSISTANCE PROVIDED TO TAXPAYER
TAO Resolved (voluntarily)................ 14,862 46.2
PRP Case Initiated........................ 2,114 6.6
Referred to Function for Resolution....... 4,052 12.6
Resolved by the PRO Without TAO........... 1,076 3.3
Relief Provided Before TAO Issued......... 2,514 7.8
Enforced TAO.............................. 5 *
------------------------
Subtotal.............................. 24,623 76.5
OTHER
Relief Not Appropriate.................... 5,546 17.3
Law Prevents Relief....................... 1,147 3.6
No Action Required(did not meet criteria). 834 2.6
------------------------
Subtotal.............................. 7,527 23.5
------------------------
TOTAL 32,150 100%
------------------------------------------------------------------------
*Less than 0.1%

Chairman Johnson. Thank you very much. And thank you for
the specifics of your testimony, which I know you did not have
the time to go through.
I also want to comment, Mr. Brown, on the opening part of
your statement, which I discouraged you from reading and
appreciate that you didn't. But I do think it is important to
put on the record that there are 120 million individual and
corporate tax returns filed every year, and that of those, that
there are only 25,000 to 30,000 Tax Court petitions and fewer
than 1,000 refund suits filed each year. That doesn't go to the
issue of problems, but it does set some outlying parameters
that can serve to remind us that this is a very big project to
collect the taxes in a nation this large and diverse as ours
every year, and that most of it does go very well. I
appreciated your opening with those statistics.
I want to just turn for a moment, Mr. Monks, to your
comments. The authority issue and whether that actually limits
you or not, will be one we will discuss. I appreciate that the
recommendation in regard to section 301 to expand the Taxpayer
Advocate's authority could actually limit it, and I will be
interested in pursuing that with you in a different setting.
I would like, though, to hear you and the panel discuss
this issue of the waiving of the penalty for the failure to
pay. Mr. Brown mentions that in his testimony, Mr. Monks
mentions that in his testimony, and I think that is a very
significant issue. To what extent do we treat a taxpayer who
has failed to pay his taxes on time differently from a taxpayer
who has paid his taxes on time, and what is the role of
penalties where there is the potential for a settlement and the
settlement can be worked out quite easily?
Then the other issue that I do want to hear a little more
discussion on, though briefly, because we do want to get to the
other panel, is this issue of negligence and whether there is a
sufficient way of dealing with taxpayers who have been the
victims of negligent action on the part of the IRS.
When you get into reckless and intentional, our concern
about that is that that is a rather high standard, and some of
the most miserable cases were really negligence early on. If we
are going to look at, in a sense, early intervention and
prevention, we have to be able to look at negligence. We can't
wait until it becomes reckless and intentional.
I appreciate your willingness to work with us on those
things, but if you would just put a little bit on the record
about how you feel on those issues, then the panel that
testifies thereafter will be testifying in the context of your
comments.
Mr. Lubick. Can I address the negligence question first?
Chairman Johnson. Yes, that would be fine.
Mr. Lubick. Then the others can chime in.
Negligence, as you know, is a big business in the United
States. It is pretty easy to allege negligence, and the thing
that I find very troublesome is that we would just open up a
flood of charges that would really inhibit the proper working
of the system by allegations of negligence. Then we would have
to be--have determinations and trials, in effect. The IRS would
be just one big defendant in negligence actions.
I think the answer is the one that Mr. Tanner alluded to.
If there really is a problem, strengthening the Office of the
Problem Resolution Officers to deal with that situation is
going to be much more effective. I think the answer has to come
from within the system. I think otherwise we are going to get
very seriously bogged down.
Stu, do you----
Mr. Brown. I would like to echo those comments. The problem
with negligence as a standard in this context is that you are
inherently talking about a situation where there is a conflict
between the Service and the taxpayer. The taxpayer has an
assessed liability on the books. There is no dispute the tax is
due and owing.
The question is how does the Service--has the Service done
something wrong in the way it went about in trying to collect
that tax? And in that kind of an environment, where a taxpayer
has no substantive legal objection to the collection--to the
liability itself, it seems to us that lowering the standard for
damages to negligence is simply providing a backdoor way to
give the taxpayer an opportunity to challenge what you have
decided shouldn't be challenged on the front end.
So the question is perhaps we can look a little bit more
deeply at the structure of the assessment and collection
process rather than layering on top of what already exists a
remedy for damages simply for negligence.
Chairman Johnson. Thank you.
Mr. Monk. I would like to comment on the elimination of the
failure to pay penalty, and I may come, I recognize, froma
different position from my colleagues on the panel.
I do support, generally support, the concept of reducing
penalties, particularly failure to pay penalties, on those
taxpayers who agree to pay their delinquent taxes through the
installment agreement process. I recognize, however, and I
think you do as well, that this could encourage some taxpayers
not to fully pay their liability when they file, particularly
if you also consider the fact that section 11 touches on
providing taxpayers an automatic right to an installment
agreement under certain conditions.
One of the things that I suggested in my written comments
was perhaps to consider a reduction in the failure to pay
penalty for those taxpayers that enter into an installment
agreement, which would give some incentive, but yet not serve
as a disincentive for filing a fully paid return.
Chairman Johnson. Does the IRS currently have much
discretion in regard to penalties in the process of developing
an installment agreement?
Mr. Brown. Well, the penalty that is imposed in this case
is a failure to pay penalty cost, which is not imposed if there
is reasonable cause for the failure to pay. So in current law,
if a taxpayer has reasonable cause for the failure to pay, the
penalty should not be imposed.
My understanding is that the--in practice, a large number
of the installment agreements that are entered into involve
situations where under at least traditional standards there
would not be reasonable cause for the failure to pay, and,
therefore, I don't know how much activity there actually is in
disputing the imposition of the penalty as opposed to simply
accepting it as properly applicable in those cases.
Chairman Johnson. For instance, generally, does documented
inability to pay represent reasonable cause?
Mr. Brown. There are standards, I believe, in the penalty
handbook, about reasonable cause, and I think the answer is if
somebody--I may ask someone to correct me if I am wrong, but I
think the answer is that if the--inability to pay currently may
be reasonable cause or may not be depending on the
circumstances which led up to the person being in that
situation; in other words, that if the person could prove or
demonstrate that their inability to pay was due to
circumstances beyond their control and was--the inability to
pay was truly inability to pay as opposed----
Chairman Johnson. Mr. Brown, I guess what I am thinking
about is, one of the most difficult situations that I see
people facing and one of the ones in which they feel abused by
the IRS is a situation in which a small business man goes
through a downturn, and, in fact, his overhead is higher than
his revenues, and yet, for a variety of reasons, it appears he
should pay taxes.
It appears there really is an inability to pay. Sometimes
this has to do with cash flow and whether people are paying
you. Certainly in New England that has been a very big problem
in recent years.
Mr. Brown. I think that the----
Chairman Johnson. There has been a sort of unwillingness on
the part of the IRS to see that as a reason to waive penalties.
I recently saw a business actually go under, not because the
person couldn't pay the taxes from the past, but they couldn't
pay the penalties and the interest that had accrued.
Mr. Brown. Uh-huh. It certainly is a difficult balancing
judgment that we have to make. I guess I would like to point
out that our people hopefully have in mind that they are
working on your behalf, and they have to try to be reasonable
in evaluating when someone is making choices about who should
be paid first, is it the IRS or is it another creditor, or, you
know, is it their employees or whatever, you know, that they
have to say, well, there has to be someone there to protect the
government's interest, and perhaps they can't always be as
lenient as people would like them to be.
Chairman Johnson. This is a longer discussion, and also it
is very difficult to provide flexibility, and I appreciate
that. But it is something that we do have to look at in terms
of a taxpayer-friendly IRS.
I do commend you on the parts of your testimony that
reflect the IRS work in recent years, and particularly in the
last year, to write clear rules and governance of a number of
complicated situations because, as you say, this does have to
be a matter of law. But you have really tried through
regulation--and through changes to try to clarify some of these
situations, and I appreciate that.
Below that is this issue of judgment and enforcement and
the interaction of all of these things that have to be
addressed. Thank you, and I am going to yield to my colleague,
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairman.
Mr. Brown, what are your views on the proposal that we will
hear about later from the American Institute of Certified
Public Accountants for limiting the IRS access to taxpayer
books and records to certain factual information?
Mr. Brown. If you are referring to the proposal that I
think you are, that was introduced, I understand, today by Mrs.
Dunn and Mr. Tanner; the Taxpayer Confidential Act?
Mr. Coyne. Right.
Mr. Brown. We have serious concerns about that act as
currently--as proposed. In the first place, it would affect a
lot of our ability to enforce the law where the issue itself
depends on things that might not be considered purely factual.
In other words, there are provisions of the Code that depend on
someone's motive or intent or purpose. There are longstanding
doctrines about business' purpose which may make a difference
in the tax consequences of a transaction. And to the extent
that we were unable to look for, ask questions about those
kinds of issues, I think you would be creating an opportunity
for people to stretch the boundaries of the tax law in areas
where I believe the Subcommittee would think it is most
inappropriate.
For example, tax shelters, tax-motivated transactions,
those are the kinds of transactions that our system has
typically tried to police, at least in part, through tests of--
that look to motive or intent or business purpose. And this
provision, as I understand it is drafted, I think would
severely interfere with our ability to get that kind of
information.
Second, we are concerned that the provision as drafted
seems to be tied to information on returns or tax returns, and
a lot of the responsibilities that have been assigned to the
IRS might not be seen as directly related to tax returns.
For example, you expect us to determine whether pension
plans are qualified or not, whether charities are eligible for
tax-exempt status or not, whether tax-exempt bonds are, in
fact, eligible for tax exemption or not. And to the extent that
the documents or the information that we need to make those
determinations would suddenly become unavailable to us, I think
it would make enforcement of whole sections of the tax law
quite problematic.
Beyond that, I have to say, although I understand that this
bill was introduced today, I actually haven't--I am not sure I
have seen the draft of the actual language, and so we would
like to have an opportunity to comment further once we have
actually seen the bill itself.
Mr. Lubick. We certainly concur with Mr. Brown's statement.
We think this is a bad idea to be extending privilege where it
doesn't exist today. In this area alone there is certainly no
such privilege in SEC matters or anything else. And I think it
may proceed from the assumption that there are--that lawyers
have an unlimited privilege, and our research indicates that
this may not be true; that there is a lot of history that is
involved in privilege, and I think extending it is a mistake.
But beyond that, Mr. Coyne, as I indicated earlier, I think
one of the things that is important to the working of the self-
assessment, voluntary compliance system is that all the cards
of both sides are laid on the table, the taxpayer as well as
the government, and then we decide.
That is not to say that a taxpayer shouldn't take any
reasonable legal position based upon his factual situation to
his best advantage, but at least there should be full
disclosure, and the Congress has provided that in many
situations by requiring a disclosure on returns, and,
therefore, I think that anything that cuts back on the ability
of both parties to play with open hands, I think, is a mistake
and jeopardizes this system.
Mr. Coyne. Thank you.
Mr. Lubick, I wonder if you would give us your views on
Congressman Traficant's bill, which would shift the burden of
proof to the IRS in civil tax cases.
Mr. Lubick. We think that would be a gargantuan mistake.
The question of burden of proof is such that the person who has
control of the facts ought to be the one to come forward. The
person who has control of the facts is obviously the taxpayer,
and if that burden is placed upon the Service, you are going to
end up with many more of these bad incidents as we have heard
about, because the Service will have to be much more intrusive
to try and find out whether there is a liability.
It seems to me the Service would have at least one hand
tied behind its back if it had to do this investigation of
proving something without having the wherewithal.
The fact that the burden of proof is on the taxpayer is--
means that the taxpayer has to lay out the facts, and that is
what makes the self-assessment system work.
Now, what is the burden of proof you are talking about? If
the IRS alleges unreported income, the burden of proof on the
taxpayer is to show that the IRS--under the decisions, that the
IRS proposal was wrong. Burden of proof is not necessarily to
show what the correct amount of tax was, but simply to show
that the IRS was wrong. And it seems to me, under the
decisions, that is certainly a reasonable burden to put upon
the taxpayer.
If you change the burden of proof, I don't know what would
happen to many rules that have been longstanding. Right now,
where a taxpayer claims an amount and doesn't substantiate it,
there was a decision in the Second Circuit, George M. Cohan,
where the court will make a decision based upon the evidence
that it sees bearing heavily against the taxpayer who created
this own--the situation of doubt through his own failure to
keep records.
Now, if we shift the burden of proof, you are encouraging
nonrecordkeeping or poor recordkeeping. It just seems to me it
would be a very serious breakdown of the enforcement mechanism.
And remember that when we are dealing with criminal cases,
or when we are dealing with fraud cases, the burden of proof
indeed is on the Internal Revenue Service. But when we are
accounting for the proper reckoning of the bill each year, it
is really essential that the taxpayer come forward with the
facts, and the burden of proof should stay where it is.
Mr. Brown. Mr. Coyne, can I just reiterate the last point
that Mr. Lubick made? Because this issue is often confused when
it is presented, and people say, well, the IRS presumes you are
guilty until you prove yourself innocent. And it is important
to understand that in the context of any criminal proceeding,
in the context of any proceeding alleging fraud, the IRS does
bear the burden of proof. It is only in the context of making
accurate accounting of your civil tax liability where the
burden of going forward with the evidence preventing the facts
to the court is on the taxpayer.
Mr. Coyne. I wonder if you could give me your views on the
proposal that we will hear later on in this hearing from the
Software Manufacturers Association that would prohibit the IRS
from obtaining source code data from computer software
manufacturers.
Mr. Brown. We think that would be a serious mistake.
I have to be somewhat cautious here because there are
matters pending currently in litigation, and I don't want to
try to get into the facts of any particular case. However, when
you talk about the source code for computer software that is
used to prepare returns, it seems to me very difficult to
understand how the IRS could decide whether a return is
prepared correctly if it can't know the decisions that were
made in preparing the return.
And when you are talking about complicated returns,
particularly--any return that is prepared with the aid of a
computer program, those decisions are embedded in the program.
And so it is not simply a matter of adding 2 + 2 = 4. It is a
decision of the program will ask for certain inputs and then
will make decisions about how those inputs are translated
into--combined and translated into numbers on the return.
And the Service simply--I believe, simply has to be able to
ascertain what those decisions are and how they are being made.
If the Service can't look at the underlying documentation, the
underlying software, you don't know whether or not someone is
actually implementing the law correctly.
Mr. Coyne. Thank you.
Chairman Johnson. Mr. Portman.
Mr. Portman. Thank you, Madam Chair. I have a lot of
questions, and I know we want to get to the next panel, so I
will try to be as brief as possible.
The Commission, as you know, worked very closely with this
Subcommittee in coming up with these taxpayer provisions which
ended up in H.R. 2292. There are 20-odd provisions, and as I
count it this afternoon, the administration supports in full,
without qualification, probably 9 or 10, and then there are
probably another 7 that you support with some qualification in
part, which is 16 out of 21; not bad.
Mr. Lubick. That is pretty good.
Mr. Portman. Yes, we are getting there. And Mr. Coyne has
asked a lot of the questions that I think we need to hear from
you on before we hear from some Advocates in the next panel
with regard to some additional rights that we may want to add
to this legislation.
If I have time, I am going to ask a couple of followup
questions on that. But let me jump to the provisions that are
in the legislation with regard to the Taxpayer Advocate.
Mr. Monks, your testimony was very good. It almost seemed
independent of Treasury at times, which I thought was----
Mr. Monk. Yes.
Mr. Portman [continuing]. Rather remarkable.
You know, just joking.
I think what you have told us is that you agree with almost
everything in the legislation. Section 301, as you know,
contains the Taxpayer Advocate provisions. The one I am a
little unclear on is the TAOs. We want to give you the
authority to issue more taxpayer assistance orders. As I
understand it, last year we issued, what, five TAOs? Is that
correct?
Mr. Monk. That is true. That was in terms of enforced TAOs.
But we assisted substantially more taxpayers in that process.
Where you have to issue a TAO is where you have strong
disagreement from the functional area, and the Advocate, the
local advocate, cannot negotiate an effective solution, and
they are forced to----
Mr. Portman. Correct.
Mr. Monk [continuing]. That that position be taken.
Mr. Portman. Right. In many of the cases, you negotiated
something that was acceptable to your Advocates out in the
field.
Mr. Monks. Right.
Mr. Portman. But the bottom line is out of thousands, there
were five issued. My inference from your earlier testimony is
that you would like to expand that authority also, but you are
concerned that our legislation may inadvertently perhaps result
in fewer TAOs, or at least less authority, because of the
stipulation of specific provisions that the court can then say
weren't all met. Is that your concern? Is that it?
Mr. Monks. My concern is that it might focus on a certain--
specific set of criteria, and I would like to have the field
Advocates be able to consider everything in terms of making
that hardship determination and whether the relief is
appropriate. And the important measure in that process is not
the fact that five TAOs were issued, but how many taxpayers
were provided relief through the process.
I don't want to have a limiting impact through that
legislation, and we are very willing to provide some language
that we think will cover this specific area.
Mr. Portman. Well, we concur on the fact that we want to
give you expanded authority. We want to give you expanded
independence, as you know, and I am very pleased that you agree
with the vast majority of these changes to try to strengthen
what was strengthened in TBOR 2.
Mr. Brown. Mr. Portman.
Mr. Portman. Yes.
Mr. Brown. In fact, the Advocate has prepared his testimony
independently, and if I could comment on those provisions that
you are just referring to in 301, the Service would have some
concerns about the first factor that is listed, because----
Mr. Portman. This is why I didn't want to hear from
Treasury; I just wanted to hear from the guy who is actually
supposedly advocating for the taxpayer.
No, I am sorry. Go ahead, Mr. Brown. I do not have much
time, so don't go into a lot of detail, please, because I do
want to ask a couple more questions.
Mr. Brown. We can discuss this with your staff later, if
that is acceptable.
Mr. Portman. Go ahead.
Mr. Brown. OK. It seems to us that the definition of a
significant hardship shouldn't be affected by whether or not
the decision is substantively correct, either in terms of
following a law or following a procedure. That factor is
relevant to whether a decision was right or wrong and should be
resolved, perhaps with the assistance of the Advocate, through
the management structure by making the decision on the merits.
We shouldn't----
Mr. Portman. Right.
Mr. Brown [continuing]. Confuse hardship with the merits of
the position.
Mr. Portman. But that is an important criteria to be
considered in the taxpayer's case, if the regulations had been
followed, the rules had been followed.
Mr. Brown. It is important for it to be considered, and I
would expect that if Mr. Monks or his office became aware of a
case where he thought the rules had been followed, that he
would bring that to the attention of the management officials,
and that ultimately, if necessary, the Commissioner would
decide whether in his or her view the rules had been followed
or not. But that issue doesn't seem to bear on the question of
whether application of the rules creates a hardship or not.
Mr. Portman. On the taxpayer.
I agree with you, there is some distinction there, but both
are important, and you want to give the independence and you
want to give them the ability to exercise that TAO when
appropriate or to have that leverage to negotiate.
On the qualifications for the Advocate, understanding that
they don't apply to you, do you have any concerns about the
qualifications listed in the legislation? It is a big change.
Mr. Monk. I think we did propose some additional language
to insert, in effect, that knowledge of the tax administration
process would be a critical requirement.
Mr. Portman. In addition to the other----
Mr. Monk. In addition to the other two, or at least
considered equal or even above the other two elements that you
had written into your bill.
Mr. Portman. OK. Again, I think this is one of the major
improvements that we can make through this process. I want to
thank Mrs. Johnson for working on this last time. I think we
have made it even better this time, particularly the idea of
independence.
Thank you, Madam Chair.
Chairman Johnson. I thank you all very much. We will have
continuing discussions on those areas where you have concerns
but are interested in working with us, and we look forward to
those, and they will include interested Subcommittee Members.
Let me convene the final panel, and we will work through
their testimony and then take questions.
My mistake. GAO is next.
Mr. White, out of respect for the following panel, since
this has gone on longer than we expected, if you could move
ahead to the parts of your testimony that pertain most directly
to the issues before us, I would appreciate it.

STATEMENT OF JAMES WHITE, ASSOCIATE DIRECTOR, TAX POLICY AND
ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S.
GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY LYNDA WILLIS,
DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES; AND TOM SHORT,
ASSISTANT DIRECTOR

Mr. White. Madam Chairman, I will be brief. We are pleased
to be here to assist the Subcommittee. With me is Lynda Willis,
Director of Tax Policy and Administration Issues, and Tom
Short, an Assistant Director.
You asked us to discuss various issues related to IRS
audits. I want to make four points. First, IRS has limited data
on the treatment of taxpayers and the burdens imposed on them
during audits. IRS has begun tracking taxpayers' complaints
about improper treatment, but it does not have data
representative of all taxpayers.
Second, an important indicator that IRS uses to measure its
overall audit performance is how much additional tax is
recommended. However, without an indicator to balance taxes
recommended against those actually collected, IRS auditors
could have an incentive to recommend additional tax, even
though the support is weak, forcing taxpayers to go through
burdensome appeals.
Third, our work on one set of controversial audit
techniques, those examining taxpayers' financial status, showed
that IRS used these techniques in less than a quarter of its
audits. We found that about 16 percent of the audits where they
were used, these techniques did help to identify unreported
income. However, in over three-quarters of the audits using
these techniques, no changes resulting from the techniques were
made.
Fourth, IRS is concerned that its ability to target the
potentially most noncompliant taxpayers for audits is
deteriorating. IRS concern arises because it last collected the
data on which its audit selection formulas are based through
audits of a random sample of taxpayers for tax year 1988. And
that concludes my statement.
[The prepared statement and attachments follow:]

Statement of James White, Associate Director, Tax Policy and
Administration Issues, General Government Division, U.S. General
Accounting Office

Madame Chairman and Members of the Subcommittee:
We are pleased to be here today to assist the Subcommittee
in its inquiry into the rights of taxpayers and their treatment
during audits of their tax returns by the Internal Revenue
Service (IRS). Recently, taxpayers, tax professionals, and
Congress have expressed concerns about how IRS treats taxpayers
during audits and whether audits are overly burdensome. You
asked us to discuss IRS' data on taxpayer complaints and the
burden imposed on taxpayers as well as IRS' indicators for
measuring audit performance. You also asked us to discuss our
ongoing work for the Chairman of the House Committee on Ways
and Means on IRS' use of a particular audit technique--reviews
of taxpayers' financial status (i.e., their flow of income and
expenses)--and IRS' methodology for selecting tax returns for
audit.
Today, I would like to make four points taken from this
ongoing work as well as from previous reports and testimonies.
--First, IRS has limited data on both the treatment of
taxpayers and the burdens imposed on them during audits. IRS
recently created a system to track taxpayers' complaints about
improper treatment but IRS does not solicit input on all
improper treatment. Similarly, IRS has no comprehensive
definition of, and little data on, the burden its audits impose
on taxpayers. IRS has recently developed a survey that will ask
individual taxpayers about their satisfaction with various
parts of the audit process but results will not be available
until 1998. While recognizing the difficulties in collecting
data from taxpayers about treatment and burden, we believe that
this survey may have the potential to provide better
information than presently exists.
--Second, IRS' Examination Division has various indicators
and standards on audit performance. One measure IRS uses for
audit performance is how much additional tax is recommended.
IRS does not have a corresponding measure on how much of the
recommended tax is ultimately collected after taxpayer appeals.
Without an indicator to balance taxes recommended against those
collected, IRS auditors could have an incentive to recommend
taxes that would be unlikely to withstand a taxpayer challenge.
IRS has nine audit standards. The standards focus on the
efficient use of auditors' time and not on when they should use
particular audit techniques. To ensure adherence to the
standards, IRS relies on oversight by the auditors' managers.
However, their workload limits their time for doing oversight.
--Third, our work on one set of audit techniques--those
used in analyzing taxpayers' financial status to identify any
unreported income--provided several interesting statistics. We
estimated that IRS auditors used these techniques in less than
a quarter of the audits completed in the time periods covered
by our review. When used, financial status techniques were
always part of an audit that included other techniques or
methodologies. In about one-quarter of the audits in which
financial status techniques were used, IRS did not have to
contact the taxpayer to obtain information on the taxpayer's
financial status beyond what was reported on the tax return. We
also found that the use of financial status techniques has not
increased in recent years. Regarding revenue impact, we found
that in about 16 percent of the cases where they were used,
these techniques did help to identify significant amounts of
unreported income--$10,000 or more. However, of the total
audits in which these techniques were used, in over three-
quarters no changes resulting from the use of these techniques
were made to the income reported, although most of the audits
resulted in some tax change for other reasons. Data are not
available to permit either us or IRS to determine the
additional burden imposed on taxpayers from the use of
financial status techniques in audits.
--Fourth, IRS is concerned that its ability to target the
potentially most noncompliant taxpayers for audits is
deteriorating. IRS' concern arises because it has not been able
to rely on its past approach for developing statistically valid
research data that allowed IRS to create and periodically
update formulas to target the returns with the most potential
for noncompliance. IRS last collected these data through audits
of a random sample of taxpayers for tax year 1988. IRS
subsequently abandoned that approach due to concerns about its
costs and to concerns from the public and Congress about the
taxpayer burden involved with those audits. For context, we
note that from the 1960s, when IRS first created its research-
based audit formulas until it stopped gathering that research
data after 1988, it had reduced the rate to which its audits
made no recommended tax change from more than 40 percent to
around 10 to 15 percent, depending on the type of return and
the year of the audit.
I would like to discuss each of these points in more detail
after providing an overview on why IRS audits tax returns and
how IRS is supposed to do the audits.

Overview of IRS Audits of Tax Returns

IRS Examination Division audits tax returns to ensure that
taxpayers report and pay the amount of tax they owe. Because
our tax system is based on self-assessment, IRS also does
audits to induce taxpayer compliance and promote public
confidence in the tax system.\1\
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\1\ IRS also induces compliance through taxpayer assistance, third-
party reporting to IRS of payments (such as wages and interest) made to
taxpayers, computer matching of tax returns to third-party data, income
tax withholding, and penalties for noncompliance.
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The income tax gap--the difference between taxes owed and
taxes paid voluntarily and on time--is one reason why IRS seeks
to provide an audit presence. Under IRS most recent estimate,
the 1992 income tax gap for individuals exceeds $90 billion, of
which about two-thirds can be attributed to individuals not
reporting income on their tax returns.
In recent years, IRS has been auditing about one to two
percent of the 100-million plus income tax returns filed
annually by individual taxpayers.\2\ IRS' policies and
procedures are generally directed at selecting returns that
appear to be most noncompliant. After selecting the returns,
IRS audits them either (1) through 1 of its 33 district offices
by meeting with taxpayers or their representatives or (2)
through 1 of its 10 service centers by corresponding with the
taxpayers. Since fiscal year 1992, these audits have been
recommending between $5 billion to $8 billion in additional
taxes each year. Appendix I of my statement summarizes selected
audit statistics since fiscal year 1992.
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\2\ IRS also annually audits tens of thousands of income tax
returns filed by corporations and partnerships as well as thousands of
other types of returns such as those filed to report estate tax, gift
tax, employment tax, and excise tax.
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IRS auditors are instructed to not only verify the
eligibility and amounts for various types of tax deductions,
credits, and exemptions, but to also look for any indications
of unreported income. If auditors find such indications, they
are to exercise their judgment in deciding whether to do
further probes in an effort to determine whether the taxpayer
underreported income.
To guide auditors, IRS manuals and publications have
identified the rights of taxpayers during audits and the manner
in which auditors should treat taxpayers. For example, IRS
documents say that taxpayers have the right, among others, to
know why IRS is asking for information about the tax return and
to authorize another person to represent them during the audit.
Through its documents and training programs, IRS instructs its
audit staff to explain these rights to the audited taxpayer and
to protect those rights. In addition, audit staff are
instructed to protect taxpayers' privacy as well as treat them
with professionalism and courtesy.

IRS Data on Audit Burden and Taxpayer Complaints about Treatment

Recently, taxpayers, tax professionals, and Congress have
criticized IRS for treating taxpayers improperly and imposing
unnecessary burdens during audits. At a general level, these
criticisms have asserted that auditors lacked sufficient
experience, training, motivation, or competence. Specific
criticisms have focused on a range of asserted IRS behaviors,
including:
subjecting compliant taxpayers to unnecessary
audits, resulting in no change to the tax liability reported on
the tax returns;
wasting taxpayers' time during the audit by asking
for irrelevant documentation or by delving into issues that are
minor or personal; and
treating taxpayers unprofessionally or abusively,
regardless of whether they underpaid their taxes, by lying,
making threats, applying pressure, and the like.
IRS has limited data for use in responding to such
assertions. With respect to unprofessional or improper
treatment, in 1994 and 1996, we reported that IRS lacked
comprehensive data on the nature and magnitude of the
complaints as well as their resolutions.\3\ Nor did IRS have
clear definitions that allowed it to determine whether these
complaints indicated auditor behaviors that were ``abusive'' or
``unnecessary.''
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\3\ Tax Administration: IRS Can Strengthen its Efforts to See That
Taxpayers are Treated Properly (GAO/GGD-95-14), and Tax Administration:
IRS is Improving its Controls for Ensuring That Taxpayers are Treated
Properly (GAO/GGD-96-176, Aug. 30, 1996).
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Since our 1996 report, IRS has developed a definition and
tracking system for complaints about improper treatment. IRS
defines a complaint as an allegation by taxpayers or their
representatives that an IRS employee violated the law,
regulation, or IRS rules of conduct or used inappropriate
behavior (e.g., rude, overzealous, discriminatory,
intimidating) or that an IRS system failed to function properly
or within the prescribed time frame.
IRS' complaint tracking system does not systematically
solicit input from taxpayers on their treatment during audits;
rather, it records only those complaints initiated by
taxpayers. As a result, neither we nor IRS have representative
data on the extent to which auditors treat taxpayers improperly
across the roughly 2 million audits.
Nevertheless, IRS does report the data the system collects
on taxpayer complaints. For the first quarter of fiscal year
1997, IRS reported that taxpayers initiated 1,203 complaints,
of which 290 (25 percent) involved audit staff. Of the 290
audit-related complaints, almost half involved assertions of
inappropriate behavior by an auditor and about one-quarter of
these complaints were addressed through counseling or
administrative action or through the employee leaving IRS; for
the remaining three-quarters of the complaints, IRS concluded
that the employee's behavior was appropriate or that
information provided by the taxpayer was not complete enough to
take disciplinary action against the employee.
With respect to taxpayer burden, IRS has limited data on
the burden--whether necessary or not--imposed by audits. For
example, in fiscal year 1996, IRS tax auditors made no changes
to 14 percent of the individual tax returns. However, IRS does
not know the amount of burden imposed by these or other audits.
Data on burden can be difficult to collect for various
reasons. Neither IRS nor its stakeholders have clear
definitions or agreement on what constitutes audit burden as
well as unnecessary burden. Further, our work has shown that
taxpayers do not keep records on the amount of audit burden in
terms of time or money.\4\
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\4\ Tax System: Issues in Tax Compliance Burden, (GAO/T-GGD-96-100,
Apr. 3, 1996) and Tax System Burden: Tax Compliance Burden Faced by
Business Taxpayers, (GAO/T-GGD-95-42, Dec. 9, 1994).
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IRS has recently developed a survey that will ask
individual taxpayers about their satisfaction with the audit
process. Results will not be available until 1998. Recognizing
the difficulties in collecting data about treatment and burden,
we believe that this survey may begin to provide better
information about taxpayer treatment and burden but its
usefulness will need to be evaluated.

IRS' Indicators To Measure the Impacts of Audits

IRS has established some indicators for measuring its audit
performance. However, existing indicators primarily focus on
interim results without also considering final results from the
audits. Similarly, IRS has established nine audit standards to
guide its auditors. However, the standards do not provide
objective criteria on when to use particular audit techniques.
IRS' Examination Division has used additional tax
recommended as an important indicator of audit performance (see
app. II for the fiscal year 1997 indicators).\5\ We expressed
concerns in previous work that overreliance on additional taxes
recommended as an indicator of performance could create
undesirable incentives for auditors (and other Examination
staff) to recommend taxes that would be unlikely to withstand a
taxpayer challenge.\6\ While we recognize the complexity of the
Internal Revenue Code and the difficulties faced by both IRS
and the taxpayer in determining the ``correct tax,'' the fact
remains that audit recommendations that do not withstand such a
challenge may have imposed an unnecessary burden on the
taxpayer. For this reason, in our previous work, we supported
the need to measure taxes recommended but advocated balancing
that indicator with others such as taxes ultimately collected.
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\5\ Taxpayers do not necessarily have to pay the recommended taxes.
Taxpayers may challenge them through administrative channels within IRS
or the courts. If they win the challenge, the recommended taxes will
not be assessed as owed. If they lose or raise no challenge, the
recommended taxes are assessed.
\6\ Tax Administration: Compliance Measures and Audits of Large
Corporations Need Improvement (GAO.GGD-94-70, Sept. 1, 1994) and Tax
Administration: Factors Affecting Results From Audits of Large
Corporations (GAO/GGD 97-62, Apr. 17, 1997).
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Our work also pointed out that developing an indicator of
taxes ultimately collected from audits would be challenging.
For example, the time lag between an audit and the ultimate tax
collected makes linking the two problematic. IRS is working on
developing a way of determining the ultimate taxes collected.
In addition to indicators of audit performance, IRS also
has nine audit standards to provide guidance to auditors on
minimizing the time spent on an audit, checking large and
unusual claims on tax returns, probing for unreported income,
and preparing adequate audit workpapers (see app. III for all
nine standards). These nine standards do not address the proper
treatment of taxpayers. Further, although the standards provide
guidance on the proper depth and breadth of audits given the
time available, they provide little objective guidance to
auditors on when to use particular audit techniques such as
those related to an analysis of a taxpayer's financial status.
To ensure adherence to the standards, IRS relies on
managers' oversight of auditors. However, according to IRS
officials, these managers cannot review all audits because
their workloads limit the time available for review. As audits
close throughout the year, separate groups of IRS staff
supplement the managerial review process by reviewing a small
sample of audits to measure adherence to the nine standards
(see appendix III for measurement results in fiscal years 1992
through 1996).

IRS' Use of Financial Status Techniques

Given recent complaints about the asserted burdens and
intrusions associated with IRS' financial status audit
techniques, the Chairman of the House Committee on Ways and
Means asked us to report on the frequency and results of IRS'
use of these techniques. IRS uses these techniques to identify
unreported income. During our analyses of audits done in 1992-
93 and 1995-96, we found that IRS relied primarily on two
financial status techniques: \7\
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\7\ Other techniques include an analysis of (1) a taxpayer's net
worth and (2) a business taxpayer's reported cost of goods sold and
data on average markups within the specific business to estimate gross
receipts generated by that taxpayer.
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1) Cash transaction analysis (or cash-T), in which the
auditor uses the tax return and other sources to ensure that
adequate income has been reported on the return to cover
expenses. In deciding to use this technique, auditors may first
do a preliminary cash-T. It differs from the regular cash-T in
that the auditor does it before meeting with taxpayers, relying
on information reported on tax returns.
2) Bank deposit analysis, in which the auditor verifies
that the taxpayer's bank deposits are consistent with the
income reported on the tax return.
To do our work, we randomly sampled from the universe of
audits closed in IRS districts in which IRS scheduled meetings
with taxpayers to review their records. These samples covered
1992-93 and 1995-96 and were both projectable to universes of
about a half million audits.
On the basis of our analysis of these two samples, we
estimate that the use of financial status techniques had not
increased over the time frames we reviewed--the techniques were
used in about one-quarter of the audits in each of our two
universes. Financial status techniques were never used alone;
they were always part of audits that included other audit
techniques to explore issues other than unreported income, such
as overstated deductions.
These techniques imposed no or little additional burden on
taxpayers in some of the audits where they were used. For
example, IRS auditors used just the preliminary cash-T in 23
percent of the 1995-96 audits that used financial status
techniques. The preliminary cash-T technique imposes no
additional burden on the taxpayer because the auditor relies on
the information on the tax return and does not have to contact
the taxpayer to obtain additional information or explanations
to complete this technique.
We found that use of the financial status techniques in
some cases helped to identify significant amounts of unreported
income--$10,000 or more--that IRS would not have otherwise
found. However, over three-quarters of the audits in which
these techniques were used resulted in no changes that were
directly attributable to the use of these techniques, even
though IRS did find noncompliance in most of these audits
through other techniques.
While neither we nor IRS know the actual burden imposed on
taxpayers, our review of IRS' workpapers illustrated some
conditions under which use of certain techniques may impose
additional burdens. For example, a bank deposit analysis can be
very burdensome if the auditor asks for records on many bank
accounts and asks many questions about the deposits in those
accounts. A regular cash-T may or may not be very burdensome,
depending on the number of contacts with taxpayers to request
information and the amount of information requested.

Barriers to Selecting the Most Noncompliant Tax Returns for Audit

As discussed in previous reports, IRS is concerned about
its ability to objectively select tax returns so that it
focuses on the most noncompliant taxpayers.\8\ IRS' concerns
arise because it has not been able to rely on its past approach
for developing statistically valid research data that allowed
IRS to create and periodically update formulas to target the
returns with the most potential for noncompliance. IRS refers
to these as discriminant function (DIF) formulas, which have
served as the major method for selecting returns for audit.\9\
IRS fears that its DIF formulas have become imprecise because
the formulas use outdated statistical data.
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\8\ Tax Research: IRS Has Made Progress But Major Challenges
Remain, (GAO/GGD-96-109, June 5, 1996); Tax Administration: Alternative
Strategies to Obtain Compliance Data (GAO/GGD-96-89, Apr. 26, 1996);
Tax Gap: Many Actions Taken, But a Cohesive Compliance Strategy Needed
(GAO/GGD-94-123, May 11, 1994); and Tax Administration: IRS's Plans to
Measure Tax Compliance Can Be Improved (GAO/GGD-93-52, Apr. 5, 1993).
\9\ Tax Administration: Audit Trends and Results for Individual
Taxpayers (GAO/GGD-96-91, Apr. 26, 1996). IRS has up to 40 methods for
identifying returns to audit. Appendix IV summarizes the number of
audits selected by the major methods for fiscal years 1992 through
1996.
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In past years, IRS collected the statistically valid
research data under its Taxpayer Compliance Measurement Program
(TCMP). TCMP involved full-scale audits of a random sample of
tax returns--usually for about 50,000 individual taxpayers
every 3 years. In 1995, IRS abandoned this approach due to
concerns about its costs and to concerns from the public and
Congress about the taxpayer burden involved with those audits.
As a result, IRS' last TCMP covered tax year 1988.
In a 1996 report, we discussed IRS' need for compliance
data that are statistically valid and more current.\10\ IRS
needs the data not only to update its DIF formulas but also to
support most of its compliance programs. Accordingly, we
recommended that IRS develop a cost-effective, long-term
strategy to ensure the continued availability of such
compliance data.
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\10\ Tax Administration: Alternative Strategies to Obtain
Compliance Data (GAO/GGD-96-89, Apr. 26, 1996).
---------------------------------------------------------------------------
Since IRS started to use DIF in the 1960s to better target
its audits through fiscal year 1996, IRS has reduced the rate
at which its auditors made no tax changes from more than 40
percent of the audited returns to around 10 to 15 percent,
depending on the type of return and the year of the audit. IRS
is concerned that as time passes, DIF's precision in
identifying noncompliant returns may decrease unless IRS
updates the formulas with valid data, and that as a result,
more and more compliant taxpayers will be unnecessarily
burdened with an audit. We are now designing a study of this
issue at the request of the Chairman of the House Committee on
Ways and Means.
Madam Chairman, this concludes my testimony. I would be
pleased to answer any questions you or other members of the
Subcommittee may have.

Appendix I

SELECTED INFORMATION ABOUT THE RETURNS FILED AND EXAMINED AND RECOMMENDED ADDITIONAL TAXES (Fiscal Years 1992-96)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Description 1992 1993 1994 1995 1996
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of returns
Filed..................................................... 152,031,900 153,453,600 152,732,800 154,293,700 155,279,600
Examined.................................................. 1,452,009 1,300,230 1,426,573 2,100,144 2,136,819
Percent coverage.......................................... .96 .85 .93 1.36 1.38
Recommended additional tax and penalties (in billions)........ $26.9 $23.1 $23.9 $27.8 $28.1
Individual returns........................................ 6.3 5.7 6.2 7.8 $7.6
Corporate returns......................................... 18.1 14.7 15.1 17.7 $18.0
All other \1\............................................. 2.5 2.7 2.6 2.3 $2.5
Average tax and penalty per return examined by
Revenue agent for non-CEP \2\............................. $25,161 $24,704 $18,177 $21,237 $24,407
Revenue agent for CEP..................................... 3,940,148 2,700,352 3,279,298 4,032,528 3,998,409
Tax auditor............................................... 2,280 2,625 3,113 3,497 3,051
Service center............................................ 2,541 2,934 1,945 1,427 1,733
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Other includes fiduciary, estate, gift, employment, excise, windfall profit, and miscellaneous taxes.
\2\ CEP = Coordinated Examination Program, under which IRS audits the largest corporations.

Appendix II

IRS Examination Division Measures for 1997

Basic measures across Examination activities include
1. Amount of additional tax and penalties recommended.
2. Percentage of additional recommended amounts plus
interest amounts that were collected before IRS issued the
second notice on the amounts that were assessed.
3. Average number of days that an audit case remains open.
4. Amount of additional tax and penalty recommended as well
as the amount of tax protected in audits divided by the total
full-time-equivalent staffing invested.
For the Coordinated Examination Program (CEP), additional
measures include
1. Average number of tax years for tax returns filed by a
CEP taxpayer that have not yet been audited.
2. Amount of additional tax and penalty recommendations
that CEP taxpayers agreed to pay minus amount overassessed
divided by the total full-time-equivalent staffing invested.
3. Amount of total adjusted revenues divided by the total
full-time-equivalent staffing invested.

Appendix III

IRS' Examination Quality Measurement System

The Office of Compliance Specialization, within IRS'
Examination Division, has responsibility for Quality
Measurement Staff operations and the Examination Quality
Measurement System (EQMS). Among other uses, EQMS measures the
quality of closed audits against nine IRS audit standards. The
standards address the scope, audit techniques, technical
conclusions, workpaper preparation, reports, and time
management of an audit. Each standard includes additional key
elements describing specific components of a quality audit.
Table III.1 summarizes the standards and the associated key
elements.

Table III.1: Summary of IRS' Examination Quality Measurement System
(EQMS) Auditing Standards (as of October 1996)
------------------------------------------------------------------------
No. Standard Key elements Purpose Overview
------------------------------------------------------------------------
1 Considered A. Balance Measures This standard
large, unusual, sheet and whether encompasses,
or questionable Schedule M consideration but is not
items. considered. was given to limited to,
B. Income, the large, the following
deduction, and unusual, or fundamental
credit items questionable considerations
considered. items in both : absolute
C. Scope of the precontact dollar value,
examination stage and relative
was during the dollar value,
appropriate. course of the multiyear
examination. comparisons,
intent to
mislead,
industry/
business
practices,
compliance
impact, and so
forth.
2 Probes for A. Measures Gross receipts
unreported Consideration whether the were probed
income. of internal steps taken during the
controls for verified that course of
all business the proper examination,
returns. amount of regardless of
B. income was whether the
Consideration reported. taxpayer
of books and maintained a
records. double entry
C. set of books.
Consideration Consideration
of financial was given to
status. responses to
D. Appropriate interview
use of questions, the
indirect financial
methods. status
analysis, tax
return
information,
and the books
and records in
probing for
unreported
income.
3 Required filing A. Measures Required filing
checks. Consideration whether checks consist
of prior and consideration of the
subsequent was given to analysis of
year tax filing and return
returns. examination information
B. potential of and, when
Consideration all returns warranted, the
of related required by pick-up of
returns. the taxpayer, related,
C. Compliance including prior, and
items those entities subsequent
considered. in taxpayer's year returns.
sphere of In accordance
influence/ with Internal
responsibility. Revenue Manual
4034,
examinations
should include
checks for
filing
information
returns.
4 Examination A. Adequate Measures The depth of
depth and interviews whether the the
records conducted. issues examination
examined. B. Adequate examined were was determined
exam completed to through
techniques the extent inspection,
used. necessary to inquiry,
C. Fraud provide interviews,
adequately sufficient observation,
considered and information to and analysis
developed. determine of appropriate
D. Issues substantially documents,
sufficiently correct tax. ledgers,
developed. journals, oral
testimony,
third-party
records, etc.,
to ensure full
development of
relevant facts
concerning the
issues of
merit.
Interviews
provided
information
not available
from documents
to obtain an
understanding
of the
taxpayer's
financial
history,
business
operations,
and accounting
records in
order to
evaluate the
accuracy of
books or
records.
Specialists
provided
expertise to
ensure proper
development of
unique or
complex
issues.
5 Findings A. Correct Measures This standard
supported by technical or whether the includes
law. factual conclusions consideration
conclusions reached were of applicable
reached. based on a law,
correct regulations,
application of court cases,
tax law. revenue
rulings, etc.,
to support
technical or
factual
conclusions.
6 Penalties A. Recognized, Measures Consideration
properly considered, whether of the
considered. and applied applicable application of
correctly. penalties were appropriate
B. Penalties considered and penalties
computed applied during all
correctly. correctly. examination is
required.
7 Workpapers A. Fully Measures the Workpapers
support disclose audit documentation provided the
conclusions. trail and of the principal
techniques. examination's support for
B. Legible and audit trail the examiner's
organized. and techniques report and
C. Adjustments used. documented the
in workpapers procedures
agree with applied, tests
4318, 4700, performed,
and reports. information
D. Activity obtained, and
record the
adequately conclusions
documents exam reached in the
activities. examination.
E. Disclosure..
8 Report writing A. Applicable Measures the Addresses the
procedures report writing presentation written
followed. procedures of the audit presentation
followed. findings in of audit
B. Correct tax terms of findings in
computation. content, terms of
format, and content,
accuracy. format, and
accuracy. All
necessary
information is
contained in
the report, so
that there is
a clear
understanding
of the
adjustments
made and the
reasons for
those
adjustments.
9 Time span or A. Examination Measures the Time is an
time charged. time utilization of essential
commensurate. time as it element of the
B. Exam relates to the auditing
initiation. complete audit standards and
C. Examination process. is a proper
activities. consideration
D. Case closing in analyses of
the
examination
process. The
process is
considered as
a whole and at
examination
initiation,
examination
activities,
and case-
closing
stages.
------------------------------------------------------------------------
Source: IRS data.

Standard Success Rate

EQMS quality reviewers use the key element definitions to
determine whether an audit adhered to the standard. Thus,
adherence to audit quality is measured by the presence or
absence of associated key elements. For a standard to be rated
as having been met, each of the associated key elements must
also be rated as met or not applicable. If the audit does not
demonstrate the characteristics described by one of the key
elements, then the standard is rated as not met.
One measure that IRS uses to evaluate the audit quality is
the standard success rate. It measures the percentage of cases
for which all the underlying key elements of each standard are
rated as having been met. According to IRS, this measure is
useful for determining whether a case is flawed and in what
area. Figures III.1 and III.2 show the standard success rates
for each of the standards for fiscal years 1992-96 for office
and field audits, respectively.
[GRAPHIC] [TIFF OMITTED] T3803.003

[GRAPHIC] [TIFF OMITTED] T3803.004

Key Element Pass Rate

IRS also uses the key element pass rate as a measure of
audit quality. This measure computes the percentage of audits
demonstrating the characteristics defined by the key element.
According to IRS, the key element pass rate is the most
sensitive measurement and is useful when describing how an
audit is flawed, establishing a baseline for improvement, and
identifying systemic changes. Figures III.3 and III.4 show the
pass rates for the key elements of standard 2 for fiscal years
1992 through 1996 for office and field audits, respectively.
[GRAPHIC] [TIFF OMITTED] T3803.005

[GRAPHIC] [TIFF OMITTED] T3803.006

Appendix IV

NUMBER AND PERCENT OF INDIVIDUAL RETURNS AUDITED BY AUDIT SOURCE (Fiscal Years 1992-96)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal year 1992 Fiscal year 1993 Fiscal year 1994 Fiscal year 1995 Fiscal year 1996
Audit sources -------------------------------------------------------------------------------------------------------------
Number Percent Number Percent Number Percent Number Percent Number Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
DIF/DIF related.......................... 452,445 38% 372,116 35% 239,557 20% 263,200 14% 351,867 18%
Nonfilers................................. 119,865 10 190,809 18 402,435 33 410,612 21 212,226 11
Tax shelter related....................... 101,453 8 48,070 5 29,687 2 27,473 1 20,300 1
Self-employment tax....................... 71,126 6 46,310 4 43,032 4 48,578 3 40,601 2
Regular classification.................... 52,528 4 50,709 5 47,170 4 46,637 2 48,534 3
State information......................... 48,418 4 3,564 0 4,573 0 3,2100 7 1,582 4
Service center studies and tests.......... 43,333 4 20,059 2 22,825 2 25,026 1 18,684 1
Compliance projects....................... 40,403 3 44,267 4 41,959 3 38,624 2 45,680 2
Claims for refund......................... 33,163 3 37,203 4 26,412 2 23,175 1 31,495 2
Return preparers.......................... 27,706 2 28,231 3 27,708 2 26,542 1 33,637 2
Non-DIF multiyear......................... 26,866 2 29,373 3 26,742 2 24,926 1 29,927 2
Unallowable items......................... 13,117 1 12,099 1 134,007 11 761,886 40 824,721 42
Other sources............................. 175,596 15 176,156 16 179,600 15 219,548 11 212,306 11
-------------------------------------------------------------------------------------------------------------
Total..................................... 1,206,019 100% 1,058,966 100% 1,225,707 100% 1,919,437 100% 1,941,560 100%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note 1: For this table, we used the format from our 1996 report on audit trends (GAO/GGD-96-91, Apr. 1996). That format listed the top 10 sources for
each of the fiscal years 1992 through 1994. Using that format, we updated the numbers and percentages for those categories for fiscal years 1995 and
1996.
Note 2: See next page for definitions of terms used in this table.
Note 3: Percentages are the percent of total audits for the year and have been rounded to the nearest whole percent.
Source: GAO analysis of IRS data.

Definitions of Audit Sources

Claims for Refund

Ammended returns audited because of taxpayers' claims for refunds.

Compliance Projects

Returns identified through IRS' information gathering projects.

DIF/DIF Related

Returns selected on the basis of a computer-generated score (the
scoring is based on an analysis technique known as discriminant
function). Also included are related returns identified during an audit
of a DIF-source return and related returns from prior or subsequent
years for the same taxpayer.

Non-DIF Multiyear

Related returns from prior or subsequent years for the same
taxpayer, when the initial source was other than a DIF-source return.

Nonfilers

Audits initiated against known taxpayers who did not file a return
with IRS.

Other Sources

Over 25 other audit sources, such as referrals from other IRS
Divisions, which were not one of the 10 largest sources during the
period of our review.

Regular Classification

Manually selected returns for audit that do not result from other
specified audit sources.

Return Preparers

Returns identified for audit due to questionable tax preparers.

Self-Employment Tax

Returns involving self-employment tax issues identified by IRS
service center examination staff.

Service Center Studies and Tests

Returns identified through service center projects initiated by the
IRS National Office.

State Information

Returns identified from various state sources, generally under
exchange agreements between IRS and the states.

Tax Shelter Related

Related returns of partners, grantors, beneficiaries, and
shareholders identified during audits of either partnerships,
fiduciaries, or Subchapter S corporations involving potential tax
shelter issues.

Unallowable Items

Returns involving refundable credits and dependency exemptions,
such as the Earned Income Tax Credit, identified by service center
examination staff.

Chairman Johnson. We will hear testimony that will look to
narrow the summons authority of the IRS and their right to ask
for certain advice documents that they received. When you look
at the conclusions that you have reached about their--use of
some of their audit techniques, and particularly the result of
seeking very extensive information, it suggests to me that
perhaps they are looking for more information than is
necessary.
Do you think that there is a need to reexamine the summons
authority of the IRS?
Mr. White. We have not done any work on that authority, so
I am not in a position to comment.
Chairman Johnson. In the issue of targeting, you say in
your testimony that the IRS is concerned that its ability to
target the potentially most noncompliant taxpayers for audits
is deteriorating. Is this because they have not done the kind
of sampling investigation that they have been accustomed to
doing?
Mr. White. Part of their sample selection methodology was
based on formulas that, in turn, were based on data that they
collected from a random sample of taxpayers. They last did the
audits of a random sample of returns for tax year 1988, and
because of the length of time that has passed and the changes
in the economy and tax law over time, they are concerned that
their ability to target the most potentially noncompliant
taxpayers is deteriorating.
Chairman Johnson. And you agree with that? You agree that
their ability to target has deteriorated?
Mr. White. We have work underway right now for the Chairman
of the Ways and Means Committee looking at that issue.
Chairman Johnson. Thank you.
Would either of the others that are with you wish to
comment?
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairman.
I wonder if the GAO has any suggestions to make here today
to the Oversight Subcommittee relative to the Taxpayer Bill of
Rights legislation that we have before us, or that we are
considering?
Mr. White. I think what we have seen this week is that
there are a whole range of problems that were uncovered. Some
of them are policy problems that Congress will be dealing with.
I would like to distinguish between the policy issues, though,
and the administration of whatever reforms are enacted. And I
think in terms of administration, the success of whatever
reforms are enacted depends on successful implementation,
successful administration, and successful management of those
reforms by the IRS. And in turn, that administration and
management depends on their having objective data, good
performance indicators that they can track over time. The theme
of my statement today is that they don't have enough of that
kind of information.
Mr. Coyne. So we might want to take a look at that area for
improved administration and management?
Mr. White. Yes, because I think that is crucial to ensuring
that any reform is successful.
Mr. Coyne. Thank you.
Chairman Johnson. Could I just follow up to ask you, the
IRS does use performance standards to measure the performance
of its employees and to motivate them to improve their
performance. What is your evaluation of the influence of those
performance standards?
Mr. White. One example is taxes recommended, which are not
used to evaluate the individual performance of employees, but
we do have a concern there, because that is one of the primary
measures that IRS examination division uses to report its
performance. Our concern is that without a balance between
taxes recommended and taxes ultimately collected after appeals,
tax auditors at IRS may have an incentive to make weak
recommendations that taxpayers then have to go through a
burdensome appeals process and ultimately get overturned, but
only after going through that kind of process.
Chairman Johnson. You referred to the nine audit standards
that the IRS has. Is any one of those associated with the
taxpayer's rights?
Mr. White. Not directly. The standards cover things like
the scope of the audit, the length of time it took. Some of
those standards get indirectly at things that impact taxpayers
like the length of time that the audit takes, but there is not
a standard that deals directly with proper treatment of
taxpayers.
Chairman Johnson. That is interesting and useful for us to
know.
Then just to enlarge briefly on your first point, because
you were right, you were very short, you said the IRS has
limited data on both the treatment of taxpayers and the burdens
imposed on them during audits.
I want you to enlarge on that. Some of it I am familiar
with, but I think we need on the record your evaluation of what
information they do or do not have access to or have data on in
regard to the treatment of taxpayers, and also the burdens
imposed on taxpayers during audits.
Mr. White. They have begun tracking taxpayers' complaints.
They have a system that tracks taxpayers' complaints. However,
they don't go out and solicit complaints from taxpayers, so
they don't have representative data from taxpayers right now.
Rather, they track the complaints that taxpayers take the
initiative on and make to IRS.
Chairman Johnson. Do they track them by employee?
Mr. Short. No, they don't.
Chairman Johnson. Pardon?
Mr. Short. No.
Chairman Johnson. That was my understanding. So if
complaints show up in an office, they don't know exactly who
isn't paying attention, do they?
Mr. White. They do investigate the complaints that they
get, and there were 290 complaints in the first quarter of the
year that were related to audits. And so they do make an effort
to go back and try to see what the problem was; and if
corrective or disciplinary action needs to be taken, they do
that.
Mr. Short. Certainly they will know who the employee is to
the extent they have enough information from that complaint,
but they are not doing any kind of tracking of that employee
through that system.
Chairman Johnson. Thank you.
Go ahead about other information in regard to the amount of
work imposed on taxpayers during audits.
Mr. White. As I said, they have little data, little
representative data, on taxpayer complaints. They also have
limited data on taxpayer burden. The information they do have
is related to things like the number of no-change audits,
audits where the auditors did not recommend a change to the tax
due. They don't have good information on the burden that audits
impose on taxpayers--and in fairness to IRS, this kind of
information is going to be very difficult to collect.
The reason that information will be difficult to collect is
because the taxpayers themselves typically don't track the time
that it takes them to go through an audit process with IRS.
Chairman Johnson. That is very useful to be reminded of at
this point. In other words, they have data about the outcomes
of audits, but not about the process of burden that audits
impose. And during the last discussion in the Congress on the
compliance audit process, that issue was a big issue, and we
don't really know enough about it to be able to pull forward.
Actually, one of the suggestions that came out at that time
was that we do a taxpayer compliance audit with people
volunteering and being compensated for the time imposed. We
certainly would then have learned a lot about that issue about
which, as I take from your testimony, we know practically
nothing.
Mr. White. If the issue is the burden associated with
audits, that is correct.
Chairman Johnson. Thank you.
Mr. Coyne.
Sorry. I recognized you, Mr. Portman.
Mr. Portman. Thank you.
Ms. Willis, you were also before the Senate yesterday, I
know. You survived the process.
I again appreciate your testimony on the exam program. I
have one question for you with regard to H.R. 2292. One of the
most important recommendations, I think, in the legislation has
to do with setting new measures. Mr. Dolan talked about that
being one of the three areas that he thought was most important
taken from the testimony in the last few days in the Senate,
that there needs to be new standards and measurements in place.
H.R. 2292, if you look at it, I think it is in title I,
subtitle B, personnel flexibilities. Have you had a chance to
look at that legislation with regard to the measurements,
taking into account other factors such as taxpayer service, and
taxpayer surveys?
Mr. White. We are somewhat familiar with it, yes.
Mr. Portman. OK. I just wondered if you had any comment on
that, because I think the performance measurement and
evaluation system for the employees is going to be a key to
improving the exam program and the whole enforcement process.
It is intended to take into account such factors as quality of
service provided, accuracy of employees' work and taxpayer
surveys. I just wondered if you could offer any suggestions as
to other measures that might be appropriate or how you felt
about those measures in H.R. 2292.
Mr. White. I think the whole issue of measures is crucial,
and I think it is much broader than just employee performance.
It is organizationwide.
Mr. Portman. Unit performance as well?
Mr. White. Pardon me?
Mr. Portman. When you say it is broader than employee
performance, do you mean that units need to be measured also?
Mr. White. Yes, the entire organization. And I think not
just the bill, but also the government Performance and Results
Act gets at this. I think the important thing here is to
develop measures that are connected to the ultimate goals that
the Congress sets for the IRS, and that those measures then
filter down, and then indicators are developed and data
collected to allow objective tracking of performance with
respect to those measures.
One key thing in that area, I think, is that outside
stakeholders be involved in the process. This is not something
that can be done internally by IRS. It is something that needs
to involve outside stakeholders, and I think that is one of the
strengths of the Results Act.
Ms. Willis. Mr. Portman, could I add something to that?
Mr. Portman. Yes.
Ms. Willis. There has been a lot of discussion lately about
IRS use of performance measures, and we focused on a specific
performance measure yesterday. And I think it is important not
to lose sight of the fact that what is key in developing
performance measures is having a balanced set of performance
measures; performance measures that measure everything that is
important in terms of achieving the mission of the agency.
And one of the problems that we have with the performance
measures currently on the board for IRS exam and collections is
they don't have customer service-related performance measures,
such as what we are talking about.
Mr. Portman. That is what we are trying to address in the
legislation.
Ms. Willis. And I think that is very important. Because in
addition to collecting the money that is owed the government,
which is obviously a very critical part of IRS mission, also
part of their mission is providing service and reducing
taxpayer burden. And we need to have countervailing measures to
make sure that we are balanced across the board and we take all
of these things into account.
And I think that is also very important in the cultural
reforms that we are talking about. What we measure sends very
important messages to employees about what is important, and
when you only have one type or one set of performance measures,
you are sending unbalanced messages; and that we not only need
measures in terms of how well the process works, but also in
terms of misconduct as it relates to taxpayers, how we treat
taxpayers, and taxpayers' satisfaction with the system overall.
I would reiterate what Mr. White said; that is, a lot of
this is going to be difficult. It is not easy to do. It is
difficult to come up with measures, and it is difficult to come
up with ways of actually quantifying change over time. But I
think the difficulty does not mean we don't need to work on
that and develop the measures so that we do have a balanced set
of indicators to judge IRS performance.
Mr. Portman. Ms. Willis, I know GAO is not in the habit of
commenting on specific legislation, but I think you have just
given an endorsement of the approach we are trying to take, and
I would just say that the most important stakeholder is the
taxpayer, and part of what we are trying to do is to provide a
survey to the IRS supervisor of the actual IRS employee that is
performing the audit, and that is part of the new standards
that we would like to see applied, the new performance
measurement that we would like to see applied to this
legislation.
Thank you very much for your input.
Ms. Willis. Thank you.
Chairman Johnson. To that point, Ms. Willis, which I think
is an excellent one, partly as a result of recent changes in
Federal law, you really have a lot of experience now at looking
across agencies at the effort to set performance goals. And we
are really only at the beginning of looking at how do we help
government set and achieve those goals. Thank you.
Thank you very much, Mr. White. I appreciate it.
We will now go to the final panel, and we will start with
Pamela Olson, the vice chair of the section of taxation of the
Bar Association. We have Joseph Lane from the Enrolled Agents;
Michael Mares from the Tax Executive Committee, American
Institute of Certified Public Accountants; Bob Kamman of the
Taxpayers' Rights Project, of the National Taxpayers Union; Al
Cors, Jr., the National Taxpayers Union; Roger Harris of the
Federal Taxation Committee; Nina Olson of the Community Tax Law
Project; and Stephen Winn, the president and chief executive
officer of Computer Language Research of Carrollton, Texas.
Welcome to all of you.
Pamela Olson.

STATEMENT OF PAMELA F. OLSON, VICE CHAIR, COMMITTEE OPERATIONS,
SECTION OF TAXATION, AMERICAN BAR ASSOCIATION; AND PARTNER,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM, L.L.P.

Ms. Pamela Olson. Madam Chairman and Members of the
Subcommittee, my name is Pamela Olson, and I am appearing
before you today in my capacity as vice chair of the American
Bar Association section of Taxation. This testimony is
presented on behalf of the section of Taxation. It has not been
approved by the House of Delegates or the Board of Governors of
the American Bar Association, and accordingly should not be
construed as representing the policy of the Association.
On behalf of the section, I would like to commend Chairman
Johnson and the Members of the Subcommittee for their ongoing
efforts in monitoring the state of the administration of our
Nation's laws. The section appreciates the opportunity to
testify before you today on legislative proposals concerning
taxpayer rights.
Our written statement contains detailed comments on the
specific taxpayer rights proposals included in H.R. 2292, many
of which we heartily support. It also contains several new
taxpayer rights proposals that we believe should be included as
part of any taxpayer rights legislative package.
I would add that we are pleased to be working with the IRS
in its efforts to improve customer service. There are a number
of steps that can be taken by the IRS to improve customer
service and the protection of taxpayer rights without
legislation, and we have recently, at the IRS request, provided
a number of suggestions in that regard.
In order to stay within the allotted time, I will limit my
remarks to two specific taxpayer rights proposals contained in
H.R. 2292, proposals to shift the burden of proof in Federal
tax cases and some preliminary thoughts on the bill regarding
confidentiality of taxpayer information that was just
introduced.
First, the two specific taxpayer rights proposals that I
want to comment on are the proposal to eliminate the interest
rate differential and the expansion of authority to award costs
and fees.
Under present law, as you know, there is a differential
between the overpayment rate charged and the underpayment rate
paid by the Service. We believe that providing the same
interest rate for underpayments and overpayments is desirable
and is an appropriate step toward addressing the inequities
created by the absence of global interest netting. However,
notwithstanding our general support for the proposal, we are
concerned about how the Treasury would determine the revenue-
neutral interest rate for a period.
We recommend that the taxwriting committees make clear that
the Secretary should base his estimate of the revenue-neutral
interest rate on the most recent historical information
regarding the absolute and relative amounts of underpayments
and overpayments, and that the percentage of such underpayments
and overpayments that have been subject to ``hot'' or GATT
interest rates should not be taken into account in determining
the appropriate rate.
Unlike the Treasury Department, we do not support
maintaining the differential. We believe that it has been a
source of needless complexity and believe that it should be
eliminated.
Section 302 of H.R. 2292 expands the ability of a taxpayer
who substantially prevails in a controversy involving the
Internal Revenue Service and/or the United States to receive an
award of costs and fees. We support the parts of the provision
that would allow the award of attorney's fees at a higher rate
when justified by the difficulty of the issues presented in the
case or the local availability of tax expertise; the awarding
of attorney's fees when the individual representing the
taxpayer has charged no more than a nominal fee; the increase
of the net worth ceiling for individuals and for businesses.
We also support that part of the provision that would allow
the award of reasonable administrative costs, including
attorney's fees incurred after the date the Service issues a
proposed notice of tax deficiency, if the taxpayer
substantially prevails and the position of the Service was not
substantially justified.
We are concerned, however, with how to interpret the rule
that the United States will not be considered to be
substantially justified if it has not prevailed on the same
issue in at least three circuit courts of appeal. As presently
drafted, the provision could be read as requiring the United
States to pay costs and fees in any case decided in favor of a
taxpayer until the point that the U.S. position has been
accepted by three circuit courts of appeal. Such an
interpretation would subject the United States to costs and
fees in situations where, for example, it has prevailed in two
circuits but lost in one. We think this would be inadvisable.
With respect to the proposals to shift the burden of proof
in Federal tax cases, we understand that the Committee on Ways
and Means may consider including in a taxpayer rights package a
proposal similar to H.R. 367 to shift the burden of proof to
the Secretary of the Treasury in all court proceedings
involving Federal tax matters. Such a proposal would reverse
the longstanding and well-established position under current
law that in general the burden of proof with respect to the
correctness of the tax liability in question rests on the
taxpayer.
The general allocation of the burden of proof to taxpayers
is consistent with our self-assessment system of tax
administration, which relies on taxpayers to maintain the
necessary records to accurately record their income and
expense. We strongly urge the Subcommittee not to include a
burden-shifting proposal in any taxpayer rights package because
of the adverse effects on tax administration we believe such a
proposal would have.
The issue of confidentiality of taxpayer information raises
very serious matters that require careful consideration. First,
we have concerns about any effort to codify limits on the IRS
investigative powers that would make it more difficult for it
to perform its legitimate function. There are many provisions
in the Internal Revenue Code, some of which were added in the
1997 act, the applicability of which specifically turned on
motive or purpose, investigation of which would seem to be off
limits under the legislation that was just introduced. Although
one may question the wisdom of a number of the provisions that
turn on such subjective elements, the fact remains that the
provisions are in the Code, and Congress presumably expects the
IRS to enforce them.
If that is the case, enacting a provision that makes it
impossible for the IRS to do so would seem counterproductive.
Second, I would note that there is currently no codified
confidentiality privilege that the provision introduced would
enter unchartered territory. At first blush, it would appear
that it would raise a number of issues that would likely be the
source of ongoing disputes. Third, the privileges that
currently exist are quite properly very limited in scope, far
more limited than the provision that has been introduced.
Broader privileges have been considered and rejected by the
courts because they did not serve the public's interest.
Congress must carefully consider the ramifications of any
provision, the scope of which extends significantly beyond the
existing privilege.
On the other hand, it is also clear from much of the recent
legislation, particularly in the penalty area, that Congress
holds taxpayers to extremely high standards of care in
determining the correctness of the positions they have taken on
their returns. In order to satisfy this standard of care,
taxpayers must fully consider all of the potential issues and
make a judgment as to which position is correct.
Taxpayers inhibited from doing so fully to the extent that
the deliberative work they have undertaken must be made
available to the IRS, Congress should be concerned about the
potential chilling effect on compliance. Nevertheless, I do not
believe that the answer to the, to this problem is a codified
privilege. Rather, I would suggest that Congress consider as a
model the procedures developed by the IRS with respect to
accountant workpapers.
For accountant workpapers for which there is no privilege,
the IRS has put in place a voluntary restraint policy pursuant
to which they are to seek access to workpapers only as a last
resort and then only as a source of factual information. The
reason for this voluntary restraint is so as not to impede the
flow of information between a company and its auditors
necessary for the auditors to be able to render an opinion on
the company's financial statements.
The same sort of a policy might be put in place with
respect to IRS access to information that is not factual
information essential to determining the correctness of a
taxpayer's return. Thank you again for the opportunity to
present our views today. We would be happy to work with the
Subcommittee as it develops any legislative recommendations on
taxpayer rights. This concludes my prepared remarks.
[The prepared statement follows:]

Statement of Pamela F. Olson, Vice Chair, Committee Operations, Section
of Taxation, American Bar Association; and Partner, Skadden, Arps,
Slate, Meagher & Flom, L.L.P.

Madame Chairman and Members of the Subcommittee:
My name is Pamela F. Olson and I am appearing before you
today in my capacity as Vice-Chair (Committee Operations) of
the American Bar Association Section of Taxation. This
testimony is presented on behalf of the Section of Taxation. It
has not been approved by the House of Delegates or the Board of
Governors of the American Bar Association and, accordingly,
should not be construed as representing policy of the
Association.
The Tax Section of the American Bar Association is
comprised of approximately 25,000 tax lawyers located
throughout the United States. It is the largest and broadest-
based professional organization of tax lawyers in the country.
On behalf of the Section, I would like to commend Chairman
Johnson and the Members of the Subcommittee for their ongoing
efforts in monitoring the state of the administration of our
Nation's tax laws. The Subcommittee's oversight responsibility
is extremely important to the confidence that the American
people have in their tax system and in their Government, and we
compliment you for the time and effort you have devoted to
performing this critical function.
The Section appreciates the opportunity to testify before
you today on legislative proposals concerning taxpayer rights.
Our comments are divided into five parts:
First, I will offer some general comments on enacting
additional taxpayer rights legislation.
Second, I will comment on some of the specific taxpayer
rights proposals contained in Title III of H.R. 2292, a bill
introduced by two distinguished Members of this Subcommittee--
Rep. Portman and Rep. Cardin. As explained below, the Section
supports some of these proposals, but opposes, or has concerns
about, others.
Third, I will comment on proposals to shift the burden of
proof in Federal tax cases, such as that contained in H.R. 367,
a bill introduced by Rep. Traficant. We believe that such a
shift in the burden would have a significant adverse effect on
tax administration and compliance. As such, we strongly oppose
legislating a shift in the burden of proof.
Finally, I will describe several other provisions we
believe should be included as part of any taxpayer rights
legislative package. These provisions include: (1) requiring
that 20 percent of the amount seized by the Internal Revenue
Service (``IRS'' or ``Service'') pursuant to a levy from
pension plans be withheld; (2) reducing estimated tax penalties
when the tax liability is reduced; (3) permitting husband-and-
wife offers in compromise to remain in effect as to a compliant
spouse; (4) requiring that statutory notices of deficiency
specify the date on which a Tax Court petition must be filed;
(5) granting the IRS access to the U.S. Postal Service's
National Change of Address database to determine a taxpayer's
last known address; and (6) disclosing certain IRS tax
policies. All of these proposals would serve to increase the
fair administration of the tax laws and protect taxpayers.

I. Taxpayer Rights Legislation--General Comments

The Section commends the Subcommittee for its interest in
examining whether or not taxpayers have adequate rights and
protections in their dealings with the IRS. As we have
testified previously, we believe it is critical to foster a tax
administration system that:
applies the tax laws in a fair and evenhanded
manner,
aids taxpayers in fulfilling their obligations
under the law,
is sensitive to the impact that taxes and tax
administration have on people's lives, and
operates efficiently and effectively.
However, we also recognize that caution must be exercised
in legislating additional changes that affect the
administration of tax laws, especially to the extent those
changes may result in Congress attempting to micro-manage the
Service. Although we respect the critical role that the
Congress plays in making sure that the tax system is
functioning satisfactorily, we believe that, as with any large
organization, the day-to-day management of the Service is best
left to its executives and key employees. In this way, the
oversight responsibilities and skills of the Legislative Branch
are blended with the management and operational
responsibilities and skills of the Executive Branch.
Moreover, we are concerned that Congress not require the
IRS to administer any new procedures or programs without
ensuring adequate appropriations. To do so could jeopardize the
ability of the IRS to perform its necessary administrative and
collection functions; delay needed modernization efforts; and
impede, rather than enhance, taxpayer service. Therefore, we
respectfully encourage this Subcommittee to take into account
the cost to the Government--and, ultimately, to taxpayers--of
imposing any new requirements on the IRS.

II. Taxpayer Rights Proposals Contained in H.R. 2292

As explained below, the Section supports the provisions in
H.R. 2292 that relate to elimination of the interest
differential, elimination of the ``failure-to-pay'' penalty
during the period of an installment agreement, expansion of the
jurisdiction of the Tax Court, and providing IRS matching
grants to low-income clinics. In addition, we support the
provision relating to the expansion of authority to award costs
and certain fees, but have concerns about certain aspects of
the provision. However, we oppose the provisions providing for
civil damages for negligence in collection actions and a safe
harbor for qualifications for installment agreements. We do not
oppose the other taxpayer rights provisions in Title III of the
bill, but have some concerns about the way some of those
provisions currently are drafted.

A. Provisions We Generally Support

1. Elimination of Interest Rate Differential (Section
309).--Under present law, there is a differential between the
overpayment rate charged, and the underpayment rate paid, by
the Service. This differential can range from one to four-and-
one-half percentage points. Section 309 of H.R. 2292 would
eliminate the interest rate differential by creating one rate
for both overpayments and underpayments and eliminating the
``hot'' and ``GATT'' interest rates contained in Section
6621(c) of the Internal Revenue Code of 1986, as amended
(``Code''). The new rate that would be created would be based
upon the Federal short-term rate, plus the number of percentage
points the Secretary of the Treasury estimates will result in
the same net revenue to the Treasury as would have resulted
without regard to the amendments made by the proposal.
We believe that providing the same interest rate for
underpayments and overpayments is very desirable and is an
appropriate step towards addressing the inequities created by
the absence of global interest netting. However,
notwithstanding our general support for the proposal, we are
concerned about how the Treasury would determine the ``revenue
neutral'' interest rate for a period. The proposal would
require the Treasury to estimate the absolute and relative
amounts of underpayments and overpayments it expects to receive
for a given quarter, and the percentage of such underpayments
and overpayments that would have been subject to ``hot'' and
``GATT'' interest rates under current law. While it is clear
that the Treasury has historical information about absolute and
relative amounts of underpayments and overpayments, it is not
clear that the Treasury has adequate, if any, information about
the percentage of such underpayments and overpayments that have
been subject to ``hot'' and ``GATT'' interest rates. If this is
the case, collecting or estimating this information on a
prospective basis would be difficult and estimation of the
``revenue neutral'' rate would be subject to considerable
judgment. Additionally, since the Treasury consistently
receives more in deficiency interest than it pays, there might
be a built-in bias to overestimate the required ``revenue
neutral'' rate.
Therefore, if the proposal is included in legislation
recommended by the Subcommittee, we respectively recommend that
the tax-writing committees make clear that (1) the Secretary
should base his or her estimate of the ``revenue-neutral''
interest rate on the most recent historical information
regarding the absolute and relative amounts of underpayments
and overpayments, and (2) that the percentage of such
underpayments and overpayments that have been subject to
``hot''/``GATT'' interest rates should not be taken into
account in determining the appropriate rate.
2. Elimination of Failure-to-Pay Penalty during Period of
Installment Agreement (Section 310)--Section 310 of H.R. 2292
would amend Code Section 6651 to provide that the penalty for
failure to pay would be disregarded for the period of time
during which an installment agreement is in effect. We think
this is a desirable and appropriate provision. In addition, we
respectfully recommend that the Congress direct the Service to
prominently describe the rights of taxpayers pursuant to this
provision in the appropriate tax return instruction booklet(s).
This directive could be accomplished through Report language.
3. Jurisdiction of the Tax Court (Section 314)--Section 314
of H.R. 2292 increases the ceiling from $10,000 to $25,000 per
taxable period for cases that can be resolved under the Tax
Court's Small Case Procedure. These procedures are often a very
efficient and cost-effective way of dealing with taxpayers who
are not represented by counsel. The current limit of $10,000
was established in 1984 and has been seriously eroded by
inflation. We support increasing the ceiling.
4. Matching Grants for Low-Income Clinics.--Section 313 of
H.R. 2292 would direct the Secretary of the Treasury to make
grants to provide matching funds for the development, expansion
or continuation of ``qualified low-income taxpayer clinics.''
We strongly support the policy underlying this provision and
respectfully recommend that the provision be included in any
taxpayer rights legislative package. However, as suggested
above, we believe it is essential for Congress to provide
adequate appropriations for the program to ensure that the IRS
will have sufficient funds to perform its collection and
enforcement functions. Further, in order to ensure that
taxpayers are made aware of the availability of pro bono
representation by qualified low-income clinics, we respectfully
recommend that Congress instruct the Secretary of the Treasury
to develop methods for publicizing the clinics, including, but
not limited to, posters and brochures displayed in taxpayer
service offices and examination, appeals and district counsel
office waiting rooms, and notices inserted in pre- and post-
examination correspondence.

B. Provisions We Generally Oppose

1. Civil Damages for Negligence in Collection Actions
(Section 303)--Section 303 of H.R. 2292 would authorize
taxpayers to bring suits against the IRS for unauthorized
collection activities and to seek damages of up to $100,000 in
the case of negligent actions of IRS employees. Under current
law, a taxpayer may bring suits for unauthorized collection
only in the case of reckless or intentional actions of IRS
employees. In such cases, a taxpayer may seek damages of up to
$1 million.
While we endorse the goal of making the IRS more
accountable for the actions of its employees, we believe the
proposal goes too far. Our principal concern is that the lower
standard of negligence may serve to impede tax administration,
rather than to foster accountability. If the proposal were
enacted, IRS employees might be deterred from taking
appropriate collection action. In addition, the lower standard
might encourage the filing of frivolous suits by taxpayers who
seek to obstruct appropriate collection action. The present law
standard of reckless or intentional action appropriately
balances the need for IRS accountability with the need to
fairly and efficiently collect taxes that are properly due.
2. Safe Harbor for Qualification for Installment Agreements
(Section 311)--Section 311 of H.R. 2292 would require the IRS
to enter into an installment agreement for the payment of tax
if the following requirements were met: (1) the agreement was
requested by a taxpayer; (2) the tax liability did not exceed
$10,000; (3) the taxpayer filed the required tax returns; (4)
the taxpayer paid the correct tax liabilities for the five
preceding taxable years; and (5) the taxpayer has not
previously entered into an installment agreement under the
provision.
We respectfully submit that requiring the IRS to enter into
installment agreements for liabilities of less than $10,000,
without taking into consideration case-specific facts, would be
ill-advised. Our principal concern is that the Service might be
required to accept an installment agreement from a taxpayer
even where the taxpayer is able to make an immediate payment of
the entire tax liability or where the amount of the installment
payments suggested by the taxpayer is unreasonably low. We
believe that the availability and terms of an installment
agreement should be related to a particular taxpayer's ability
to pay. Thus, if it is determined that legislation on this
issue is appropriate, we recommend that the Secretary be
directed to enter into an installment agreement only when the
agreement reasonably reflects the taxpayer's ability to make
payments consistent with his or her reasonable living expenses.
Finally, because the Code generally defines ``tax'' to
include penalties and interest, there is a question as to
whether the $10,000 threshold amount referenced in the proposal
relates only to the amount of tax due or whether it also
includes penalties and interest. We suggest that this point
should be clarified if this provision is included in a
legislative package. We also believe that it would be
appropriate to clarify that any time-sensitive underpayment
penalties would not continue to accrue during the review
process, but, instead, would again begin to run from the date
of the notice of denial.

C. Provision Which We Support in Part and Oppose in Part--
Expansion of Authority to Award Costs and Fees (Section 302)

Section 302 of H.R. 2292 expands the ability of a taxpayer
who substantially prevails in a controversy involving the
Internal Revenue Service and/or the United States to receive an
award of costs and fees. We support the parts of the provision
that would allow the award of attorney fees at a higher rate
when justified by the difficulty of the issues presented in the
case or the local availability of tax expertise; the awarding
of attorney fees when the individual representing the taxpayer
has charged no more than a nominal fee; the increase of the net
worth ceiling for individuals from $2 to $5 million; and the
increase of the net worth of a business from $7 to $35 million.
We also support that part of the provision that would allow
the award of reasonable administrative costs including
attorneys fees incurred after the date the Service issues a
proposed notice of tax deficiency (i.e., generally a 30-day
letter and Revenue Agent's report), if the taxpayer
substantially prevails and the position of the Service was not
substantially justified. This approach was originally contained
in the Senate version of the Technical and Miscellaneous
Revenue Act of 1988 but was dropped by the Conference Committee
in favor of the current law provisions. History now confirms
that the effect of the Conference Committee action limiting
awards of reasonable administrative costs to those costs
incurred after the decision of the Office of Appeals or
issuance of the statutory notice of deficiency effectively
excludes substantially all administrative costs from the
possibility of any reimbursement. As a correlative change, we
recommend that Congress also amend the definition of ``position
of the United States'' to delete the reference to the date of
receipt of the decision of the Office of Appeals and to refer,
instead, to the date of issuance of the first notice of
proposed deficiency.
Finally, we are concerned with how to interpret the rule
that the United States will not be considered to be
``substantially justified'' if it has not prevailed on the same
issue in at least three circuit courts of appeal. In general, a
taxpayer's costs and fees are not awarded against the United
States if its position was substantially justified. As
presently drafted, the provision could be read as requiring the
United States to pay costs and fees in any case decided in
favor of a taxpayer until the point that the United States'
position has been accepted by three circuit courts of appeal.
Such an interpretation would subject the United States to costs
and fees in situations where, for example, it has prevailed in
two circuit courts, but lost in one. We think this would be
inadvisable. Such an interpretation may deter litigation in
cases of first impression where guidance is crucial. We believe
the appropriate rule is that if three circuit courts of appeals
have ruled against the IRS and none of the cases are accepted
for review by the United States Supreme Court, the IRS would be
bound by these decisions. Accordingly, this language in the
provision should be clarified.

D. Provisions We Do Not Oppose

We do not oppose the sections of H.R. 2292: requiring the
IRS to disclose the reasons tax returns were selected for audit
(section 304); directing the Joint Committee on Taxation to
study the provisions in tax law regarding taxpayer
confidentiality and access to tax return information (section
306); improving public access to IRS material under the Freedom
of Information Act (section 307); directing the IRS to ensure
that ``offers-in-compromise'' provide taxpayers with an
adequate means to provide for basic living expenses (section
308); requiring that checks for the payment of taxes be made
payable to the ``Treasurer, United States of America'' (section
312); requiring the IRS to establish a toll-free ``hotline''
for taxpayers to register complaints (section 315); improving
the rights of taxpayers during IRS interviews (section 316);
directing the IRS to establish procedures for alerting married
taxpayers about their joint and several liabilities on all tax
forms, publications and instructions (section 317); directing
the Treasury and General Accounting Office (``GAO'') to study
the marriage penalty (section 320); and directing the GAO to
report on the burdens of proofs for controversies (section
321). We also do not oppose the following provisions of the
bill, but have concerns about the manner in which they
currently are drafted.
1. Expansion of Authority to Issue Taxpayer Assistance
Orders (Section 301).--The Taxpayer Bill of Rights 2 (Public
Law 104-168) amended Code Section 7811 to provide the Taxpayer
Advocate with broader authority to affirmatively take any
action as permitted by law with respect to taxpayers who would
otherwise suffer a ``significant hardship'' as a result of the
manner in which the IRS is administering the tax laws. Treas.
Reg. 301.7811-1(a)(4)(ii) defines the term ``significant
hardship'' as ``a serious privation caused or about to be
caused to the taxpayer as the result of the particular manner
in which the revenue laws are being administered by the IRS.''
The regulation further provides that mere economic or personal
inconvenience to the taxpayer does not constitute significant
hardship.
Section 301 of H.R. 2292 would further amend Section 7811
to identify four factors the Taxpayer Advocate should consider
in determining whether a taxpayer is suffering significant
hardship. These factors are: (1) whether the IRS employee to
which such order would issue is following applicable published
guidance, including the Internal Revenue Manual; (2) whether
there is an immediate threat of adverse action; (3) whether
there has been a delay of more than 30 days in resolving
taxpayer account problems; and (4) the prospect that the
taxpayer will have to pay significant professional fees.
We are concerned that specifying four particular factors in
the Code would create an implication that these are the only
relevant factors or that these factors should be weighted more
heavily than other considerations. Thus, although we have no
problem with the Taxpayer Advocate taking into account any of
the particular factors specified in the proposal, we do not
believe that any amendment to the Code is necessary. Instead,
we believe the Taxpayer Advocate should continue to take into
account the particular situation of each taxpayer, including
factors beyond the four set forth in the proposal.
2. Archival of Records to Internal Revenue Service (Section
305).--Section 305 of H.R. 2292 would require the Secretary of
Treasury to disclose all IRS records to the Archivist of the
United States, on request of the Archivist. Although we respect
the Congressional interest in maintaining records of historical
significance, we are concerned that the proposal, as currently
drafted, does not adequately protect against the disclosure of
confidential taxpayer information. We suggest that the
provision not be enacted unless adequate safeguards are added
to protect the integrity of confidential information so that
taxpayers can be assured that personal information will remain
private. We believe that failure to provide such safeguards
would impede, rather than promote, taxpayer rights.
3. Procedures Relating to Extensions of Statute of
Limitations by Agreement (Section 318).--Section 318 of H.R.
2292 would require the Service to notify a taxpayer of his or
her right to refuse to extend the period of limitations, or to
limit such extensions to particular issues, on each occasion
where the Service requests the taxpayer to extend the statue of
limitations. Although this provision appears to be beneficial
to taxpayers, especially individuals and small businesses, we
are concerned that, as currently drafted, it will be of little
value from a taxpayer rights perspective because it ignores the
practical ramifications that occur if the taxpayer fails to
agree to an extension. In most cases, the Service will issue a
notice of deficiency. The taxpayer then will be required either
to (1) petition the Tax Court or (2) pay the tax and file a
refund claim so that the issues in dispute can be referred to
the IRS Appeals Office for settlement negotiations.
Furthermore, the Service's current policy for entering into
restricted consents to extend the statute of limitations, as
set forth in the Internal Revenue Manual, is limited to
situations involving no more than two issues where the
examination is already complete and/or the case is already
under the jurisdiction of the Office of Appeals.
Accordingly, we suggest that, if the provision is included
in a legislative package, it be expanded to require the Service
to provide an explanation of the ramifications of not agreeing
to an extension. In addition, the Secretary should be required
to issue regulations describing under what conditions the IRS
will enter into restricted consents and those conditions should
be explained to any taxpayer from whom a consent is sought.
4. Review of Penalty Administration (Section 319).--Section
319 of H.R. 2292 provides for a study and report by the
Taxpayer Advocate reviewing the administration and
implementation by the IRS of penalty reform recommendations
made in the Omnibus Budget Reconciliation Act of 1989. Although
we do not oppose the preparation of such a report, we believe
that it should be prepared by the Secretary of Treasury and the
General Accounting Office, rather than by the Taxpayer
Advocate.

III. Comments on Legislative Proposals Shifting the Burden of Proof in
Tax Cases

We understand that the Committee on Ways and Means may
consider including in a taxpayer rights package a proposal
similar to H.R. 367, a bill introduced by Rep. Traficant, to
shift the burden of proof to the Secretary of the Treasury in
all court proceedings involving Federal tax matters. Such a
proposal would reverse the long-standing and well-established
position under current law that, in general, the burden of
proof with respect to the correctness of the tax liability in
question rests on the taxpayer. The general allocation of the
burden of proof to taxpayers is consistent with our self-
assessment system of tax administration, which relies on
taxpayers to maintain the necessary records to accurately
report their income and expenses.
We have serious concerns about legislating a change in the
burden of proof and, therefore, respectfully encourage the
Subcommittee to take no such action. Placing the burden of
proof on the Government in tax litigation would require the
Government to produce the business records, testimony or other
evidence necessary to demonstrate the taxpayer's tax liability.
This would place the Government at a fundamental disadvantage
and likely would have at least three detrimental effects on tax
administration. First, taxpayers might be inclined to be less
forthright in preparing and filing their tax returns and,
notwithstanding the potential for civil penalties (for which
the Government would have the burden of proof), we believe that
taxpayers would take more aggressive positions on their
returns. Second, because taxpayers would have less incentive to
volunteer the evidence supporting the positions reported on
their returns, the Service would be forced to use its
administrative summons power more frequently and intrusively
during the audit process to gather the necessary information to
support its determinations. This would be contrary to the
objectives of taxpayer rights legislation. Finally, we believe
that more taxpayers would litigate the Service's audit
determinations, particularly in the Tax Court where prepayment
of the contested amount is not required.
The potential adverse consequences of these effects on tax
administration could be very dramatic. We would expect that the
IRS no longer would be able to assure general compliance with
the tax laws; that the high level of tax compliance in the
United States would decrease, perhaps substantially; and that
the revenues collected by the Federal Government from income
and other taxes likely would correspondingly decrease, perhaps
substantially. Further, additional litigation by taxpayers
would require the expenditure of additional resources,
increasing costs to the Government and, ultimately, to
taxpayers in general. Thus, this single change in the law could
significantly complicate the fiscal condition of the United
States. Therefore, we strongly urge the Subcommittee not to
include a burden shifting proposal in any taxpayer rights
package.

IV. Additional Taxpayer Rights Legislative Proposals We Support

1. Withholding When IRS Seizes Funds From Pension Plan

Funds held in retirement plans are subject to levy by the
IRS. Under Code Section 3405, certain distributions from
retirement plans, including distributions resulting from an IRS
levy, are subject to withholding in an amount equal to 20
percent of the distribution. However, in the case of a levy,
the IRS does not allocate any of the funds paid in satisfaction
of the 20-percent withholding requirement. As a result, the
taxpayer can be subject to estimated tax penalties, failure to
pay penalties, and interest. It is inequitable and onerous to
subject taxpayers to these penalties and interest. Therefore,
we recommend that Section 3405 be amended to require the IRS to
set aside 20 percent of any funds in a retirement plan that are
seized by levy.

2. Reduce Estimated Tax Penalty When Amount of Tax Due Is
Reduced

Estimated tax payments are equivalent to withholding on an
employee's wages. The estimated tax penalty, which is generally
self-assessed by the taxpayer, is imposed where the taxpayer
has underpaid estimated taxes. Technically, the estimated tax
penalty represents an interest payment to the Government
because, to the extent the estimated taxes are underpaid, the
taxpayer has retained the use of money legally belonging to the
Government. In situations where the taxpayer's tax liability is
subsequently reduced, resulting in an overpayment of the
estimated tax penalty, a taxpayer should be entitled to a
reduction in the penalty. In this case, the overpayment
represents interest payments on monies the taxpayer never owed
the Government. Under present law, taxpayers cannot request a
reduction in their estimated tax penalty in this situation. We
believe that this inequity in present law should be corrected
through legislative action.

3. Revocation of Husband-and-Wife Offers in Compromise

Offers in compromise contain an agreement by the taxpayer
to comply with the tax law for five years. If the taxpayer
fails to comply, the compromise is invalidated. In the case of
a husband and wife, the offer is invalidated as to both if
either one fails to comply. This is true even if the parties
are separated or divorced. We propose that, rather than
automatically invalidating the offer as to both spouses,
separate notices be sent to each taxpayer and if, within 60
days, the taxpayer demonstrates compliance, the compromise be
preserved as to the compliant taxpayer.

4. Statutory Notice of Deficiency

Under Code Section 6213, the Tax Court has no discretion to
accept petitions filed after the expiration of the applicable
90-day or 150-day period for filing petitions with the court.
This leads to dismissals of many cases where taxpayers were
confused as to the correct date, or cases where taxpayers
relied on erroneous advice given by IRS officials as to the
correct date. Therefore, we believe Section 6213(a) should be
amended to require that the statutory notice specify the date
on which the petition must be filed, with both parties bound by
that determination of the date unless the taxpayer can prove
the date is incorrect.

5. Communication With Taxpayers--Last Known Address

The tax compliance system depends heavily on being able to
communicate with taxpayers by mail, and taxpayers often are
required to respond within a limited period of time. Too often,
however, the system breaks down due to the use by the Service
of an incorrect address. Therefore, we believe that the IRS
should be granted statutory power to access the U.S. Postal
Service's National Change of Address data base, and that the
Code be amended to define the taxpayer's last known address in
terms of all the facts and circumstances reasonably known to
the IRS, including information in the U.S. Postal Service's
database.

6. Disclosure of Service Tax Policies

Over the years, the IRS has greatly reduced the publication
of Revenue Rulings and General Counsel Memoranda. The IRS
should be required to disclose to a taxpayer, in any contested
matter, any legal opinions from the Office of Chief Counsel
that are relevant to the taxpayer's legal, as opposed to
factual, issues. Such opinions should then be publicly
disclosed, after deleting taxpayer identifying information, in
the same manner as is currently done with private letter
rulings and technical advice memoranda.

V. Conclusion

Thank you again for the opportunity to present our views
today. We would be happy to work with the Subcommittee as it
develops any legislative recommendations on taxpayer rights.
This concludes my prepared remarks. I would be pleased to
answer any questions.

Chairman Johnson. Thanks very much, Ms. Olson.
Mr. Mares.

STATEMENT OF MICHAEL E. MARES, CHAIR, TAX EXECUTIVE COMMITTEE,
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

Mr. Mares. Good afternoon, Madam Chair, and Members of the
Subcommittee. My name is Michael Mares and I am chair of the
AICPA tax executive committee. We welcome the opportunity to
discuss and present our recommendations to you on taxpayer
rights. We believe the taxpayer rights provisions of H.R. 2292
will shield taxpayers from unjust treatment without causing
undue burden on the IRS.
Accordingly, we support the taxpayer rights provisions, but
we believe much more could and should be done. Our written
testimony sets forth our comments on each of the proposals, but
also describes additional measures that need to be adopted.
Because of the limited time available today, I will highlight
only a few of these items. We welcome, however, the opportunity
to meet with any of you or your staff to discuss in detail the
material in our written testimony.
The primary source of factual data used to substantiate
information appearing on the face of a return should be the
taxpayers' original books and record. Recently, however, it has
become more common for examining agents to seek records that
are not factually based, but rather represent the taxpayers'
thought processes. Tax decisions developed by taxpayers or
recommendations or advice from tax professionals necessarily
involve opinions, judgments, and even pure speculation as to
the outcome of financial transactions and events over time.
Taxpayers expect, and as a matter of public policy should
expect, privacy and confidentiality in discussing tax matters
internally or with their external advisors, no matter what
their professional classification.
IRC section 7602 currently does not distinguish between
factual information necessary for a properly filed return and
personal or proprietary information not needed for tax
administration. The AICPA therefore supports the bipartisan
bill sponsored by Congresswoman Dunn and Congressman Tanner
providing a legislative change to IRC section 7602.
Under the proposal, the Internal Revenue Service would have
access to the factual information upon which a return is based,
but not the thought processes, theories, or analyses. If the
IRS had a reasonable suspicion based on evidence that a
taxpayer failed to fully report income, the Service would have
broader authority to summons other factual information relevant
to determining that income. And if taxpayers became the subject
of a criminal investigation, they would face the same broad
summons authority available to the IRS today.
In the examination area, there are a couple of issues we
feel merit consideration. IRS statistics indicate that
approximately 50 percent of all individual returns are prepared
by paid preparers. Both our experience and IRS records show
that the processing of notices during the return perfection and
processing phase is a significant workload factor. We believe
changes in the disclosure rules would reduce both IRS and
taxpayer burdens. Specifically, we recommend that third parties
be allowed to discuss a notice and its related account with IRS
by the use of a personal identification or PIN number on
notices sent to taxpayers.
This would reduce the time spent, the frustration and the
cost for all parties involved. However, this discussion of
notices, payments, and so forth, must be distinguished from
representing taxpayers before the IRS for which there is and
should be a need for a formal power of attorney.
Under Treasury Circular 230, IRS section 6694 and the
professional ethics guidance of the AICPA and our colleagues at
the American Bar Association, there is a provision that tax
advisors may not recommend a position on a return that lacks a
realistic possibility of success. That is a 1 in 3 or greater
likelihood of being sustained on its merits.
Unfortunately, the IRS has not chosen to instruct revenue
agents to apply this same standard before raising issues in
examinations. As a matter of fairness and consistency, we
recommend that the IRS require its agents to have concluded
that there be a realistic possibility of success before
proposing an adjustment against a taxpayer. Implementing a
policy such as this would be consistent with tax administration
principles for the IRS as set forth in Rev. Proc. 64-22.
Finally, the vast majority of small cases under $10,000 in
the Tax Court are currently pro se; that is, individual
representation by the taxpayer. The need for greater access to
representation by taxpayers is recognized both by the Tax Court
and by the National Commission on Restructuring the IRS in its
report. We recommend that in order to enhance the access of
those taxpayers to representation, all CPAs be authorized to
practice before the Tax Court in small tax cases.
Once again, the AICPA appreciates the opportunity to offer
comments at today's hearing and stands willing as always to
provide the Subcommittee with any additional assistance and
comments as requested. Thank you for your attention.
[The prepared statement follows:]

Statement of Michael E. Mares, Chair, Tax Executive Committee, American
Institute of Certified Public Accountants

I. Introduction

Madam Chairman and members of the Subcommittee: Thank you
for inviting the American Institute of Certified Public
Accountants (``AICPA'') to testify before you today. I am
Michael Mares, Chair of the AICPA's Tax Executive Committee.
The AICPA is the national, professional organization of more
than 331,000 certified public accountants. The Institute's
members advise clients on Federal, state, and international tax
matters and prepare income and other tax returns for millions
of Americans. They provide services to individuals, not-for-
profit organizations, small and medium-size businesses, as well
as America's largest businesses. It is from this base of
experience that the AICPA offers its comments.
As requested, our testimony addresses the taxpayer rights
provisions in H.R. 2292, the Internal Revenue Service
Restructuring and Reform Act of 1997, (``the Bill'') and also
sets forth additional AICPA proposals for taxpayer rights and
protections.

II. Internal Revenue Service Restructuring and Reform Act of 1997,
Title III--Taxpayer Protection and Rights

A. Provisions Supported by the AICPA

The AICPA supports, without reservations, the following
provisions in the Bill:
Expanded Authority to Award Fees and Costs
(Section 302), expanding the authority of courts to award fees
and costs under IRC section 7430 by: (1) allowing courts to
consider the local availability of practitioners with tax
expertise when determining whether to allow more than the $110
hourly rate for attorney's fees; (2) permitting an award of
costs beginning from the date of the notice of proposed
deficiency--i.e., the 30-day letter; (3) clarifying that fees
can be allowed for pro bono services; (4) increasing the net
worth limits from $2 million to $5 million for individuals and
from $7 million to $35 million for businesses; and (5)
requiring an award of fees and costs if the taxpayer prevails
on an issue that the IRS has previously lost in at least three
Courts of Appeals.
Disclosure of Criteria for Examination Selection
(Section 304), requiring the IRS to include in Publication 1,
``Your Rights as a Taxpayer,'' the criteria and procedures used
in selecting returns for audit.
Disclosure of Records to National Archives
(Section 305), allowing the IRS to disclose tax records to the
National Archives for purposes of determining which records
should be destroyed and which should be retained in the
Archives.
Study Regarding Confidentiality of Tax Return
Information (Section 306), directing the Joint Committee on
Taxation to establish a study of present protections for
taxpayer privacy, the need for third parties to use tax
information, and the ability to achieve greater levels of
voluntary compliance by allowing the public to know who does
not file tax returns.
Expedited FOIA Procedures for Media Requests
(Section 307), requiring the IRS to adopt expedited Freedom of
Information Act procedures for expedited access to certain
media requests, akin to provisions currently used by the
Justice Department.
Amendment to Failure to Pay Penalty (Section 310),
eliminating the application of the failure to pay penalty while
an installment agreement remains in effect with respect to the
amount owed.
Safe Harbor for Qualification for Installment
Agreement (Section 311), providing a safe harbor for paying
taxes by means of an installment agreement, provided the
taxpayer does not owe more than $10,000, has not failed to file
any tax return in the prior five years, and has not previously
used this safe harbor provision.
Taxes Made Payable to U.S. Treasurer (Section
312), requiring tax payments be made payable to the Treasurer,
United States of America.
Tax Court Jurisdiction (Section 314), clarifying
that the Tax Court has jurisdiction over interest
determinations, expanding the Tax Court's jurisdiction to issue
declaratory judgments concerning an estate's eligibility for an
extension of time under IRC section 6166 to pay estate taxes,
and increasing the jurisdictional limit under the small case
procedures from $10,000 to $25,000.
Explanation of Joint Liability (Section 317),
requiring the IRS to alert taxpayers on all tax forms,
publications, and instructions, of their joint and several
liabilities.
Procedures Relating to Extensions of the Statute
of Limitations by Agreement (Section 318), requiring the IRS to
notify taxpayers on each occasion they are asked to consent to
an extension of the statute of limitations, that they have the
right to refuse to execute such consent or to limit their
consent to particular issues.

B. Provisions Supported by AICPA, but with Revisions or
Additional Recommendations

Expansion of Authority to Issue Taxpayer Assistance Orders

IRC section 7811 authorizes the Taxpayer Advocate to issue
Taxpayer Assistance Orders (``TAOs'') if the Taxpayer Advocate
determines that the taxpayer is suffering or about to suffer a
significant hardship. The Code, regulations, and other
administrative guidance set forth a standard of hardship
requiring that the basis for seeking relief is ``undue'' or
``significant'' hardship. Section 301 of the Bill would expand
the authority to issue TAOs by allowing the Taxpayer Advocate
to consider whether the IRS employee is following applicable
published guidance (including the Internal Revenue Manual), the
immediate threat of adverse action, a delay of more than 30
days in resolving taxpayer account problems, and the prospect
that the taxpayer will have to pay significant fees for
representation.
The AICPA supports this provision; however, we believe that
the provision does not go far enough. The AICPA recommends that
the Taxpayer Advocate's authority under section 7811 be further
expanded by eliminating the qualifiers ``undue,''
``significant,'' etc., thereby allowing the Taxpayer Advocate
to take action when deemed necessary to assure that taxpayers
do not suffer unfairly. This recommendation is consistent with
Congress' goal that the Taxpayer Advocate take a more assertive
role on behalf of taxpayers when addressing the IRS'
shortcomings.

Increased Damages for IRS Negligence in Collection Actions and
for Wrongful Liens

Section 303 of the Bill includes a provision which would
allow taxpayers to recover up to $100,000 for damages incurred
as a result of the IRS' negligence in unauthorized collection
actions. The AICPA supports this provision but believes that
it, alone, is insufficient because it does not provide
jurisdiction where the IRS has wrongfully filed tax liens.
Accordingly, we recommend that this provision be amended to
provide a cause of action against the IRS for wrongful liens
and for federal tax liens filed in violation of the automatic
stay provisions of the Bankruptcy Code (11 USC section 362).

Offers in Compromise

Section 308 of the Bill would require the IRS to develop
and publish national and local allowance standards to ensure
that taxpayers who enter into compromise agreements have
adequate means to provide for their basic living expenses. The
AICPA supports this provision, but recommends the legislation
be amended to reflect that revenue officers are encouraged, not
just allowed, to use the discretion contained in the Internal
Revenue Manual to permit variances from national and local
standards when circumstances justify the variance. The
standards should generally be followed but exceptions should be
made if documented by the taxpayer or the IRS. In many cases,
justifiable exceptions currently are not being allowed.
We also recommend that legislation provide that the
standards should be updated and adjusted for inflation annually
and that the standards be adjusted by moving the cost of food
from a national to a local standard, by localizing the cost of
housing by zip code rather than by county, and by taking into
account the taxpayer's income and the size of the family in
determining the housing standard.
In addition, we recommend that a study of the offer program
be made to determine the reason for the declining acceptance
rates, the increasing number of unprocessable offers, and other
issues related to uniformity and fairness.

Elimination of Interest Differential on Overpayments and
Underpayments

Section 309 of the Bill would eliminate the differential in
interest rates for overpayments and underpayments in a revenue
neutral manner. The AICPA supports this provision, with
additional recommendations, as set forth later in our
discussion of various issues concerning interest.

Low Income Taxpayer Clinic

To help low income taxpayers involved in tax controversies
and to educate non-English speaking taxpayers about their
rights and responsibilities under the tax law, section 313 of
the Bill would allow the IRS to make grants for low income
taxpayer clinics. The AICPA supports the funding of such
clinics.
The proposal indicates that for any low income taxpayer
clinic to qualify for a grant, however, it must ``operate
programs to inform individuals for whom English is a second
language about their rights and responsibilities....'' This
mandate may not be reasonable--for example, in areas where
there are few people for whom English is a second language.
Thus, it is suggested this requirement be modified to indicate
the need for these programs only as deemed appropriate.

Review of Penalty Administration and Development of
Recommendations

Section 319 of the Bill would require the Taxpayer Advocate
to review the administration and implementation of penalty
reform recommendations made by Congress in 1989 and, by July
30, 1998, to provide an independent report to the House
Committee on Ways and Means, the Senate Committee on Finance,
and the Joint Committee on Taxation, containing legislative
recommendations to simplify penalty administration and reduce
taxpayer burden. The AICPA supports this provision; however, we
believe the review and recommended legislation should also
address all other penalty issues, particularly penalty
assessment and abatement practices of the IRS.
The IRS assesses numerous penalties, thus requiring
taxpayers to spend a great deal of time documenting reasonable
cause for having the penalties abated. The process is both time
consuming and expensive. Through reasonable cause and because
of IRS errors, however, the IRS abates up to 50 percent of some
types of proposed penalties. Unfortunately, taxpayers without
representation are often unaware of the opportunities for
abatement. It may be possible to achieve a more cost-effective
and equitable outcome by establishing criteria for reducing
assessments that are likely to be abated.
To reduce the burden on both the IRS and taxpayers, we
recommend that the IRS establish safe harbor provisions for a
variety of penalties which would automatically be deemed to be
reasonable cause for abatement. This could be confined to late
filing, late deposit, and certain information return related
penalties. The object would be to concentrate on those
penalties that are regularly assessed and abated. Safe harbor
provisions could take the form of:
No penalty assessments for an initial occurrence;
however, the taxpayer would receive a notice that a
reoccurrence will result in a penalty;
Automatic non-assertion or abatement based on a
record of a certain number of periods of compliance; or
Voluntary attendance at some type of educational
seminar on the issue in question, as the basis for non-
assertion or abatement.
Use of the safe harbor approach would encourage and create
a vested interest in compliance, since a good history of
compliance could automatically result in relief. Additionally,
the likelihood of future abatements would diminish if the
taxpayer has a history of non-compliance. Furthermore, a system
of automatic abatements would reduce the time spent by the IRS
and taxpayers on proposing assessments, initiating and handling
correspondence, and subsequently abating a high percentage of
penalties. The ability to abate a penalty for a reasonable
cause other than those used for automatic abatements would
exist; however, reasonable cause abatements requiring
independent evaluation may be reduced.

Cataloging Taxpayer Complaints of IRS Misconduct

Section 315 of the Bill would require the IRS to establish
procedures for cataloging and reviewing taxpayer complaints of
misconduct by IRS employees. In addition, a toll-free telephone
number would be established, for taxpayers to register their
complaints.
The AICPA supports the development of procedures for
cataloging and reviewing taxpayers' complaints of misconduct by
IRS employees. The AICPA has reservations, however, about how
such complaints should be registered with the IRS. We are
concerned that establishing yet another toll-free telephone
number, given the IRS' limited resources and its current
inability to handle the volume of calls it receives on its
taxpayer assistance toll-free lines, could drain resources and
further erode the level of service provided. As an alternative,
an electronic means of registering complaints might be
considered to minimize the burden on the IRS. Further, a better
approach might be to use existing avenues for registering
complaints, such as the Problem Resolution Program or the IRS
Inspection Service, that currently receive, handle, and catalog
such complaints; however, the public should be made aware of
the existence of such forums and of the procedures for filing
complaints. Taxpayers should also receive a positive response,
in some fashion, from the IRS indicating the resolution of
their matter. Adequate safeguards should be added to protect
taxpayers from reprisals when a complaint has been filed.

Procedures Involving Taxpayer Contacts and Interviews

Section 316 of the Bill would require that, before
conducting an initial in-person interview relating to the
determination of tax, IRS personnel must: (1) explain to the
taxpayer the audit process and the taxpayer's rights under the
process; (2) inquire as to whether the taxpayer is represented
by an individual authorized to practice before the IRS; (3)
explain that the taxpayer has the right to have the interview
take place at a reasonable location, and that the location does
not have to be the taxpayer's home; (4) state the reasons why
the taxpayer's return was selected for examination; and (5)
provide the taxpayer with a written explanation of the
applicable burdens of proof on taxpayers and on the IRS. The
section also would require that, before conducting an in-person
interview relating to the collection of any tax, IRS personnel
must explain to the taxpayer the collection process and the
taxpayer's rights under the process. The AICPA supports these
provisions.
a. Taxpayer Interviews.--The AICPA also recommends an
additional provision concerning taxpayer interviews, to inform
taxpayers of their rights to representation. IRC section 7521
specifically states that ``if the taxpayer clearly states to an
officer or employee of the IRS at any time during any
interview...that the taxpayer wishes to consult with an
attorney, certified public accountant, enrolled agent, enrolled
actuary...such officer or employee shall suspend such interview
regardless of whether the taxpayer may have answered one or
more questions.'' We are aware of many instances where the IRS
appeared to demand that a taxpayer personally appear at an
initial examination meeting, and the taxpayer was not informed
of the right to have a representative appear on his or her
behalf. In most instances, an examination can be handled in its
entirety by a representative. We believe stronger legislation
is needed to ensure that taxpayers are notified of their rights
under section 7521 and allowed appropriate representation.
b. Place of Examination.--Currently, IRC section 7605(a)
provides that the ``time and place of examination...shall be
such time and place as may be fixed by the Secretary and as are
reasonable under the circumstances.'' Treas. Reg. section
301.7605-1 provides general criteria for the IRS to apply in
determining whether a particular time and place for an
examination are reasonable under the circumstances. The
regulation also instructs that sound judgment should be
exercised in applying these criteria and that there should be a
balancing of the convenience of the taxpayer with the
requirements of sound and efficient tax administration.
Unfortunately, the IRS placed unnecessary limitations on
their field personnel through the Internal Revenue Manual.
Parts 320:(1) and :(2) of IRM [4235], the Techniques Handbook
for In-Depth Examinations, provide that the place of
examination will be established consistent with the regulation
and, with few exceptions, the examination of the records should
be made at the taxpayer's place of business. This guidance also
indicates that consideration should be given to conducting the
examination at the IRS office or the representative's office
only if the taxpayer's place of business falls short in some
respect relevant to conducting an examination. This often
places an undue burden on small taxpayers with limited space.
It also may result in a denial of a taxpayer's privacy if the
taxpayer does not want others to know an audit is being
conducted. Thus, the IRM guidelines are inappropriate in
certain circumstances; the place of examination standard needs
to be clarified legislatively. We recommend that IRC section
7605(a) be amended to state that the ``time and place of
examination...shall be such time and place as requested by the
taxpayer and as are reasonable under the circumstances.''
c. Notice of Examination.--The IRS initially contacts
taxpayers either by telephone or letter to inform them of an
upcoming examination. When the initial contact is made by
telephone, it is followed by a letter to present the taxpayers'
rights in written form. The process of allowing initial
contacts to be made by telephone, however, creates many
problems in ensuring taxpayers their rights. The revenue agent
may request an appointment with taxpayers in initial calls. As
previously noted, sometimes taxpayers believe they must
personally be at the appointment and do not understand that
they have a right to representation.
In order to protect the rights of taxpayers, we recommend
that IRC section 7605 be amended to require that the initial
notification of an examination be made in writing. This
requirement should extend to all examinations. The rights
accorded to taxpayers under IRC section 7521 (explanation of
examination process, right to be represented, etc.) should
attach when taxpayers receive a notice of examination.

Studies of Reducing the ``Marriage Penalty''

Section 320 of the Bill would require Treasury and GAO to
study of the feasibility of treating each individual separately
for tax purposes, including recommendations for eliminating the
marriage penalty, addressing community property issues, and
reducing the burdens on divorced and separated taxpayers. The
AICPA fully supports a legislative effort to mitigate or
eliminate the ``marriage penalty.'' The ``marriage penalty''
could be calculated as being equal to the difference between
the tax calculated on the joint tax return as prepared and the
amount of tax that would have resulted if the taxpayers'
married filing combined taxable incomes were divided between
each of the spouses, with tax calculated using the single tax
rate tables. Another alternative is to just increase the tax
bracket amounts for married returns or adjust the married
filing jointly tax rate schedule, given the predominance of
two-earner families at various income levels.

Study of Burden of Proof

Under section 321 of the Bill, the General Accounting
Office would be required to prepare a report on the burdens of
proof on taxpayers and on the IRS, and to comment on the impact
of changes to those burdens. The AICPA does not agree with the
proposals that have been made for shifting the burden of proof
in civil tax matters. Accordingly, we could only support this
provision in that it would provide information to Congress on
the impact of such a change.

III. Additional Recommendations by the AICPA

The AICPA recommends that any taxpayer rights legislation
also address the following issues:

Confidentiality in Tax Matters

Historically, it has been the Internal Revenue Service's
view that the primary source of factual data used to
substantiate information appearing on the face of a return
should be the taxpayer's original books and records. Recently,
however, it has become more common for examining agents to
seek, at the start of and during an examination, documents
other than original books and records (such as engagement
letters, management letters, representation letters, internal
audit reports, and correspondence between the taxpayer and a
tax advisor) that are not factually based but rather represent
the taxpayers' thought process. Collateral source documentation
(documents other than original books and records or other
factually based documents) should not become part of a
``fishing expedition,'' burdening a taxpayer and wasting
resources.
Tax decisions developed by taxpayers or recommendations or
tax advice from tax professionals may be based in part on
private information and involve opinions and judgements, and
even pure speculation as to the outcome of financial
transactions and events over time. Taxpayers expect privacy and
confidentiality in discussing tax matters internally or with
their external advisors. Also, as a matter of public policy, a
taxpayer has the right to expect all information regarding the
taxpayer's tax matters will be accorded the same protection of
privacy notwithstanding the professional classification of the
representative.
Currently, IRC section 7602 authorizes the examination of
books and records, the summoning of any person and the taking
of testimony with respect to that which ``may be relevant or
material to the inquiry.'' However, current law does not
distinguish between factual information necessary for a
properly filed tax return and personal or proprietary
information not necessary for proper administration of tax law.
As previously mentioned, the result has been the periodic use
of the broad summons authority by the IRS to probe for
information not directly related to the tax return even when
taxpayers are not suspected of wrongdoing.
The AICPA, together with the National Federation of
Independent Business (NFIB) and the National Taxpayers Union
(NTU), therefore, supports a legislative change to IRC section
7602. To maximize taxpayer protection, the proposal provides
confidentiality protection to the taxpayer for nonfactual
information such as thought processes and opinions, which
includes advice sought from a tax professional. Under the
proposal: (1) For all taxpayers, the IRS would have access to
the factual information upon which a return is based (but not
``thought processes, theories, analyses, opinions and mental
impressions''); (2) If the IRS had a reasonable suspicion based
on evidence that a taxpayer failed to fully report income, the
Service would have broader authority to summon other factual
information relevant to the taxpayer's income; and (3) If
taxpayers become the subject of a criminal investigation, they
would face the same broad summons authority available to the
IRS today.
The purpose of this legislation is to facilitate the free
flow of information and discussions by taxpayers, either
internally or with their tax advisors. The legislation will not
hinder the examination process, since it does not restrict the
IRS' ability to obtain factual information upon which the tax
return is based.

Consistent Standards for Raising an Issue in an IRS Examination

Treasury Department Circular No. 230, IRC section 6694, and
professional ethics guidance of the AICPA and the American Bar
Association (``ABA'') provide that tax advisors may not
recommend a position in a return that lacks a realistic
possibility of being sustained on its merits. A position is
considered to have a realistic possibility of being sustained
on its merits if a reasonable and well-informed analysis by a
person knowledgeable in the tax law would lead such a person to
conclude that the position has approximately a one in three, or
greater, likelihood of being sustained on its merits.
Although the AICPA and the ABA prefer not to assign
mathematical probabilities to the realistic possibility
standard, nevertheless, both professions subscribe to the
standard. Unfortunately, the IRS has not chosen to instruct
revenue agents to apply the same ``realistic possibility''
standard before raising issues in examinations.
For example, in a recent IRS examination, a revenue agent
asserted in his Revenue Agent's Report (``RAR'') that a
taxpayer corporation must switch from the cash method of
accounting to the accrual method of accounting based on an IRS
Industry Specialization Paper for Health Care. Although the
taxpayer was a personal service corporation (with no
inventories) that is entitled by statute (IRC section 448) to
be on the cash method of accounting, the revenue agent did not
feel constrained from raising the method of accounting issue.
When the taxpayer protested this issue to the Appeals Office,
the Appeals officer consulted with the industry coordinator and
dropped the issue. The taxpayer incurred the expense of
protesting the revenue agent's adjustment to the Appeals Office
even though there was no realistic possibility of the IRS
prevailing on the issue.
As a matter of fairness and consistency, we recommend that
the IRS require revenue agents to have concluded that there is
at least a realistic possibility of success before proposing an
adjustment against a taxpayer. One method of ensuring that a
position contained in a RAR has a realistic possibility of
success could be to require that each RAR be signed by an
individual at the group manager or higher level, attesting to
the fact that the proposed adjustments set forth therein meet
the realistic possibility standard. Implementing a policy such
as this would be consistent with tax administration principles
for the IRS, set forth in Rev. Proc. 64-22, 1964-1 C.B. 689.
Rev. Proc. 64-22 provides, in part:

The Service...has the responsibility of applying and
administering the law in a reasonable, practical manner. Issues
should only be raised by examining officers when they have
merit, never arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate to raise a
meritorious issue. It is also important that care be exercised
not to raise an issue or to ask a court to adopt a position
inconsistent with an established Service position.

Timely Case Resolution

Currently, there is no incentive for the IRS to complete an
examination within the statutory period (without regard to
extension). Furthermore, taxpayers faced with the prospect of a
notice of deficiency are, in essence, forced to grant
extensions of the limitations period as a matter of course.
This practice defeats the general purpose of a limitations
period: finality.
Too frequently the Internal Revenue Service initiates an
examination of a taxpayer's return when there is insufficient
time remaining within the statue of limitations (without regard
to extensions) to complete the examination and make a correct
determination of the taxpayer's liability. In such a case, the
IRS must either seek a consent to extend the statute of
limitations or issue a statutory notice of deficiency.
Ultimately, the choice falls upon the taxpayer; if the taxpayer
extends the assessment period, a more accurate determination
can be made; if the taxpayer fails to extend the assessment
period, a notice of deficiency may be issued. In such a case,
the notice of deficiency may be speculative or arbitrary,
because the IRS failed to complete a thorough examination of
the taxpayer's books and records.
In response to a notice of deficiency, a taxpayer has two
options: file a petition for redetermination with the United
States Tax Court or pay the deficiency. Either alternative can
result in substantial expense to the taxpayer. Furthermore, a
notice of deficiency receives a presumption of correctness
before the Tax Court. As a result of the consequences of the
issuance of a notice of deficiency, taxpayers generally are
forced to agree to an extension of the limitations period.
In complicated audits, such as those involving large
corporate returns, it may not be feasible for the IRS to
complete an examination within the statutory period.
Accordingly, in such cases, it may be reasonable for the
government to request a consent to extend the statute. However,
in audits of individual taxpayers, the government should
complete its examination in the time prescribed by statute,
without the need for extensions. Administrative or legislative
changes should be made to provide a disincentive to the IRS for
seeking extensions.

Safeguard for Divorced or Separated Spouses and Married Persons
in Community Property States

Taxpayer Bill of Rights 2 (``TBOR2'') provided for the
disclosure of collection activities with respect to joint
returns. However, we believe additional safeguards are needed
to ensure the equal and fair treatment of spouses who are
separated, divorced and/or have community property issues
compounding their tax problems. The root of the collection
problem is in the examination procedures that do not require
both spouses be involved in an audit. We recommend legislation
be enacted that would require, at the initiation of an
examination, the absent spouse acknowledge by signature whether
the other spouse may, or may not, represent the absent spouse
(as well as procedures to deal with situations where a spouse
refuses to sign such a statement or cannot be located). If both
parties are aware of, or participate in the examination, then
no one should be caught unaware of the liability and the
resulting collection process.

Interest Netting

Currently, there is a differential between the interest
rate a taxpayer pays on a deficiency and the interest rate the
government pays to a taxpayer on an overpayment; the
differential rate can vary from 1 percent to 4.5 percent.
Situations often arise when a taxpayer is indebted to the
government at the same time that the government is indebted to
the taxpayer. Absent netting, a taxpayer who owes the
government the same amount that the government owes the
taxpayer would incur an interest obligation in favor of the
government.
The Service's current policy with respect to interest
netting is fundamentally unfair, both because of the manner in
which the Service makes interest netting calculations and also
because of the Service's inconsistent application of netting
principles, resulting in similarly situated taxpayers receiving
disparate treatment.
Interest provisions in the Code are intended to compensate
the government or the taxpayer for the use of the money. (Rev.
Proc. 60-17, 1960-2 C.B. 942) Interest applies only if there is
an amount that is both due and unpaid. (See, e.g., IRC
Sec. 6601(a); and Avon Products, Inc. v. United States, 78-2
U.S.T.C. (CCH) para. 9821 (2d Cir. 1978).) To the extent there
is a ``mutuality of indebtedness'' between the taxpayer and the
government (i.e., to the extent the government and the taxpayer
owe each other the same amount of money over the same period of
time), there is no unpaid balance and, therefore, no amount on
which interest should accrue.
The Service's current policy (See Treas. Reg. 301.6402-1.)
of only netting outstanding overpayments against outstanding
liabilities for both computational and collection purposes is
unfair to taxpayers that promptly pay contested amounts of tax
and, therefore, have no ``outstanding'' liabilities. This is
illustrated by the recent case of Northern States Power, in
which the company's prompt payment of alleged deficiencies cost
it $460,000 more in interest than it would have had to pay if
it had delayed in making the payment. (See Northern States
Power Co. v. United States, 73 F3d 764 (8th Cir. 1996), cert
denied 117 S.Ct. 168.)
Finally, and of significant import, despite the Service's
stated policies toward interest netting (i.e., that netting can
legally occur when both deficiencies and overpayments are
outstanding and unpaid, see, e.g., Notice 96-18), netting
continues to be performed on an ad hoc basis. A revenue agent's
decision to deny a taxpayer netting is supported and justified
by language in the Eighth Circuit's opinion in Northern States
Power, which states that such netting is discretionary.
However, the Service's discretionary application of the law
without any formal or enforced guidelines, policies or
procedures is inherently unfair to taxpayers. The virtual
absence of any clear legal standards for interest netting also
is unacceptable from a systemic standpoint, because it affords
the IRS unfettered power to convert a taxpayer from a creditor
to a debtor, with the size of a potential interest debt quickly
becoming astronomical.
Further, viewing comprehensive netting as entirely within
the discretion of the Service interjects serious fairness
concerns into the settlement process. The Service has used the
netting issue as a bargaining chip in negotiations to extract
concessions from taxpayers on issues under examination. This
inappropriately distances negotiations from the merits of the
underlying issues. It also has the inappropriate effect of
using netting (or the absence of netting) as a tool to raise
revenue, rather than as a means to compensate for the use of
money.
The Service counters taxpayer criticism of unfairness with
the argument that netting in all situations is not
administratively feasible. While comprehensive interest netting
raises concerns of administrative feasibility, more progress
must be made in balancing these concerns with taxpayer
fairness.
For these reasons, we recommend that Congress mandate that:
(1) within 90 days, guidance be issued to implement
comprehensive netting in all situations; and (2) as an interim
measure, guidance be issued to require the Service to net
comprehensively at the request of the taxpayer, provided the
taxpayer furnishes the Service with relevant information and
interest computations. We also recommend that the mandated
guidance in this area be issued in the form of proposed
regulations, so that all interested persons will have an
opportunity to comment on the technical details.
By ``comprehensive netting'' we mean netting for all
interest accruing after December 31, 1986 for all types of
taxes and all years (open or closed) to the extent necessary to
compute interest accurately for a refund or an assessment in an
open year. The interim recommendation is similar to the
elective approach previously recommended by the House Ways and
Means Subcommittee on Oversight, as well as the approach of a
draft revenue procedure submitted by the Compliance Subgroup of
the Commissioner's Advisory Group at its January 1995 meeting.
As stated by House Committee on Ways and Means Chair Bill
Archer in his letter to Treasury Secretary Rubin dated
September 26, 1996: ``In my view, Congress has given Treasury
and the IRS both a clear mandate and clear authority to
implement comprehensive procedures to net underpayments and
overpayments before applying differential interest rates.''
Chairman Archer concluded that interest netting is a problem
``Congress has long expected would be resolved administratively
and I certainly hope that Treasury will reexamine its position
on this issue.'' No further delays are acceptable. The time has
come for the IRS to implement these procedures.

Elimination of Interest Differential on Overpayments and
Underpayments

As noted earlier, section 309 of the Bill would eliminate
the differential in interest rates for overpayments and
underpayments in a revenue neutral manner. On a ``going-
forward'' basis, the elimination of all interest rate
differentials for purposes of determining interest on
overpayments and underpayments effectively eliminates the
economic detriment for some taxpayers who are both creditors
and debtors during the same period of time. (However, it
generally does not eliminate it for individuals who will be
taxed on interest income and not be allowed a deduction for
interest expense.) Although the proposal will increase the
uniform interest rate to a level such that there will be no
economic cost to the government due to its enactment, there is
an inherent disincentive to establishing an exorbitant rate
which encourages taxpayers to overpay their taxes.
With interest rate equalization, there is not an economic
detriment for some taxpayers caused solely by the timing of
payment and refunds (for interest periods after date of
enactment). In addition, the use of a single rate will ease the
administrative burden of the IRS, encourage prompt payment of
even partial deficiencies, and simplify the overall computation
process. It is certainly a first step in the overall
simplification process.
Given the recent court decisions in cases such as The May
Department Stores Co. v. United States, 36 Fed. Cl. 680, 96-2
USTC para. 50,596 (Nov. 4, 1996) and Fluor Corporation and
Affiliates v. United States, 97 TNT 162-9, however, the IRS
should also take this opportunity to review the overall
interest scheme and analyze the existing rules given the ``use
of money'' principles long advocated by taxpayers and the
courts. In addition, for interest accruing after 12/31/86 and
before date of enactment, IRS should allow taxpayers to provide
supportable interest computations which reflect interest
netting to eliminate the economic detriment to such taxpayers
currently resulting from the existing rate differential of up
to 4\1/2\%.

Detailed Interest Computations

The AICPA is of the opinion that the IRS should provide
interest computations, as a matter of course, to taxpayers when
adjustments involving interest are made. Currently, a taxpayer
only receives a notice showing the amount of tax and the
interest due on such amount. IRC section 7522, which is
applicable for notices mailed on or after January 1, 1990,
requires that such notices describe the ``basis for, and
identify the amounts (if any) of, the tax due, interest,
additional amounts, additions to the tax, and assessable
penalties included in such notice.'' At the present time, the
starting date for the interest, the principal amount upon which
such interest is based, and the rate charged on such amount are
not provided to taxpayers as part of the notice procedure.
We believe the ``basis for'' description in the notice
should apply to interest computations and should include
interest rates and the dates for which the interest applied,
the dates and amount of payments and credits, and the interest
compounding method. With this information, taxpayers and
practitioners will be able to verify the accuracy of interest
computations and expeditiously resolve any discrepancies. We
recognize that detailed interest computations could result in a
burden to the IRS. Therefore, an exception could be made for de
minimis interest amounts such as less than $50 or $100. If
providing this information still would constitute a significant
burden on the IRS, at a minimum, this information should be
made available to taxpayers upon request and notice of the
availability of the information should be communicated to
taxpayers.

Payroll Tax Collection

The Taxpayer Bill of Rights 2 made a number of changes in
the procedures under IRC section 6672 for the assessment
against and collection of unpaid payroll taxes from owners,
officers, and others known as ``responsible persons.'' We
recommend additional legislation be enacted to prohibit the IRS
from attempting to collect the trust fund recovery penalty
(also known as the 100 percent penalty) from any alleged
responsible person during the pendency of any administrative
proceeding or judicial action brought to contest the merits of
the trust fund recovery penalty liability.

Disclosure Changes (PIN/POA)

IRS statistics indicate approximately 50 percent of all
individual returns are prepared by paid preparers. We believe,
especially because of the increasingly complex nature of the
tax law, that taxpayers have a right to expect that the hiring
of a preparer will avoid personal inconvenience and unnecessary
loss of their own productive time in having their return
accepted in the processing phases by the IRS. Our experience
and IRS records show that the processing of notices during the
return perfection and processing phase is a significant
workload factor. Many practitioners and taxpayers, unaware of
the strict enforcement of the disclosure rules, attempt to
resolve these notices by having a preparer ``do what the
preparer is being paid to do''--i.e, prepare the return, solve
any processing problems, and appropriately interact with the
Service.
We believe changes in the disclosure rules would reduce
taxpayer burden, reduce IRS correspondence in dealing with
ineffective contacts by preparers without a power of attorney,
and support the taxpayer's rights to be represented.
Specifically, we recommend that third parties be allowed to
discuss a notice and its related account with the IRS by use of
a Personal Identification Number (``PIN'') on the notices sent
to taxpayers.
The use of a PIN was under active discussion between the
AICPA Tax Practice and Procedures Committee and the IRS in the
past, but we were unable to reach agreement with the Service
regarding implementation of such a procedure.
The ability of a practitioner, parent, child, or neighbor
to assist a taxpayer who does not understand, see well, hear
well, etc., in handling his or her business affairs with the
IRS immediately (i.e., a telephone reply or discussion), would
reduce the time spent, frustration, and cost for the IRS,
taxpayers, and preparers. Telephonic interaction with the IRS
is the future of ``one-stop'' service and efficiency in a
modern-day tax system. Two-way conversations between taxpayers,
their representatives, and the IRS discussing notices,
payments, penalties, errors, missing information, etc. must be
distinguished from representing taxpayers before the Service
and entering into binding agreements on their behalf, for which
there is a need for a formal power of attorney.

Consistency When Implementing IRS Policies

Often, the IRS will institute policies designed to assist
taxpayers or clarify the application of particular Code
sections. However, when the Service institutes policies that
impact taxpayers, it can be unfair when those policies are
applied only to some taxpayers. In certain instances, the
policies are designed to apply only to particular taxpayers,
and those instances are not at issue. But, when a benefit is
intended to apply to a taxpayer, and through ignorance or
capriciousness, an agent fails to give the taxpayer the benefit
of those policies, it is detrimental to both the taxpayer and
tax administration. One such example is the IRS' inconsistent
application of interest netting principles. Other examples
exist. On June 3, 1996, the Assistant Commissioner
(Examination) issued a memorandum to all regional compliance
officers regarding overly broad Information Document Requests
(``IDRs''). The memorandum was, in part, in response to
complaints from taxpayers and practitioners about revenue
agents initiating an examination and immediately requesting an
array of documents, many of which prove to be irrelevant to the
examination. The well-reasoned memorandum of the Assistant
Commissioner (Examination) set forth a standard for issuing
document requests: an IDR should be issued for specifically
identified issues or specifically identified reasons. The
memorandum made it clear that ``kitchen sink'' or ``boxcar''
IDRs are inappropriate.
The experience of many tax practitioners is that the
guidance issued by National Office is sometimes disregarded
and, in this instance, many agents are unaware of the
memorandum. As a result, taxpayers continue to receive these
overly broad, burdensome document requests. From the standpoint
of an advocate, it is imprudent to bypass the revenue agent,
and taxpayers thus frequently comply with these broad IDRs. As
a general principle, the Service must strive to communicate its
policies more uniformly throughout the organization. Policies
should be meaningful, and there should be consequences when an
agent or Appeals officer disregards a policy set forth by the
National Office.

Notification of Intention to Offset

Current IRS procedures require that before any overpayment
is refunded or credited to estimated tax, as requested by the
taxpayer, there must be a review of a taxpayer's account for
any balances due. If a balance due is showing for the taxpayer
on another account or module, the overpayment will be offset
and the remaining balance, if any, refunded or credited. The
taxpayer is not given an opportunity to verify the correctness
of the IRS data before this action is taken. We believe the IRS
should provide taxpayers with notification of its intention to
offset an overpayment from one account to a balance due on
another account or module. We recognize the IRS' authority to
credit amounts due the taxpayer to any other liability of the
taxpayer, in accordance with IRC section 6402. However, the
taxpayer should be notified of such credit application before
the action is taken. In many instances, the balance due is
erroneous or subsequently abated. Also, the credit application
may have serious ramifications for the taxpayer, particularly
an individual or a smaller business that cannot afford to
engage a representative to deal with the IRS on such issues.
For example, a taxpayer may elect to apply an overpayment
of income tax from one year to the next as an estimated tax
payment. This overpayment is sufficient to cover the taxpayer's
first quarter estimate for the subsequent year. The taxpayer, a
sole proprietor, may have been assessed an employment tax
penalty on a given quarter. The penalty is due to the fact that
a proper liability breakdown was not included with the Form
941. Once this information is supplied by the taxpayer, the
penalty will be abated.
Under the IRS' current system, the taxpayer's overpayment
of income tax will be applied to the outstanding assessment for
the employment tax penalty. The remaining amount applied to the
first quarter estimated tax payment for the subsequent year may
then be insufficient to cover the required quarterly payment
and cause the taxpayer to be subject to an estimated tax
penalty on the subsequent year. If the employment tax penalty
is subsequently abated, the amount credited to the account will
then be refunded to the taxpayer from the employment tax
account; the estimated tax penalty will not be abated
automatically.
To remedy this and similar situations, we recommend that
taxpayers be notified prior to the application of overpayments
to balances due on other accounts or modules. There may be
other actions in progress to rectify such accounts or
significant mitigating factors under consideration by another
area within the IRS. The application of such overpayments,
without providing the taxpayer an opportunity to address the
situation, is a denial of ``due process'' and may create
unnecessary complications and frustrations for both the IRS and
taxpayers.

Protection from Retroactivity

The Taxpayer Bill of Rights 2 (``TBOR2'') provided relief
from retroactive application of Treasury Department regulations
by providing that temporary and proposed regulations must have
an effective date no earlier than the date of publication in
the Federal Register or the date on which any notice
substantially describing the expected contents of such
regulation is issued to the public, with some limitations. The
revision also allowed Treasury to provide that taxpayers may
elect to apply a temporary or proposed regulation retroactively
from the date of publication of the regulation. However, to
date, Treasury has not provided taxpayers with the option of
retroactive application.
In addition, the changes by TBOR2 did not address the issue
of proposed regulations that are not finalized in a timely
manner. For example, many proposed regulations have existed for
ten years or more and have yet to be finalized. Even with the
TBOR2 changes, such changes would apply retroactively to the
date the proposed regulations were first issued. We recommend a
time limit of no more than eighteen months be added for the
period between the date proposed regulations are issued and the
date they are finalized, for purposes of retroactive
application.

Rounding

We believe requiring the rounding of numbers on most tax
returns would decrease the number of errors in tax return
preparation and processing. It could greatly enhance efficiency
in processing tax returns and does not affect the rights of
individual taxpayers.

Technical Advice in Employee Plans and Exempt Organizations

Currently, if technical advice is sought with regard to an
exempt organization, and the determination by the National
Office is in favor of the Service as to a tax-related issue
(i.e., liability for or amount of tax), Examination is bound by
that determination; however, the taxpayer may take the issue to
Appeals. If already in Appeals (or once appealed), Appeals may
settle the issue, but must accept the underlying legal analysis
of the National Office. In other words, Appeals could settle
the issue based on litigation risks, but could not ``give
away'' the issue. However, if technical advice is sought with
regard to an exempt organization and a determination is made by
the National Office that the entity does not qualify as an
exempt organization (or has engaged in activity that should
result in the termination of the entity's exempt status), both
the Examination Division and Appeals Office of the Service are
bound by this decision.
Generally, technical advice may be reviewed on appeal, and
the IRS Appeals Office may settle an issue, regardless of
technical advice. The reason for this is that Appeals
specializes in, and is trained to look at factors other than
the ``Service's position'' as to an issue. Appeals is intended
to give the issue a ``fresh look'' and can make independent
determinations. One important factor considered in Appeals is
the risk of litigation. Generally, issues may be settled for
some dollar value despite the fact that one (or both) of the
parties believes that its position is correct. However, the
unique rules established in the limited circumstances of EP/EO
deny taxpayers a ``fresh look'' other than by a court, which
necessarily involves the expenses of litigation. We recommend
that the legislation address this issue.

IRS ``Test'' Programs

In an effort to enhance taxpayer service, the IRS has
implemented several test programs or other programs that are
limited to select groups of taxpayers. Generally, it is the
intent of the Service to expand test programs to other groups
of taxpayers. Unfortunately, expanding the scope of taxpayers
who may avail themselves of some of these programs often takes
years, if ever. Some of these programs are naturally suited to
be expanded into other areas.
For example, in Fiscal Year 1996, the Service began a one-
year test of mediation with certain types of cases in the
Coordinated Examination Program. The Service has now announced
that the ``test'' will continue for another year. To the extent
that mediation has been used, it has been an unmitigated
success. Furthermore, there are other taxpayers and subject
matters that would be particularly well suited to mediation--
such as valuation cases--that could benefit from the expansion
of the mediation program rather than continuation as a
``test.'' Other programs that could be evaluated for expedited
expansion include accelerated issue resolution, early referral,
and the delegation of more settlement authority to the
Examination Division.

Allowing Taxpayers in ``Small Cases'' in Tax Court to be
Represented by CPAs

The vast majority of small cases in Tax Court are ``pro
se.'' In such instances, the taxpayers do not have the benefit
of representation and the Tax Court, in trying to determine a
just resolution of the tax controversy, does not have the
benefit of having the facts and applicable tax authorities
presented to it by an individual knowledgeable in the area.
The need for greater access to representation of taxpayers
in the Tax Court apparently is recognized by the court itself,
by permitting students enrolled in certain tax clinic programs
to practice before the Tax Court. The need also is apparently
recognized by the National Commission on Restructuring the
Internal Revenue Service and the drafters of the H.R. 2292,
based on the proposal to fund tax clinics where students may
practice before the Tax Court.
To provide taxpayers with greater access to representation
with respect to their controversies, it is recommended that
legislation be enacted to allow all CPAs to be authorized for
small case practice before the Tax Court.

VII. Conclusion

The AICPA appreciates the opportunity to offer comments at
today's hearing and is willing to provide the Subcommittee with
additional assistance and comments as requested. Thank you for
your attention.

Chairman Johnson. Thank you, Mr. Mares.
Mr. Lane.

STATEMENT OF JOSEPH F. LANE, ENROLLED AGENT, MENLO PARK,
CALIFORNIA, AND CHAIRMAN, GOVERNMENT RELATIONS COMMITTEE,
NATIONAL ASSOCIATION OF ENROLLED AGENTS

Mr. Lane. Madam Chair, thank you for the invitation for the
National Association of Enrolled Agents to appear before you
today. We have submitted a rather extensive written testimony
and I'll just go through the highlights in the interest of
time.
Out of the 21 provisions in title III of H.R. 2292, we
agree fully with 14 of them and we have listed those, so we
will not bother to comment on them at this time. On the
remaining provisions, we offer some suggestions and comments.
On the Freedom of Information Provision, section 307, we
would like to see this section expanded to require that
whenever taxpayers or their authorized representatives request
copies of workpapers, history sheets and other administrative
file contents from revenue offices or revenue agents that are
assigned the case that the law require that that be turned over
within 10 days.
We have a vast variety of activities in the IRS districts.
We have some activities, some IRS districts that are turning
information over when requested by these people, others
requiring the people to go through a formal FOI process that is
not the process.
In the offer in compromise area, we would like to see, we
have reviewed testimony from the American Bar Association Tax
Section Committee, which we understand is in the process of
approval, and another one which is endorsed by the Federal Bar
of Illinois, which would permit or bar the IRS from using the
Bureau of Labor Statistics averages for determining taxpayer
expense allowances in the collection case determinations.
We think each taxpayer's case should be determined on the
unique facts and circumstances of that taxpayer. One of the
problems that has been caused by the use of these national
standards and local standards, we believe, have been an
increase in the number of bankruptcies filed in 1996 and
continues to this day. And we believe Congress should implement
a study to look at those bankruptcies. GAO should also do that.
And we believe the law should be changed in that area.
Regarding taxpayer interviews, section 316, we think this
section must include language that makes it clear beyond a
doubt that the Service does not have the right to interview a
taxpayer without a summons. That was made imminently clear in
Taxpayer Bill of Rights 1. If the taxpayer does not want to
appear before the IRS and wants his representative to do so,
that should be the taxpayer's right and the taxpayer can be
made to appear by IRS only through the issuance of a summons.
We think that there are ample examples in the current
processing of cases in the Exam Division where they are abusing
their summons authority by attempting to bypass illegally the
powers of attorney that are in place to interview the taxpayer.
And, Mr. Portman, we provided your office with a case right
on point on that that is occurring right now in--where they
have illegally bypassed the representative and attempted to go
to the taxpayer and issue a summons rather than requesting or
honoring the taxpayer's request for a 30-day letter to be
issued. This must stop. I mean we cannot allow the IRS to just
flaunt the law and ignore provisions of the Taxpayer Bill of
Rights that give the taxpayer right to counsel.
The evaluation of joint and several liability. I was
stunned to sit here this morning and listen to Mr. Lubick's
comments on this. I remember sitting in the Taxpayer Bill of
Rights hearing in March 1995 where we talked about changing
that to a proportionate share liability. We had that NGU
professor here. He did an excellent job, 2 years to get a 50-
page document analyzed. You know, maybe we ought to go out and
contract with a law firm to give us an opinion on this law if
the Treasury Department's Chief Counsel's Office can't do it in
2 years. It is just incomprehensible for me. He says he has
been working on it since 1963. Thirty-four years is another
matter.
Procedures relating to extensions of statutes, section 318.
We don't have a problem with the procedural problems we have
with the exam function. But we do believe there are severe
problems right now with collection procedures for requesting
statute extensions on collections cases and urge the
Subcommittee to hold a hearing on this area. We believe there
are abuses going on in this position.
We have situations today where the automated collection
function in the IRS is asking people who filed a 1996 tax
return in April and who are asking for an installment
agreement, and let's say it is a $10,000 case, and they can
only pay $55 a month, the IRS manual today requires them to ask
that taxpayer as a provision for giving and granting an
installment agreement to sign a statute extension to extend the
statute to 14\1/2\ years from now. That's outrageous. There is
nothing to say that that statute is imminent. They have 9\1/2\
years left on the 10-year statute Congress gave them in 1990.
I don't think it was ever the intention of Congress to have
IRS in the mortgage business with 20- and 30-year notes on
taxpayers. If they can't collect it in 10 years, it is
outrageous. That whole area ought to be looked at, whether or
not they should even be continued to have the right to collect
statute extensions in collection. They, after all, have the
right to reduce their lien to a judgment if they think there is
a sufficient reason to pursue the taxpayer.
A review of penalty administration. We would like to see
the whole penalty structure reviewed. There are too many
penalties for too many infractions, and you can't expect
anybody to understand how they should work. And I think that we
have seen ample evidence of that this week.
We have some additional comments. We support the Dunn-
Tanner bill that was introduced today. We absolutely think that
is a fundamental right of taxpayers not to have their own
advisors used as witnesses against them. We believe another
thing that needs to be changed in this statute is the
unreasonable compensation statute needs to be amended. We have
seen an abuse of process in the exam function where the
unreasonable compensation statutes in small businesses are
being used to target people that have paid themselves
relatively attractive salaries. And I think the abuse on this
is this generally occurs when you have a situation where the
agents have spent a lot of time on a case and they have not
been able to develop any issues because, quite frankly,
companies that are this well off and can afford to pay the
corporate shareholders very welfarely have their accounting act
together, have afforded good tax advise, and have done things
correctly.
So we would like to see the Code change which bars the IRS
from raising the unreasonable compensation from corporate cases
if the W-2 compensation is $1 million or less. It is only fair
to put small business on the same plane you have large
corporations, especially when we have situations today where we
see average corporate executives earning 300 and 400 times the
average salary in the corporation, and we have got one example
quite publicized last year.
Disney paid somebody $90 million not to work for them. It
is a phony tax issue that should be dropped. We also urge the
Subcommittee to register all commercial tax preparers and level
the playingfield. There is another problem we have where we
have identified that the taxpayer who files a delinquent tax
return and it is more than 3 years old, they do not get credit
for their Social Security taxes, even though they are paid in.
That needs to be changed. That is an unfair law.
We also believe that Congress ought to establish a
principle that in no case will the penalties ever exceed 100
percent of the tax due for a given tax period. And the other
thing is that the tax penalty should be used or scored for
revenue estimation purposes.
The last thing we will leave you with is a suggestion that
you may want to look at extending the time based on reasonable
cause for people to file claims for refunds. We saw a case last
year where an elderly man who had Alzheimer's paid an estimated
tax payment of $7,000 instead of $700 and it was discovered by
his daughter 3 or 4 years later and she filed a suit and the
court was not able to grant relief in that area because they
didn't have the statutory authority to do so. We would like to
see that addressed. There should be a provision for reasonable
cause for taxpayers that find themselves in these situations
where they can go back and get refunds.
We will be happy to take any questions you may have on this
topic. Thank you.
Chairman Johnson. Thank you, Mr. Lane. And thank you for
your offer of the rural agents to work with the IRS to look at
any backlog of problems there are right now----
Mr. Lane. We're very concerned.
Chairman Johnson [continuing]. And to ensure that we don't
have more cases out there like those that testified in the
Senate. We appreciate that. That was spirited action on your
part.
[The prepared statement follows:]

Statement of Joseph F. Lane, Enrolled Agent, Menlo Park, California,
and Chairman, Government Relations Committee, National Association of
Enrolled Agents

Madame Chair and members of the Oversight Subcommittee, my
name is Joseph F. Lane, EA. I am an Enrolled Agent engaged in
private practice in Menlo Park, California. I am the Chairman
of the Government Relations Committee of the National
Association of Enrolled Agents and I am pleased to have this
opportunity to present testimony on behalf of NAEA's more than
9,000 members on the taxpayer rights provisions of H.R. 2292.
Enrolled Agents are tax professionals licensed by the
Department of the Treasury to represent taxpayers before the
Internal Revenue Service. The Enrolled Agent designation was
created by Congress and signed into law by President Chester
Arthur in 1884 to ensure ethical and professional
representation of claims brought to the Treasury Department.
Members of NAEA ascribe to a Code of Ethics and Rules of
Professional Conduct and adhere to annual Continuing
Professional Education standards which exceed IRS requirements.
Today, Enrolled Agents represent taxpayers at all
administrative levels of the IRS. Since we collectively work
with millions of taxpayers and small businesses each year,
Enrolled Agents are uniquely positioned to observe and comment
on the average American taxpayer's views about the Internal
Revenue Service.
Representatives of NAEA testified at five public hearings
conducted by the National Commission on Restructuring the IRS
and we submitted written testimony for the record for a sixth
hearing. In addition, our National staff attended numerous
informal meetings with Commission staffers and Commissioners.
We praised the work done by the Commission in focusing on
constructive ways of improving our tax administration system
and making the IRS more responsive to taxpayer input. We
support the Commission's recommendations which have been
incorporated into the pending legislation as we believe the
true bipartisan nature of the Commission's deliberations and
the earnest give and take of the democratic process have
produced a set of recommendations which are carefully woven
together and interdependent upon each other to effect the
change all agree is necessary in the way our tax administration
system works. We urge the House to pass H.R. 2292, the Portman-
Cardin bill, currently under consideration so restructuring can
proceed as soon as possible.
One of the major focus areas of the Commission report was
that the IRS must place more emphasis on respecting taxpayer
rights in carrying out its compliance mission. Toward that
goal, H.R. 2292 addresses several specific provisions for
enhancement of taxpayer protection and rights and we are
pleased to be able to comment on those today. In addition, we
are including several additional suggestions in this crucial
area for the Committee's consideration.

H.R. 2292 Title III Provisions

We support the following provisions of the bill without
exception:
Expansion of Authority to Issue Taxpayer
Assistance Orders (Section 301)
Expansion of Authority to Award Costs and Certain
Fees (Section 302)
Civil Damages for Negligence in Collection Actions
(Section 303)
Disclosure of Criteria for Examination Selection
(Section 304)
Archival of Records of the Internal Revenue
Service (Section 305)
Tax Return Information (Section 306)
Elimination of Interest Differential on
Overpayments and Underpayment (Section 309)
Elimination of Application of Failure to Pay
Penalty During Period of Installment Agreement (Section 310)
Safe Harbor for Qualification for Installment
Agreement (Section 311)
Payment of Taxes (Section 312)
Low Income Taxpayer Clinics (Section 313)
Jurisdiction of the Tax Court (Section 314)
Cataloging Complaints (Section 315)
Study of Burden of Proof (Section 321)
On the remaining provisions, we offer the following
comments and suggestions:

Freedom of Information (Section 307)

We would like to see this section expanded to require that
whenever taxpayers or their authorized representatives request
copies of the work papers, history sheets and other
administrative file contents from a Revenue Officer or Revenue
Agent assigned to the taxpayer's case that the Service employee
will comply with the request within 10 working days. We have
encountered widespread variations among IRS districts regarding
this question. In some they are following the National Office
policy of releasing the requested data while others are
requiring the taxpayer or the representative to file formal
FOIA requests which greatly increase defense costs to the
taxpayer. In addition, the items which should be released
should be everything in the administrative file not
specifically prohibited by statute.

Offers in Compromise (Section 308)

We believe the intent of this section was to make certain
that taxpayers, seeking to compromise their tax liabilities,
were insured they would be able to have adequate means for
their normal living expenses but we do not believe the language
of the bill adequately addresses the key issues. We believe the
Service should be required to view each taxpayer's case facts
on their own merits and not be authorized to employ national
and local standards.
We have reviewed the legislative proposal drafted by the
American Bar Association's Tax Section and another endorsed by
the Federal Bar of Illinois and concur with the concept that
the Service should be barred from using statistically generated
average expenses in favor of considering the unique facts and
circumstances of each taxpayer's case in making collection case
resolution decisions, including offers in compromise.
We understand the Service's position that using the Bureau
of Labor Statistics data provides a level playing field among
all taxpayers. The Service maintains that the standards were
developed to answer taxpayer and practitioner complaints about
inconsistent treatment of taxpayers. We agree that if the
result of the use of standards was consistent treatment it
would be an acceptable result, but we are increasingly
concerned about the lack of good judgment being exhibited in
cases reported to us by our Members. Service employees,
especially Revenue Officers, are compensated based on the
complexity of their cases. When the National Office dictates
that standard allowances be used then more often than not the
standard amount becomes the final answer despite the fact that
the Manual permits some deviation from the standards in
exceptional cases with supervisory approval. This ``checklist
approach'' leads to as many inequities as the prior system of
evaluating each taxpayer on their actual expenses and has
caused some new concerns to crop up, notably in the areas of
bankruptcy and offers in compromise.
There has been a dramatic increase in the number of
personal bankruptcies since January, 1996. The increase last
year was in excess of 25% despite a very strong economy in
almost every part of the country. In our opinion, many of these
increased bankruptcies were the direct result of the IRS
imposition, in October, 1995, of National and Local standard
expense allowances for use in reaching Collection case
determination decisions. In many instances, the imposition of
these limits on what a taxpayer may claim as a necessary and
reasonable monthly expense has benefitted the Service to the
detriment of other unsecured creditors and, in some cases,
secured creditors who enjoyed lien priority to the IRS liens.
This is especially true with respect to real estate holdings of
taxpayers.
We do not believe this effect was ever intended by Congress
when enacting the Federal Tax Lien statutes. These standards
have a pervasive effect as they impact any case resolution
decision relating to the ability of the taxpayer to secure an
offer in compromise, an installment agreement, or a
determination that the tax is currently not collectible.
In many geographical areas, the standard expense allowances
for housing, utilities, property taxes, homeowners or renters
insurance, association fees and property maintenance and
repairs are absurdly low. As a consequence, many practitioners
have been forced to recommend that their clients seek the
protection of the bankruptcy court as there simply is no way to
resolve the matter administratively within the IRS.
When we raised this issue with IRS National Office
Collection officials last year, we were advised that their new
policy had no impact they could discern on bankruptcies. We
believe there is ample indication that there is a direct cause
and effect and urge the Committee to investigate the problem.

Procedures Involving Taxpayer Interviews (Section 316)

We believe this section must include language that makes it
clear beyond doubt that the Service does not have the right to
interview the taxpayer without a summons. The first Taxpayer
Bill of Rights made it clear that taxpayers had the right to
counsel and did not have to appear along with their
representatives. We have been fighting with the Service ever
since then regarding this question. In fact, we would propose
that taxpayers be given the ability to secure monetary
sanctions against Service employees who bypass taxpayers'
representatives with legal Powers of Attorney. This issue is
significant enough that when we poll our Members we find that
the overwhelming majority can cite specific instances where
Service employees have gone around them and tried to contact
the taxpayer directly in clear contravention of published
internal IRS procedures and the law. It is such a pervasive
problem that we have had to develop training materials for our
Members on how to handle illegal bypasses. It is time to make
those Service employees who flaunt the law to pay up personally
for their transgressions.

Evaluation of Joint and Several Liability (Section 317)

We have no specific objection to this section but wish to
comment that we are still in favor of the United States being
brought into conformity with the rest of the industrial nations
of the world in permitting proportionate share liability on
jointly filed returns. We thought the Committee's hearing on
this subject in March 1995, was very interesting and hoped that
some substantive change would be in process by now on this
issue which is the cause of so many problems between the IRS
and taxpayers.

Procedures Relating to Extensions of Statute of Limitations by
Agreement (Section 318)

We have no objection to the provision with respect to
examination statute extensions but in our opinion, current IRS
procedures for seeking collection statute extension approvals
from taxpayers need a total overhaul. It should be an
exceptional case where the Service is not able to collect the
assessment within the ten years permitted by statute, this was
their justification for seeking the extension from six years to
ten in 1990. One would be reasonable to assume that requests
for taxpayers to extend statutes were rare. In fact, the
Collection Division Automated Collection Service (ACS) has
begun requiring taxpayers who request installment agreements
which can not fully pay their tax obligation within ten years
to sign extensions on the collection statute now even though
there may be as much as 9.5 years left on the statute! For
example, a taxpayer filed a 1996 return on April 15, 1997 owing
$10,000.00. The IRS review of the taxpayer's financial
condition revealed an ability to pay installments of $55.00 per
month. The taxpayer was requested to sign an extension until
the year 2012! In a contrasting situation, taxpayers with no
ability to pay monthly would have their cases reported as
``currently not collectible'' and suspended without being asked
for the statute extension! We question if the current statute
permitting extensions is still needed in light of the 10 years
permitted to collect. After all, the Service always has the
right to reduce its lien to a civil judgment if it feels
additional time is warranted to effect collection.
Congress should examine the whole issue of permitting
extension of Collection statutes and at the very least should
consider establishing some dollar criteria threshold before a
statute extension request could be made of a taxpayer. In the
interim, we suggest that the Service be required to provide
every taxpayer asked to sign a statute extension with a
publication specifically addressing the implications of signing
or refusing to sign such requests. Additionally, we think
Service requests for extension ought to be in writing and that
the taxpayer should be provided with a 5 business day ``cooling
off'' period to seek professional advice concerning the request
for extension. Finally, in the event Service personnel coerce,
mislead, or misinform taxpayers about the consequences of
statute extensions, then taxpayers should have the right to
revoke the extension and the original statute date should be
reinstated even if that means the Service becomes effectively
barred from further Collection efforts. These changes would go
a long way towards making taxpayers feel the Service is
adhering to both the spirit and the letter of the law.

Review of Penalty Administration (Section 319)

We have no objection to the Taxpayer Advocate studying the
issue of penalty reform but the problem with penalties often
originates here in Congress. The best example we can cite is
the recently enacted practitioner penalty for failure to
perform due diligence on earned income tax credit cases. We
acknowledge there are several legitimate questions concerning
if there should be an earned income credit and if IRS is the
proper agency to handle it, but the way to solve it is not to
penalize the income tax preparer who is relying on information
provided by the client. The onus for accuracy belongs with the
taxpayer. We offer some additional suggestions in the penalty
arena below.

Study of Treatment of All Taxpayers as Separate Filing Units
(Section 320)

We would have expected to see the issue of joint and
several liability listed among the items studied under this
section. If it was intended then we believe the wording of the
section ought to spell it out.

Additional Taxpayer Rights Issues

Protecting a Taxpayer's Right to Confidentiality

We would like to see the Committee recommend legislation
protecting a taxpayer's right to confidentiality for any tax
counsel and advice. It should be a basic right of taxpayers not
to have their own advisors used as witnesses against them. We
believe that the IRS has overly broad summons authority which
permits it to inquire into a taxpayer's thought processes and
the tax advice they received. This violates the taxpayer's
reasonable expectation of privacy and confidentiality and goes
beyond IRS needs for factual information to determine proper
tax liability. Under current law, taxpayers can protect
nonfactual information such as analyses, advice and opinions
only if they have the financial resources necessary to obtain
legal counsel. This practice results in unequal treatment of
taxpayers based on their financial status or choice of tax
professional.
We believe that the Committee should consider the following
proposal to provide all taxpayers fair and equal treatment:
1. for all taxpayers, permit the IRS access to all factual
information upon which a return is based;
2. if the IRS had a reasonable suspicion based on evidence
that the taxpayer failed to fully report income, the Service
would have authority to summon other factual information
relevant to the taxpayer's income; and
3. if a taxpayer became the subject of a criminal
investigation, the IRS could employ the same broad summons
authority available today.
This proposal removes the conditions and ambiguities
regarding whether a taxpayer may keep tax advice confidential
by linking that protection to the taxpayer--rather than the
identity of the tax advisor. Taxpayers remain fully obligated
to report every dollar of income and prove every deduction,
exemption, expense and credit claimed on the return. However,
the IRS would not have access to nonfactual information--such
as opinions, analyses, thoughts, theories and mental
impressions of the taxpayer and his/her advisor--without the
taxpayer's consent.

Revise the Unreasonable Compensation Statute

We recommend that Congress revise the Internal Revenue Code
provisions concerning unreasonable compensation to include
language which bars the IRS from raising this issue in cases
where the Form W-2 compensation is $1,000,000.00 or less. We
think it is nothing short of outrageous that small business
owners who have worked for years to build their successful
business enterprise should be subjected to second guessing by
IRS Revenue Agents as to what should be their compensation.
This is especially true in light of highly publicized reports
where large corporation executives are being paid 300 or 400
times the average wage in their company and in one case where
Disney paid one executive $90 million to leave! The courts have
held for taxpayers in most cases on this issue in recent years.
This issue is usually raised only after the agents have spent a
great deal of time looking at other issues and not been able to
identify any problems since enterprises able to pay up to this
level of compensation generally are well run, have excellent
accounting systems in place, and can afford competent tax
advice. It is time to stop harassing successful entrepreneurs
with this phony tax issue!

We would like to see the recommendations of the IRS
Commissioner's Advisory Group regarding the registration of all
commercial tax return preparers enacted into law. We believe
that a fundamental taxpayer right is to be able to rely on the
expertise of the individuals who assist in helping citizens
meet their tax obligations. We have, for too long, had an
uneven playing field where those tax professionals who have
made the most significant commitment to their profession--
Enrolled Agents, attorneys and Certified Public Accountants--
are the most regulated. Only those professions require
continuing professional education. Only those professions have
developed standards of professional practice and published
standards of professional ethics. The tax laws of this country
are too complex to permit commercial firms to offer services to
taxpayers without requiring they maintain a minimum level of
technical proficiency and stand by their product in the event
of error. Taxpayers deserve no less. We regulate barbers more
than we regulate commercial tax preparers in this country and
you can recover from a bad haircut in three weeks!

Provide Full Credit for Social Security and Self-Employment
Taxes Paid In

Current procedures followed by the IRS and the Social
Security Administration with respect to properly crediting the
Social Security and Self-Employment taxes paid by delinquent
taxpayers need to be corrected by statute. If a taxpayer fails
to file a tax return for more than three years, even if there
is a refund due and all taxes are paid in timely, the taxpayer
is not credited by the SSA for the FICA and SE taxes paid in,
yet the IRS insists on collecting these same taxes. If the
government is paid the taxes it should credit the taxpayer's
account--that is only fair.

The Total Amount of Penalties Should Never Exceed 100% of the
Tax

As a general principle of fair and reasonable tax
administration, we believe Congress should declare that the
total amount of penalties asserted against taxpayers should
never exceed the tax amount for the same period.

Tax Penalties Should Not be Used for Revenue Raising

We believe the current penalty statutes should be subject
to a top down Congressional review. There are too many
penalties for too many infractions and no one could reasonably
expect taxpayers to comprehend their applicability. We think
the current code's proliferation of penalties has accomplished
nothing but to create taxpayer perceptions of a system run amok
and acts like a hidden tax rate. This feeling is reinforced by
the fact that various committees have taken to scoring
penalties for revenue estimation purposes.

The Number of Years to Claim Refunds Should be Lengthened

We have all seen some recent tax law cases where ample
reasonable cause existed to permit longer periods for taxpayers
to claim refunds and the Courts found themselves bound by
statute to deny the claims. We believe this is wrong and
Congress should extend the right to refund claims for a period
longer than three years.

Summary

We thank the Committee for the invitation to share our
Members' positions with you today. I will be happy to respond
to your questions and comments about our views.

Mr. Kamman.
Mr. Kamman. Kamman.
Chairman Johnson. Sorry. Kamman.

STATEMENT OF BOB KAMMAN, COUNSEL, TAXPAYER RIGHTS PROJECT,
NATIONAL TAXPAYERS UNION, ALEXANDRIA, VIRGINIA; ACCOMPANIED BY
AL CORS, JR., DIRECTOR, GOVERNMENT RELATIONS, NATIONAL
TAXPAYERS UNION, ALEXANDRIA, VIRGINIA

Mr. Kamman. Thank you Chairman Johnson, Members of the
Subcommittee. My name is Bob Kamman, and I represent the
300,000 members of the National Taxpayers Union, who strongly
support granting additional rights to and remedies for
taxpayers. When Congress enacted taxpayer rights legislation in
1988 and again in 1996, it left something out. It should have
made the statement requiring that when you grant a taxpayer
right by statute, it should be liberally construed in favor of
the taxpayer. That is not being done. And the result is that
rights that are granted by statute are taken away by the
regulations as IRS right to construe them.
I would like to focus on a couple of examples of this. One
under section 7811, the Code section that authorizes taxpayer
assistance orders, the definition of hardship that is contained
in that section has become a burden that the taxpayer must meet
in order to get entry to the Taxpayer Assistance Program.
One of the most important job skills of an IRS Problem
Resolution Officer is to deny that hardship exists. We see
evidence of this all the time. While there is no evidence that
the first Taxpayer Bill of Rights intended for a strict
definition of hardship to be applied, that is what is
happening. For example, it is unlikely that any of the
taxpayers who testified this week before the Senate Finance
Committee could have convinced the IRS Taxpayer Advocate that
they met the IRS standard for hardship.
The time has come for Congress to tell the IRS the meaning
of hardship. Section 301 of H.R. 2292 accomplishes this
objective. If an IRS employee is breaking IRS rules, then that
is a hardship, and the Taxpayer Advocate should intervene. If a
taxpayer is threatened with a levy despite good faith efforts
to make payment arrangements or proof that the tax is not owed,
then the Problem Resolution Officer should act instead of
advising, ``call us back when the levy is actually issued.''
Having account problems with the IRS may just be stressful,
but having to wait more than 1 month for an answer is a
hardship. And being told by a tax professional that it will
take 5 hours or $500 to convince the IRS of its mistake is a
hardship regardless of the taxpayer's income or assets.
The second example of the need for regulatory relief is
Code section 7430, which awards costs and certain fees to
taxpayers who prevail in cases against the IRS. The current law
allows payment of fees to CPAs and enrolled agents. This is not
just an attorney fee statute. Fees are allowed in
administrative proceedings only when administrative remedies
are exhausted.
Section 302 of H.R. 2292 recognizes that the clock should
start running for IRS liability for reimbursing fees after
issuance of the 30-day letter. The 30-day letter generally
follows the conclusion of an unagreed audit and invites the
taxpayer to take the case to the Appeals Office. There is a
problem with section 7430 in the regulations. The regulations
state a request must be filed with the Internal Revenue Service
personnel who have jurisdiction over the tax matter underlying
the claim for the cost. This is somewhat like the New York
Police Department requiring a victim of alleged abuse to file
their claims for compensation with the arresting officer.
Under existing law, a taxpayer who is denied administrative
expenses for cases settled at the administrative level must sue
the IRS in Tax Court. Even if section 7030 is amended as
proposed by H.R. 2292, the Nation's CPAs and EAs may have to
advise their clients that having won their case, they will
still have to hire a lawyer to win their fees.
We recommend that the fee approval process be assigned to
the Taxpayer Advocate Office with input from the IRS personnel
who handled the case. But if there is an independent Taxpayer
Advocate, that position is where taxpayers should go for this
remedy of having some of their fees paid in administrative and
court proceedings.
Finally, maybe we should submit a bid on Mr. Lane's
contract here regarding spouses. The tax problems of spouses
who wind up paying the tax debts of their former husbands or
wives, which has been pointed out earlier, is one of the most
common complaints. There is another example this week, which is
the former spouse who is paying the taxes on the income of the
former spouse who has left town and is mostly a tax deadbeat,
maybe a child support deadbeat also. We have made a proposal to
remedy this. This isn't a perfect solution, but it didn't take
a year to come up with it in a draft and review.
We believe that when the same tax debt is owed by two
people, Congress should establish a priority for the IRS to
follow in its collection efforts. Thousands of divorced single
parents would welcome simply some breathing room so they can
make their family, not their tax bill, their first priority. We
propose, upon request by a qualifying former spouse, the
statute of limitations for collection, along with all enforced
collection action be suspended until the taxpayer's youngest
child reaches 18. And during that period, the failure-to-pay
penalty not be assessed.
The other spouse would continue to be targeted for
collection action. To qualify for this relief, a former spouse
would have to have a dependent child living at home and owe tax
only on income received by the former spouse, disregarding
community property rules.
We have made a number of other suggestions, comments and
proposals regarding the taxpayer rights provisions of H.R. 2292
in our written statement. We look forward to working with the
Subcommittee staff if they have questions or require assistance
on any of these suggestions. Thank you.
[The prepared statement and attachment follow:]

Statement of Bob Kamman, Counsel, Taxpayer Rights Project, National
Taxpayers Union, Alexandria, VA

Thank you for the opportunity to testify on reforms to
improve taxpayer rights. I represent the 300,000 members of the
National Taxpayers Union (NTU) who strongly support providing
taxpayers with additional rights and protections during the tax
audit and collection process. I am accompanied by Al Cors, Jr.,
who is Director of Government Relations of NTU. Although NTU's
Executive Vice President David Keating could not be here today,
he contributed substantially to our analysis and comments.
I am a lawyer in Phoenix, Arizona. My office address is
3031 W. Northern Avenue #150, Phoenix AZ 85051. I also write
articles on tax topics; many of these have appeared in a
membership newsletter published by NTU. I have also written on
tax issues for The Wall Street Journal's opinion pages, and
have been quoted concerning taxpayer rights in publications
such as U.S. News and World Report, Reader's Digest, Money and
Kiplinger's Personal Finance. I worked for the Internal Revenue
Service, from 1973 through 1978, in various Taxpayer Service
assignments.
Representative Johnson, we commend you for scheduling this
hearing to examine taxpayer rights. Because the IRS has more
power over more citizens than any other agency, it is
especially important that Congress establish safeguards to
protect the rights of taxpayers and to regularly maintain
oversight of the tax collection power.

Focus On Taxpayer Remedies

In the last decade, many proposals have been made about
granting rights to taxpayers who must deal with the Internal
Revenue Service. Some of these suggestions have been enacted
into law. Today, the time has come for Congress to consider,
not just the subject of taxpayer rights, but the need for
taxpayer remedies. Americans do not yet have enough of the
former, but what they lack most is the latter.
The taxpayer rights provisions of the Internal Revenue Code
are like the civil rights provisions of the former Soviet
Union's constitution. On paper, they tell a wonderful story. In
practice, for many taxpayers there is no effective protection
against government abuse.
The first question that taxpayers may ask about an IRS
action is, ``Can they do that?'' But when the answer is ``No,''
the next question has greater importance: ``What can I do to
stop it?'' Too often, the answer is, ``not much,'' or ``nothing
at all.''
There are a number of practical ways to fix this lack of
remedies. The legislative approach should recognize the need
for ``Taxpayer Triage''--categorizing and providing the
appropriate level of assistance for each taxpayer problem.
Most complaints can be handled by the IRS itself, if there
is a Taxpayer Advocate who is independent, effective and
resourceful. Many more disputes with the IRS can be resolved by
the professionals who deal with the tax law most, day to day--
Certified Public Accountants (CPAs) and Enrolled Agents. The
smallest number of cases, although perhaps the most important,
will require the involvement of the legal profession.
Because of the government's fondness for acronyms, perhaps
this program should be known as TRAUMA (Taxpayer Remedies
Against Unfair Mistakes and Abuse).

TRAUMA Level One: The Taxpayer Advocate

Today, one of the most important job skills of an IRS
Problem Resolution Officer is knowing how to deny that a
``hardship'' exists for a taxpayer who has asked for help.
There is no evidence that, when the first Taxpayer Bill of
Rights was enacted in 1988, Congress intended the definition of
``hardship'' to be liberally construed in favor of the IRS and
against taxpayer rights. Nevertheless, that is what happened,
when the Regulations to Section 7811 were written.
To help prevent such narrow interpretations by the IRS, the
following language should be added to this bill: ``In any
administrative or judicial proceeding, the taxpayer rights
provisions of this Act and all other Taxpayer Bill of Rights
legislation shall be liberally construed in favor of the
taxpayer.''
The time has come for Congress to tell the IRS the meaning
of ``hardship.'' Section 301 of HR 2292 accomplishes this
objective. If an IRS employee is breaking IRS rules, then it is
a hardship, and the Taxpayer Advocate should intervene. If a
taxpayer is threatened with a levy despite good-faith efforts
to make payment arrangements or proof that the tax is not owed,
then the Problem Resolution Officer should act, instead of
advising ``call us back if a levy is actually issued.''
Having an account problem with the IRS may just be
stressful, but having to wait more than a month for an answer
is a hardship. And being told by a tax professional that it
will take five hours, or five hundred dollars, to convince the
IRS of its mistake, is a hardship regardless of a taxpayer's
income or assets.
That these are circumstances that create hardships for
taxpayers should be obvious to anyone except a career IRS
employee; and that is why we strongly believe that the Taxpayer
Advocate should not be selected from those ranks. The Taxpayer
Advocate must be free to function without concern for his
career aspirations within the IRS. He should not have to worry
about how other IRS managers view his involvement with their
areas of responsibility. A presidential appointee, confirmed by
the Senate, in the role of Taxpayer Advocate would be most
likely to effect pro-taxpayer changes in the IRS and with
Congress.
A more independent Advocate, however structured, would come
to the job without the restrictive mission-oriented mentality
that besets many career agency executives. He or she would be
more receptive to the needs of taxpayers and to changing
business-as-usual, and would be far more likely to recommend,
to the Congress and to the IRS Board (as proposed in HR 2292),
solutions to taxpayers' problems.
The National Commission on Restructuring the IRS (NCRIRS)
recommended that candidates for Taxpayer Advocate ``should have
substantial experience representing taxpayers before the IRS or
with taxpayer rights issues. If the Advocate is selected from
the ranks of career IRS employees, the selection also should be
a person with substantial experience assisting taxpayers or
with taxpayer rights issues, and the job description should
stipulate that it will be the employee's final position within
the agency.''
HR 2292 modifies the Commission's recommendations so that
the Advocate could be an IRS employee, saying ``An individual
who, before being appointed as the Taxpayer Advocate, was an
officer or employee of the Internal Revenue Service may be so
appointed only if such individual agrees not to accept any
employment with the Internal Revenue Service for at least 5
years after ceasing to be the Taxpayer Advocate.'' National
Taxpayers Union does not oppose this modification.
The Commission's recommendation that the IRS Board should
``have final authority over the hiring decision'' of the
Taxpayer Advocate will also help ensure the independence and
clout needed to increase the effectiveness of this position.

TRAUMA Level Two: Taxpayer Representatives

Awarding attorney fees, when most taxpayer representatives
are not licensed to practice law, is like writing health
insurance policies that pay emergency-room physicians, when
there are not enough paramedics to staff the ambulances.
Current law--Internal Revenue Code Section 7430--allows payment
of fees to CPAs and Enrolled Agents, in administrative
proceedings, only when administrative remedies are exhausted.
Section 302 of HR 2292 recognizes that the clock should start
running, for IRS liability for reimbursing professional fees
incurred by taxpayers, after issuance of the 30-day letter.
This letter generally follows the conclusion of an unagreed
audit, and invites the taxpayer to take the case to the Appeals
Office.
What is wrong with this picture? While Congress may enact
laws that permit the payment of such costs, the IRS writes the
procedures for actually claiming the reimbursements. The
Regulations provide, ``A request. . . must be filed with the
Internal Revenue Service personnel who have jurisdiction over
the tax matter underlying the claim for the costs.'' This is
somewhat like the New York Police Department requiring that
victims of alleged abuse file their claims for compensation
with the arresting officer.
Under existing law, a taxpayer who is denied administrative
expenses for cases settled at the administrative level must sue
the IRS in Tax Court. Even if Section 7430 is amended, as
proposed by HR 2292, the nation's Certified Public Accountants
and Enrolled Agents may have to advise their clients that,
having won their case, they will have to hire a lawyer to win
their fees.
If there were no IRS officer charged with protecting
taxpayer rights with the maximum degree of independence and
authority allowed by the system, there would be no solution to
this problem. Fortunately, Congress has created, and now plans
to enhance, the position of Taxpayer Advocate. One of the
functions of that office should be to review and approve
applications for Taxpayer Compensation Payments, from those who
qualify for Section 7430 relief.

TRAUMA Level Three: The Legal Profession and Courts

Taxpayers can suffer enormous financial damages even when
they win. The 1996 Taxpayer Bill of Rights 2 legislation made
several needed improvements in the law, especially the new
requirement that the IRS prove it was ``substantially
justified'' in pursuing a case. Nevertheless, the IRS still has
the ability to crush taxpayers of modest means because they
know such taxpayers often cannot afford representation to
ensure their rights.
Because litigation expenses are paid, if at all, only after
the taxpayer prevails, the IRS will continue to have the
advantage over middle-class taxpayers. To the extent that IRS
losses can be used as precedent by all litigants, the proposed
changes to Section 7430, at the upper and lower ends of the
income scale, will help all taxpayers. Low-income taxpayers
will be better served by legal clinics, and high-income
taxpayers whose assets exceed the current qualifying levels
will have less incentive to accept unjust results simply to
avoid the cost of resistance.
As the Commission noted in its report, ``there historically
has been a concern that expanding taxpayer rights to redress
would be disruptive to collection efforts. Setting aside the
issue of whether it is appropriate that taxpayers should be
provided rights only to the extent that it does not disrupt
collection efforts, the Commission found no evidence that the
rights to redress and collection of representation fees
provided to the taxpayer under the Omnibus Taxpayer Bill of
Rights and Taxpayer Bill of Rights 2 have caused disruption to
IRS collection efforts. In addition, the costs of expanding
taxpayers' redress have been vastly overestimated. For example,
the cost of reimbursing representation fees was originally
estimated to be over $100 million per year. The actual cost has
been approximately $5 million per year.''
It should be noted that Section 302 of HR 2292 creates a
``safe harbor'' for the awarding of fees as follows: ``The
position of the United States was not substantially justified
if the United States has not prevailed on the same issue in at
least 3 United States Courts of Appeal.'' Proponents of
taxpayer rights would wonder if they had died and gone to
Heaven if this language were actually enacted, because the
NCRIRS recommendation was only that ``if the IRS has lost a
position in at least three United States Courts of Appeal .. .
. subsequent taxpayers will be entitled to recover under
section 7430 because the subsequent loss would serve to
indicate that the position of the IRS was not substantially
justified.''
Lawyers in the Justice Department's Tax Division have
rights too, so it may be unfair to require three wins by the
IRS before a loss can be disputed. However, the Commission
recommendation needs to be reworked also, since the IRS usually
stops litigating when it has lost in three circuits. We believe
the safe harbor should be a loss in one circuit without any
offsetting win in any circuit. If the IRS wants another
taxpayer ``guinea pig'' in another region, let it take the risk
of paying the attorney fees if it loses yet again. Taxpayers
should be able to rely on Tax Court decisions without fear of
IRS lawsuits.

Safeguard the Right to be Self-Supporting

The 1988 Taxpayer Bill of Rights made the very necessary
improvement of exempting a larger amount of a taxpayer's weekly
salary from levy. But that law, as well as the Taxpayer Bill of
Rights II passed last year, made little change in the amount of
property exempt from seizure.
The 1996 law lifted the amounts from a paltry $1,650 for
personal property to $2,000, and from $1,100 for equipment and
property for a trade, business or profession to $1,250. Despite
indexation of these amounts after 1997, they hardly add up to a
significant change and are far from sufficient to allow a
taxpayer to be self-supporting.
What self-employed plumber could maintain his self-
employment with just $1,250 in tools, equipment and a truck?
What computer programmer or author could do so? Very few, if
any.
Who can provide the basic essentials of clothing and
furnishings for a family with only a $2,500 exemption?
Here is another absurd contrast: O.J. Simpson could protect
more assets from a wrongful death judgment than an overdue
federal tax debt! You could say that while everyone knows death
and taxes are certain, Congress believes that taxes are more
important.
The bankruptcy laws provide far more protection than this.
We would like to see the exemption amounts lifted, either to
$10,000 or to the same protection level as the bankruptcy laws.
Many taxpayers are forced into bankruptcy court by the IRS.
Raising the exemption amounts might reduce tax-related
bankruptcy filings, and would safeguard the right to be self-
supporting. The current levels are ridiculously low.
We would also like to see a study of how many bankruptcies
could be prevented by requiring IRS collection procedures to
recognize the reality of bankruptcy as an easier way of dealing
with many tax problems. Under current procedures, the IRS will
refuse a $10,000 offer in compromise, even if the entire debt
is dischargeable in bankruptcy. The IRS will also require
higher monthly payments than a Chapter 13 plan might require.
When the IRS forces a taxpayer to file bankruptcy, it not only
diminishes the amount of revenue collected by the government,
but it often reduces the amount that other creditors would
otherwise collect from a debtor who wants to make payment
arrangements in good faith.

Stop Expecting Divorce-Related Tax Problems To ``Just Go Away''

One of the most common complaints we hear comes from
taxpayers whose former spouse has disappeared, at least from
the IRS's radar screen. The IRS pursues the former marriage
partner it finds first, usually looking no further than for the
name and address it has in its computer. She is often a single
parent, working to support a family with little or no help.
Tax-debt deadbeats are often child-support deadbeats, as well.
The biggest mistake made by these targets of IRS collection and
audit activity is that they filed a joint return.
Of course, in some audits, taxpayers can be relieved of a
tax liability under the so-called ``innocent spouse'' rule.
However, its provisions are so complicated that it should be
known as the ``lucky spouse'' rule for the few people who can
meet all of its tests.
In one case in Arizona, the IRS dunned Carol Bettencourt,
even though she had been divorced for five years. Her former
husband ran out on a court-ordered $60-a-month child support
payment schedule. Carol never saw a dime from him, but she was
expected to pay his tax debts. Carol turned to the IRS Problem
Resolution Officer, who told her that since she had once filed
joint returns, the only solution was to pay up.
But the Problem Resolution Officer failed to note that the
IRS hadn't sent Carol's notice of tax deficiency to her last
known address, which the tax law requires. Fortunately, with
volunteer legal help, Carol got her tax refund, which had been
withheld to pay her husband's tax debt. It is especially
important to simplify and ease criteria that taxpayers must
meet to qualify for protection as an ``innocent spouse.''
Taxpayer Bill of Rights II required that the Treasury
Department study this issue and report to Congress by January,
1997. We are still waiting for that report. Why is it that the
Treasury Department and IRS expect taxpayers to file on time,
but that studies required by law are often extremely late? In
Arizona, state judges are not paid if they fail to reach a
decision on a pending matter within 90 days. If Congress
impounded the paychecks of Treasury Department executives until
required reports were delivered, perhaps these officials would
find a way to turn in their homework on time.
The 1996 legislation also required that one party to a
joint return be told what efforts are being made by IRS to
collect from the other. ``You satisfy the tax debt, and we'll
satisfy your curiosity,'' seemed to be the remedy. What the law
should require is, ``You tell us where he is, where he works,
and what he owns, and we'll go after him at least as vigorously
as we are now pursuing you.''
A divorcing spouse should also have the right to petition
the IRS for a final determination of any outstanding or
potential tax liabilities, under the ``prompt assessment''
procedures now available to deceased taxpayers (that is, their
executors and personal representatives). This would provide
some protection from a tax surprise, after a divorce is final.
Reportedly, the IRS computer system is unable to set up
separate collection accounts when the two divorced spouses live
in different IRS districts. If this is true, then it is not
simply a question of the IRS trying to collect the joint tax
liability from the spouse who is located first, but the spouse
whose case is being aggressively pursued by one of the two
districts. Or, a Revenue Officer may determine that another
spouse lives in another district and refer his case to the
other district for collection. Case closed, problem
transferred. But a fair solution would still elude the
unfortunate taxpayer.
In some cases when the same tax debt is owed by two people,
Congress should establish a priority for the IRS to follow in
its collection efforts. What thousands of divorced single
parents would welcome is simply some ``breathing room'' so that
they can make their family, not their tax bill, their first
priority. There is a way to do this that will not cost the
Treasury a dime, and may actually result in higher receipts.
In Attachment 1, we propose that, upon request by a
qualifying former spouse, the statute of limitations for
collection--along with all enforced collection action--be
suspended until the taxpayer's youngest child reaches the age
of 18; and during that period, the failure-to-pay penalty not
be assessed. The other spouse would continue to be targeted for
collection action. To qualify, a former spouse would (1) have a
dependent child living at home; and (2) owe tax only on income
received by the former spouse (disregarding community property
rules).
This relief would not help every divorced person who
unwisely filed a joint return; but it would certainly help all
those who elected to use it. And I believe it would improve
morale among IRS collection employees, who have as much regard
for ``family values'' as anyone else.

Employers Need Remedies Too

If an employer does not report and deposit withheld income
and Social Security taxes, then certain responsible officers
can be held personally responsible for the taxes. Such
assessments are commonly known as ``one hundred percent
penalty'' cases, because the penalty on the individual equals
all of the Trust Fund taxes that the corporate employer did not
pay IRS. While Taxpayer Bill of Rights II provided the IRS with
additional abatement authority, this is still an area ripe for
reform.
When the IRS seeks to collect these Trust Fund taxes, it
often assesses liabilities on everyone in sight (including
bookkeepers, accountants, bank officers, inactive directors,
inactive or resigned corporate officers, and family members),
whether or not they are truly a responsible officer. Inside the
agency, this is called the shotgun penalty approach. A lot of
innocent people get hurt.
Unfortunately, the burden of proof is on the taxpayer to
prove that he or she was not responsible for the lack of
payment. You might as well ask the taxpayer ``When did you stop
beating your spouse?'' Proving a negative is a difficult
proposition at best.
The burden should be on the IRS to prove the taxpayer was
responsible.
Why can't the tax laws define the responsible parties as:
1) the chief executive officer; 2) the chief and senior
financial officers; 3) those who serve on the board of
directors and own a significant stake in a privately held
corporation; and 4) other responsible parties, designated on a
schedule that could be attached to the corporation's last
quarterly 941 tax return of each year? The attached schedule
would clearly state the serious responsibilities to remit Trust
Fund taxes and require the signature of each named responsible
person to indicate their knowledge of, and consent to, these
rules.
If the IRS had the names and addresses of such persons in
its computer, then these responsible persons could be
immediately notified when a payment has been missed. It would
allow these officers and other responsible persons to
immediately investigate why these taxes have not been remitted
on time, protecting the Treasury and innocent taxpayers.

Protecting Confidentiality of Taxpayer Advice

Taxpayers often feel they are presumed guilty by the IRS
and asked to prove their innocence. The reach of IRS authority
even encompasses taxpayers' private thoughts, including what
options they may have considered or tax advice they may have
received, that have nothing to do with the information on the
tax return.
NTU strongly supports legislation to limit the IRS's scope
of authority to ``factual information upon which the return is
based'' in routine audits, while providing for a progressively
broadened scope of authority under appropriate circumstances.
This would help ensure that all taxpayers are treated equally
by the IRS. It can also save them money and give them a greater
choice of tax advisors. Currently, taxpayers can protect non-
factual information only if they can afford legal counsel.
Under such proposed legislation:
The IRS will continue to have the authority to
access all factual information upon which every tax return is
based;
When there is a reason to suspect that the
taxpayer has failed to fully report income, the IRS will
continue to have the authority to access all factual
information exposing unreported income through more extensive
investigations; and
Should a taxpayer become the subject of a criminal
inquiry, the IRS will continue to have the authority to conduct
a full criminal investigation.
Curbing unwarranted intrusiveness into taxpayers' privacy
will in no way curtail IRS authority to conduct a criminal
investigation or gain access to all relevant facts when a
taxpayer is suspected of underreporting income. In fact, by
limiting the IRS in most cases to the factual information
necessary to ensure compliance, taxpayer privacy legislation
will enable the IRS to focus its resources more effectively on
investigations and other tax compliance measures that stand a
more realistic chance of success.

Legal Aliens Also Deserve Greater Taxpayer Rights

HR 2292 should repeal the ``alien tax clearance''
procedures contained in Code Section 6851(d). This archaic and
absurd statute requires, for example, that a taxpayer who is
not a citizen but who has lived in the United States for twenty
years, complying with all federal tax laws, to obtain written
permission from the IRS to leave the country for a two-week
vacation.
To the extent that this law is ignored--which is largely
the case--it contributes to the lack of respect for enforcement
provisions that do serve a worthwhile purpose. To the extent
that it is enforced, it wastes IRS Taxpayer Service resources
and imposes only on taxpayers who are dedicated to voluntary
compliance.

Taxpayers Need a Remedy for Careless IRS Behavior

There are many fine employees in the IRS who care about
helping taxpayers to comply with the law and who care about
respecting taxpayers' rights. But given the sheer number of
employees and the billions of tax returns and documents that
are received by the IRS each year, it is inevitable that
mistakes will be made and that some employees will act out of
line.
Although the Taxpayer Bill of Rights laws enacted in 1988
and 1996 offered important new protections for taxpayers, they
maintained traditional protections for IRS employees--even
those whose behavior the agency long ago should have disavowed.
The original Taxpayer Bill of Rights proposal would have
allowed taxpayers to sue for damages if ``any officer or
employee of the Internal Revenue Service carelessly, recklessly
or intentionally disregards any provision'' of the tax laws. As
the bill progressed through the Congress, the word
``carelessly'' was dropped from what became Section 7433 of the
tax code.
In the 1986 Tax Reform Act, Congress substantially
liberalized the definition of negligent actions by individual
taxpayers. During the 1980s, tax preparers have also been
subject to increasing penalties for not exercising due
diligence. Yet incredibly, Congress refuses to require the IRS
to exercise reasonable caution in using its vast array of
enforcement powers. We believe Congress should require the IRS
to practice due diligence in its enforcement actions in order
to prevail in litigation where a taxpayer sues for damages.
Congress should require that the IRS issue regulations defining
a due diligence standard for actions by its employees. We
expect that the IRS would include the procedures already
outlined in the Internal Revenue Manual as much of the criteria
to define this standard.
Taxpayers who have been financially harmed or devastated by
IRS carelessness in ignoring a due diligence standard should
have the right to sue and recover damages. We strongly support
allowing taxpayers to recover damages for negligent actions by
the IRS as proposed in Section 303. We also note that Section
7433 of the Internal Revenue Code is still flawed because it
only applies to collection of a tax, not the determination of
it.
Courts should also have the option of requiring damage
awards, when based on the ``reckless'' or ``intentional
disregard'' standards, to be paid by the employees who violated
taxpayer rights, and not just by the agency that employed them.
Several years ago, Congressman Andy Jacobs introduced an
amendment t make IRS employees personally liable for attorneys'
fees paid by taxpayers who proved IRS agents acted arbitrarily
and capriciously in pursuing the taxpayers. While this proposal
may have gone too far, the concept is a good one--allowing such
judgments, in egregious cases, would serve notice to IRS
employees that their first duty is to protect taxpayers'
rights.
Section 552(F) of the Federal Freedom of Information Act
contains a standard that may be useful in drafting such a
provision in the federal tax law. It says that ``Whenever the
court orders the production of any agency records improperly
withheld from the complainant and assesses against the United
States reasonable attorney fees and other litigation costs, and
the court additionally issues a written finding that the
circumstances surrounding the withholding raise questions
whether agency personnel acted arbitrarily or capriciously with
respect to the withholding, the Special Counsel shall promptly
initiate a proceeding to determine whether disciplinary action
is warranted against the officer or employee who was primarily
responsible for the withholding.''

Unlocking the Courthouse Door

In the rare cases when the IRS goes out of control, federal
law largely prevents the courts from allowing taxpayers to
enforce their rights. The Federal Tort Claims Act allows the
government to be sued in certain instances but specifically
excludes ``any claim arising in respect of the assessment or
collection of any tax or custom duty.'' Of course, the 1988
Taxpayer Bill of Rights granted two very limited exceptions to
that rule.
Another unnecessarily restrictive law is the Anti-
Injunction Act, the law that locks the courthouse door when
taxpayers try to assert their rights. It's past time to give
them the keys.
Under Section 7421 of the Internal Revenue Code, no lawsuit
can be brought by any person in any court for the purpose of
restraining the assessment or collection of any tax, except in
limited circumstances.
The case law around the Anti-Injunction Act indicates many
problems in obtaining injunctions to restrain the collection of
the tax. It is clear that injunctions will be granted where the
failure to grant relief would result in irreparable damage to
the taxpayer. But an injunction will only be allowed where it
is clear that under no circumstances would the government
prevail (or that the taxpayer would not owe the tax). Otherwise
only two remedies are available to the taxpayer: 1) pay the
tax, file a claim for refund, and sue for recovery if the claim
is rejected; or, 2) file a petition in Tax Court before
assessment and within the short period of time allowed for
filing such a petition.
NTU recommends that the Anti-Injunction Act should be
amended to give taxpayers the ability to enforce their rights
if necessary. Taxpayers should be allowed to file suit in a
federal district court to enjoin the IRS from enforcement
action because: 1) the deficiency assessment was made without
knowledge of the taxpayer and without benefit of the appeal
procedures provided by law; 2) there has been an improper or
illegal assessment; 3) there has been an action in violation of
the law or tax laws or regulations providing for procedural
safeguards for taxpayers; 4) the IRS has made an unlawful
determination that collection of the tax was in jeopardy; 5)
the value of seized property is out of proportion to the amount
of the liability if other collection remedies are available;
or, 6) the IRS will not release the seized property upon an
offer of payment of the U.S. interest in the property.
Then, there's the Declaratory Relief Act. This law says
that citizens can file suit to get a court to declare their
rights ``except with respect to federal taxes.''
In author David Burnham's excellent book, A Law Unto
Itself, he quotes California tax attorney Montie Day and his
views on these laws that prevent taxpayers from enforcing their
rights. He says that allowing such limited lawsuits would make
``the IRS more accountable and make the agency more likely to
operate in a lawful fashion.''
To illustrate this point, he said ``assume you are under
audit and somehow you learn that the revenue agent has decided
the best way to investigate you is to break a window of your
office, climb through it and examine your correspondence.''
``You come into my office for advice, wanting the court to
rule that the IRS agent can't conduct his audit in this way. We
consider filing a suit for declaratory relief, but then we
remember that the court does not have the authority to issue
such a declaration of rights in tax matters because of that
exception in the Declaratory Relief Act.''
``Then we think his tax investigation by breaking into your
office. This approach, of course, cannot be followed because
the court is forbidden to even consider such requests under the
Anti-Injunction Act.''
As long as taxpayers are largely banned from suing to
enforce their rights, taxpayers will continue to be at risk of
financial ruin and emotional devastation from the IRS. It is
completely unfair for the IRS to have all the powers and for
taxpayers to have few rights that can only be enforced with
great legal difficulty. We must ensure fair treatment of
innocent taxpayers to continue respect for our Constitutional
system of government.

Tax Complexity Invites Abuse

Only weeks after the National Commission on Restructuring
the IRS reported that ``reducing taxpayer burdens by
simplifying the tax laws and administration must start with the
Congress and the President,'' one of the most insidiously
complex tax bills ever conceived by Congress was signed into
law by the President.
The fact that the nation has survived the greater part of a
century, since the adoption of the 16th Amendment is
unfortunately being accepted as evidence that no amount of
absurdity can be a threat to democracy, even when contained in
the tax form instructions that every law-abiding citizen is
expected to understand.
Consider the language of the new Child Tax Credit, which
provides in part:
``(2) Alternative credit amount.--For purposes of this
subsection, the alternative credit amount is the amount of the
credit which would be allowed under this section if the
limitation under paragraph (3) were applied in lieu of the
limitation under section 26.
(3) Limitation.--The limitation under this paragraph for
any taxable year is the limitation under section 26 (without
regard to this subsection)--
(A) increased by the taxpayer's social security taxes for
such taxable year, and
(B) reduced by the sum of--
(i) the credits allowed under this part other than under
subpart C or this section, and
(ii) the credit allowed under section 32 without regard to
subsection (m) thereof.''
The insidious aspect of this and other parts of the latest
tax law is that they create the greatest degree of complexity
for those who are least able to deal with it--the average
American family, earning under the ``phase-out'' income
limitations. If their incomes are high enough to meet the
``Alternative Minimum Tax'' criteria--only $45,000 for married
couples, they face even greater levels of complexity and
possibly a loss in the value of the credit.
Federal judges don't sentence tax-crime defendants to read
the Internal Revenue Code, because it would be cruel and
unusual punishment. Law-abiding Americans should not be asked
to wade through such gibberish, ironically labeled as
``Taxpayer Relief.''

Conclusion

The job of protecting taxpayer rights will never end. Much
progress has been made, but more legal protections are
necessary. We sincerely appreciate the efforts being made by
members of this subcommittee to formulate legislation to better
protect taxpayer rights.

Attachment 1

1] Section 6502 (relating to statute of limitations for
collection action) is amended to add the following:
(c) Upon application by a qualifying former spouse with
dependent child, the period for collection allowed by
subsection (a) shall be suspended until the end of the tax year
in which the taxpayer's qualifying child reaches the age of 18.
During this suspended period, no enforced collection action
(including refund offsets) shall be taken against the
applicant. For purposes of this subsection,
i) a ``qualifying former spouse with dependent child'' is a
taxpayer whose unpaid tax liability arises from a joint return,
on which the unpaid balance of tax is attributable to income
received by the other spouse (disregarding community property
rules); and who has a qualifying child.
ii) a ``qualifying child'' is a child under the age of 18
for whom the taxpayer is allowed a deduction under section 151,
and who is identified by name and Social Security Number at the
time the taxpayer applies for suspension of collection action.
2] Section 6651(c) (relating to failure-to-pay penalty) is
amended to add the following:
(4) The penalty for failure to pay tax under Section
6651(a)(2) shall not be assessed for any period of time that
the period for collection is suspended under the provision of
Section 6502(c).

Chairman Johnson. Thank you very much.
Mr. Harris.

STATEMENT OF ROGER HARRIS, VICE CHAIRMAN, FEDERAL TAXATION
COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS; AND PADGETT
BUSINESS SERVICES

Mr. Harris. First of all, let me begin by saying the
National Society of Accountants is again pleased to offer
testimony on H.R. 2292. We would like to commend the
Subcommittee for holding this important session today. And we
would also like to strongly endorse the legislation introduced
by Representatives Portman and Cardin.
My name is Roger Harris. I am testifying today in my
capacity as vice chairman of the National Society of
Accountants, Federal Taxation Committee. I also represent
Padgett Business Services, a firm which for over the last 30
years has provided accounting and financial services to small
businesses.
The NSA's 17,000 member practitioners represent over 4
million individual and small businesses. And we think this
gives us a unique perspective on taxpayer rights. In our view,
the best way for government to foster and protect taxpayer
rights is for the IRS to improve its level of customer service.
The service component of the IRS should be the primary
engine that drives the agency. Taxpayers have a right to expect
prompt and courteous treatment from the IRS. The vast majority
of the taxpayers who attempt to comply with the rules and
regulations should not feel like they are treated like the
smaller group, who for whatever reason, are noncompliant.
For the sake of time, I will comment on a few parts of the
taxpayer rights that we believe either need slight modification
or we agree with strongly, beginning with the Taxpayer
Advocate. We are very pleased to see the independence that this
bill gives to the Taxpayer Advocate so that they may be free to
offer suggestions without concerns about their future within
the Service.
We also recognize the importance and the effectiveness of
the Problem Resolution Officers, and this bill has addressed
their ability to issue taxpayer assistance orders. Again, we
commend the legislation for its expansion of what they now can
do, but we would offer one additional suggestion. That is that
when a small business is involved, that the definition or the
examination of significant hardship should and must include the
effect that the IRS procedures would have on the employees of
that small business. I think to ignore the hardship that could
be created on employees would certainly not be in the best
interest of the government as a whole.
With regard to offers in compromise, again, the IRS has
been asked to develop public schedules of national and local
allowances. We have some concerns here in that the regional and
local issues may not always be addressed properly, such as
family size, health, whatever. What we think has to happen here
is that the agents are directed under all circumstances to use
these as guidelines only. They must have the directives issued
to them to not issue these guidelines without consideration of
factors that may exist in an individual taxpayer's situation.
These guidelines cannot be expected to work for any and all
taxpayers.
With regard to the performance awards, here we do not want
this, I think, worthy goal to be interpreted improperly by the
taxpaying public. And we have, in this case, offered a wording
adjustment that customer service should be considered an
important factor regarding any cash award to an IRS employee.
Tax enforcement performance for employees engaged in
enforcement work should be considered only one factor in
determination of making a cash award.
With regard to penalty reform, again, we are very happy to
see this area being looked at. We are particularly hopeful that
the area that--one of the areas that will be looked at is the
consideration of the due diligence penalty that could be
assessed on preparers with regard to the earned income credit.
We think this opens up a whole new area of concerns for
preparers that they are being asked to go above and beyond
their normal responsibilities with regard to the tax law.
And finally, as an addition to this bill, we continue to
offer our suggestion that the IRS find other ways to track
preparers other than their Social Security number. I find it
extremely hard to believe in today's society that the only way
preparers can be monitored is by placing their Social Security
number on the tax return.
Many other agencies seem to have no difficulty tracking
individuals without publishing their Social Security number on
the statements or the credit cards that they carry around with
them.
In conclusion, Madam Chair, again let us thank the
Subcommittee for the opportunity to be here. And again, I would
like to reemphasize our support for this legislation. We think
that this legislation is the only thing that we have seen that
offers not only the taxpayers, but the people at the Internal
Revenue Service that come to work every day and try to do a
good job the structural and the attitudinal changes necessary
to make this a customer service organization. Thank you. And we
look forward to any questions you may have.
[The prepared statement follows:]

Statement of Roger Harris, Vice Chairman, Federal Taxation Committee,
National Society of Accountants; and Padgett Business Services

The National Society of Accountants (NSA) is pleased to
testify on H.R. 2292, the Internal Revenue Service
Restructuring and Reform Act of 1997. The legislation is the
result of recommendations made by the National Commission on
Restructuring the Internal Revenue Service. NSA commends
Chairman Nancy L. Johnson and the other members of the
Subcommittee on Oversight for holding this most important
hearing on taxpayer rights. NSA strongly supports H.R. 2292,
legislation introduced by Representatives Rob Portman and
Benjamin Cardin. The legislation greatly elevates the prospects
for modernization, improvement in agency efficiency, and
enhancement of taxpayer services.
My name is Roger Harris. I am testifying today in my
capacity as Vice-Chairman of the National Society's Federal
Taxation Committee. I am the President of Padgett Business
Services, a firm that has provided accounting and financial
services to small service and retail businesses for over 30
years. Our 400 plus franchises prepare several hundred thousand
tax returns each year, and provide taxpayer representation
services to their clients.
The National Society of Accountants is well positioned to
provide testimony to the Subcommittee on the issue of taxpayer
rights, particularly in the context of the Commission's report
and H.R. 2292. The National Society is an individual membership
organization representing approximately 17,000 practicing
accountants located throughout the United States. NSA members
are, for the most, part either sole practitioners or partners
in moderate-size public accounting firms who provide
accounting, tax return preparation, representation before the
Internal Revenue Service, tax planning, financial planning and
managerial advisory services to an estimated four million
individual and small business clients. The members of NSA are
pledged to a strict code of professional ethics and rules of
professional conduct. As our members serve a sizeable small
business constituency, NSA is in a unique position to address
those matters regarding taxpayer rights.

Customer Service and Taxpayer Rights

The best way for the government to foster and protect
taxpayer rights is for the IRS to improve the level of customer
service the agency provides the public. H.R. 2292 emphasizes
the concept of customer service over compliance. This is at
variance with the public's perception that the IRS' main
mission is tax compliance, e.g. audits and collections. NSA
agrees the service component of the IRS should be the primary
engine which drives the agency. We believe that a customer
service oriented mission will bring out the best in IRS
employees. This is what the American public wants, and we
believe IRS employees want as well.
By helping to inculcate a customer service oriented culture
at the IRS, Congress would be taking a major step in protecting
a taxpayer's rights when faced with an IRS audit or collection
problem. In this connection, the practitioner community is an
important stakeholder relative to customer service and taxpayer
rights. A great number of taxpayers deal with the IRS through
their tax practitioners. There are many opportunities for
practitioners to experience IRS customer service at various
levels, from telephone contacts through audits, collections,
and appeals. Based on their repeated and varied contacts with
the IRS, practitioners have a unique perspective on customer
service.
There is a clear need for improvement in all aspects of IRS
customer service. For example, from the public's perspective,
the front line in IRS customer service is what they experience
when they speak with an IRS employee on the telephone. The
quality of the IRS' telephone systems, as well as the manner in
which the IRS employees conduct themselves on the telephone,
has shown substantial improvement in recent years.
Nevertheless, the IRS telephone system and customer relations
process continue to cry out for further and dramatic
improvement.
The proper training of IRS employees and providing them
with technology are important keys to quality customer service.
The Commission's report strives to portray IRS employees as
competent, hard-working individuals who want nothing more than
to deliver the highest quality in service to the public. In
order to turn around the supertanker we call the IRS, there
needs to be a change in the management structure of the IRS
along the principles described above. This includes better
training of IRS employees. They also need to be provided with
more of the basic technology tools of the 1990s, tools which
NSA's members often take for granted, e.g. more fax machines,
copiers, and computers.

Office of Taxpayer Advocate

The National Society of Accountants commends the sponsors
of H.R. 2292 for providing certain meaningful enhancements in
the office of Taxpayer Advocate. We view this provision as a
critical component of improving taxpayer rights.
The legislation builds on the pro-taxpayer provisions found
in the Taxpayer Bill of Rights II (TBOR2). TBOR2 established
the office of Taxpayer Advocate within the Internal Revenue
Service. It empowered the Advocate to resolve individual
taxpayer problems, to analyze concerns about the nation's tax
system, to propose legislative and administrative solutions to
those problems and concerns, and to report to Congress on the
operations of the Advocate's office. TBOR2 also gave the
Advocate broad authority to take any warranted action permitted
by law relative to taxpayers who would otherwise suffer a
significant hardship as the result of IRS action.
In testimony earlier this year before the Restructuring
Commission, NSA stated that the Taxpayer Advocate, to be
successful in his or her position, must have an intimate
knowledge of the functioning of the IRS. Since knowledge is
gained from years of experience within the Service, we observed
that in order to be truly the taxpayer's advocate, this
individual at the same time must be willing to question,
publicly as well as internally, the functioning of the very
agency to which his or her career has been devoted.
NSA believes H.R. 2292 strikes the right balance in
ensuring that the Taxpayer Advocate is successful. The
legislation provides the Taxpayer Advocate be appointed by and
report directly to the Commissioner of Internal Revenue, with
the approval of the Internal Revenue Service Oversight Board.
H.R. 2292 also provides that the Advocate have substantial
experience representing taxpayers before the IRS or with
taxpayer rights issues. If the Advocate is a person who
previously has worked for a significant period of time for the
IRS, he or she must agree not to accept any employment with the
IRS for at least 5 years after ceasing to be the Taxpayer
Advocate.
From a positive perspective, we believe H.R. 2292 is
carefully crafted in that American taxpayers are not foreclosed
from benefitting from the appointment of a Taxpayer Advocate
who may happen to have the experience and insight of an IRS
veteran. Ironically, the IRS veteran may in fact be the person
best situated to ``fill the shoes'' of the Taxpayer Advocate.
Requiring that any such person take an oath not to work for the
IRS for at least 5 years after leaving the Advocate post
evidences a critical step has been taken to help ensure that
the Advocate is willing and able to report openly about
potentially sensitive issues.
H.R. 2292 broadens the scope of the Taxpayer Advocate's
annual report to identify areas of the tax law that impose
significant compliance burdens on taxpayers or the IRS. The
report also must identify--in conjunction with the IRS National
Director of Appeals--the 10 most litigated issues for each
category of taxpayers with recommendations for mitigating such
disputes. In addition, the legislation makes certain
improvements in the selection process, geographic allocation,
and career opportunities of Problem Resolution Officers. The
National Society strongly supports these improvements in the
Taxpayer Advocate's position and authority. We also are
particularly supportive of the requirement that the Advocate
take steps to ensure local telephone numbers for the Problem
Resolution Officer in each IRS district be published and made
available to taxpayers.

Expansion of the Authority to Issue Taxpayer Assistance Orders

In order for a Problem Resolution Officer (PRO) to issue a
Taxpayer Assistance Order under current law, the PRO must
determine whether the taxpayer is suffering or is about to
suffer a significant hardship. If such hardship is determined
to exist, the PRO is to make a determination as to whether the
IRS action warrants being changed. The Tax Regulations define a
significant hardship as a serious deprivation caused or about
to be caused to the taxpayer as a result of IRS administration
of the tax law.
H.R. 2292 modifies the current application of the
significant hardship test by requiring the Taxpayer Advocate to
consider whether IRS employees followed applicable
administrative guidance (including the Internal Revenue
Manual), whether there is an immediate threat of adverse
action, whether there has been a delay of more than 30 days in
resolving the taxpayer account problem, and whether there is a
prospect that the taxpayer will have to pay significant
professional fees for representation. The National Society of
Accountants supports all of these modifications.
However, we believe there is yet another consideration in
cases involving small businesses. NSA recommends that in
situations affecting small business, a determination be made as
to whether a ``significant hardship'' will be imposed upon
employees of the business who may be adversely affected by the
IRS decision regarding the Taxpayer Assistance Order, e.g.
losing their employment.
The National Society considers these modifications will
change the landscape of Taxpayer Assistance Orders in a
positive fashion. This in turn will help IRS enforcement
activities in a constructive manner.

Removal of Preparer's Social Security Number from Tax Returns

The practitioner community is becoming increasingly
concerned about the requirement that a paid tax return
preparer's Social Security number appear on returns he or she
prepares. Revenue Ruling 79-243 states under Section 6109(a)(4)
of the Internal Revenue Code, ``any return or claim for refund
prepared by an income tax return preparer must bear the
identifying number of the preparer, the preparer's employer, or
both ...(and) that the identifying number of an individual
shall be the individual's Social Security number.'' Revenue
Ruling 78-317 gives some relief by stating that ``an income tax
return preparer is not required to sign and affix an
identification number to the taxpayer's copy of a federal
income tax return.'' The Social Security number need only be
reflected on the tax return filed with the IRS. This kind of
``fix'' does not alleviate practitioners' frustrations.
In today's world of instant access to volumes of sensitive
information about an individual, including even credit reports
accessible over the Internet, practitioners are very concerned
that their Social Security number could be the key to
unauthorized release of their own financial information.
Practitioners feel the requirement they include their Social
Security number on returns violates their privacy, as it could
provide a possibly unscrupulous taxpayer with the opportunity
to access certain records that otherwise would not be
available. Once the taxpayer leaves the practitioner's office,
there is no guarantee that he or she will file the original tax
return with the IRS, without first making copies of the
original returns. There is always the possibility those copies
could end up being misused. As part of the Subcommittee's
deliberations on H.R. 2292, the National Society of Accountants
suggests the Subcommittee review this requirement with the IRS
and develop a separate system for identifying tax return
preparers.

Performance Awards

H.R. 2292 requires the IRS' establishment of a performance
management system covering all IRS employees, with the
exception of members of the IRS Governance Board, the
Commissioner, and the Chief Counsel. As part of this
performance management system, the bill generally provides the
IRS with flexibility in granting awards to employees. However,
the legislation provides that ``A cash award...may not be based
solely on tax enforcement results.'' While this particular
sentence appears to be well intentioned, NSA believes it could
be misconstrued to authorize IRS officials to make cash awards
to employees ``principally'' on tax enforcement results.
Further, tax enforcement ``results'' also could be misconstrued
to indicate the fostering of quotas to qualify for awards.
In NSA's view, the criteria for cash awards should be
redrafted to highlight the point that: ``Customer service
should be considered an important factor regarding any cash
award to an IRS employee. Tax enforcement performance for
employees engaged in enforcement work should be considered only
one factor in a determination of making a cash award.'' This
change in the bill's language would be consistent with the
spirit of the IRS Restructuring Commission report, which is to
encourage the IRS to place greater reliance on customer service
and less on tax enforcement.

Offers in Compromise

The legislation provides for the IRS to develop and publish
schedules of national and local expense allowances to ensure
taxpayers entering into an Offer in Compromise can provide for
basic living expenses. While the National Society believes this
provision attempts to address a real problem underlying the IRS
collection process, we are concerned the provision (as
currently drafted) does not give practical relief to taxpayers.
The National Society of Accountants' members are of the
view the current allowable expense standards for Offers in
Compromise and Installment Agreements are inconsistent with the
real cost of living for families. Our members' concerns include
the fact the expense standards do not adequately address issues
such as family size, housing and utility allowances, and the
cost of car ownership. Our members also are concerned that
Revenue Officers are using the expense standards as strict
rules rather than for general guidance.
IRS collection personnel must be given a clearer directive
allowing them to make exceptions with respect to a taxpayer's
expenses in an Offer in Compromise situation. This is
particularly so when the taxpayer's health or his or her
ability to generate income provides a reasonable basis for such
exceptions. Further, Revenue Officers should be given the
authority to take into account the possibility that the
taxpayer may file bankruptcy when reviewing an Offer in
Compromise, which is counterproductive.
In view of the systemic and recurring Offer in Compromise
issues, a study of the program by an entity outside the
government should be considered. An objective and realistic
perspective on the subject would be helpful to both the
government and the public.

Safe Harbor for Installment Agreements

Section 6159 of the Internal Revenue Code requires the IRS
to consider entering into an Installment Agreement with
taxpayers to the extent such an agreement will facilitate the
collection of the tax liability. However, Internal Revenue
Manual Section 5331.1: (1) states the taxpayer does not have an
absolute right to demand the IRS enter into an Installment
Agreement with him. Once the Installment Agreement has been
entered, current IRS procedures generally do not alter the
conditions of an agreement unless the IRS determines the
taxpayer's financial condition has significantly changed.
H.R. 2292 modifies Section 6159 by providing a safe harbor
for taxpayers who do not owe the IRS more than $10,000 in tax
liability. Under this provision of H.R. 2292, the safe harbor
is available as long as the taxpayer has filed all tax returns
during the prior five years and the taxpayer has not previously
obtained an Installment Agreement under the safe harbor.
NSA supports a safe harbor measure. However, we believe the
tax administration process would be better served if the safe
harbor is made available to taxpayers on more than just a
``once-in-a-lifetime'' basis. Further, the safe harbor
provision of H.R. 2292 should be modified to permit the
rollover of a tax liability from a previous Installment
Agreement as long as the total liability under the new safe
harbor Installment Agreement does not exceed $10,000.
Because the Installment Agreement provision of the
legislation is described as a safe harbor, the legislative
report language should clarify that the provision does not in
any way restrict other available collection settlement options,
including other means of obtaining an Installment Agreement.

Tax Penalty Reform

The National Society of Accountants is very supportive of
the provision mandating a study by the Taxpayer Advocate on tax
penalties. The legislation calls for the Advocate to review the
administration and implementation of penalty reform
recommendations made by Congress in 1989, including legislative
and administrative recommendations to simplify penalty
administration and to reduce taxpayer burden.
NSA believes tax penalty reform should become the next
serious phase of IRS restructuring. A review of the full range
of taxpayer and preparer penalties would be productive.
Moreover, we strongly urge the bill be clarified so that the
Advocate is required to review the extent to which the federal
government relies on tax penalties for revenue raising
purposes.
We recommend the penalty study also include a review of the
new earned income tax credit due diligence requirement imposed
on paid tax return preparers by the Taxpayer Relief Act of
1997. Under the new tax law, should a preparer fail to exercise
``due diligence'' in determining a taxpayer's eligibility for
the earned income tax credit, or with respect to the amount of
the credit itself, the preparer is subject to a $100 penalty.
The new law requires this penalty be imposed in addition to any
other penalty of present law. Yet there is no guidance given
for the regulations to be promulgated under the legislation.
It is our view the IRS will find the earned income tax
credit due diligence penalty very difficult to administer.
While the National Society of Accountants fully believes a
preparer should ask the proper questions of a client about an
individual's qualification for the credit, the practitioner
should not be expected to become a ``policeman'' for the IRS on
the issue. The standard for earned income tax credit reporting
should be consistent with the standard for any reporting
position.
Instead of imposing due diligence penalties of this kind on
preparers, a preferable approach would be to make all tax
return preparers subject to the regulations in Treasury
Department Circular 230 enforced by the IRS Director of
Practice. In this way, the full practitioner community would be
subject to uniform requirements. We believe this is the best
way to increase professionalism, encourage continuing
education, assure more ethical behavior, and better enable the
IRS to prevent unscrupulous tax preparers from operating.

Problems with Interest and Penalties

The bill makes a number of positive changes in the law with
respect to interest and penalties. First, the bill eliminates
the differential in the interest rates for overpayments and
underpayments ``in a revenue neutral manner.'' Second, the bill
tolls the application of the failure to file penalty while a
taxpayer is making payments under an IRS Installment Agreement.
NSA commends the bill sponsors for including these pro-taxpayer
measures as part of the legislation.

Low Income Taxpayer Clinics

Under the legislation, the IRS is permitted to make grants,
i.e. to provide matching funds, for the development and
expansion of low income taxpayer clinics. We strongly support
this initiative. It is an important measure in ensuring all
taxpayers are afforded the opportunity to obtain representation
when faced with an IRS audit or collection matter.
The legislation requires clinics be made available to
taxpayers whose income generally does not exceed the poverty
level by 250 percent. NSA believes this income test may be too
high and not properly targeted. In order to better utilize the
scarce financial resources involved with this important program
for the American public, it may be preferable to limit the
availability of the clinics to taxpayers whose income generally
does not exceed the poverty level by 125 percent.

Other Pro-Taxpayer Initiatives

H.R. 2292 includes a number of positive provisions to
enable taxpayers to recover certain costs and fees when they
prevail and when the position of the IRS was not substantially
justified. Other positive, pro-taxpayer provisions in the
legislation include certain modifications with respect to the
U.S. Tax Court's jurisdiction, and procedures for cataloguing
and reviewing taxpayer complaints regarding the misconduct of
IRS employees. NSA believes these are positive taxpayer
protection measures and supports them.

Conclusion

The National Society of Accountants offers its assistance
to the Subcommittee in any way requested. It would be our
pleasure to help you achieve these mutual goals.

Chairman Johnson. Thank you, Mr. Harris.
Ms. Olson.

STATEMENT OF NINA E. OLSON, EXECUTIVE DIRECTOR, THE COMMUNITY
TAX LAW PROJECT, RICHMOND, VIRGINIA

Ms. Nina Olson. My name is Nina Olson. I am the executive
director of The Community Tax Law Project and I thank you for
the opportunity to be here today. And first and foremost, I
want to say that I appreciate you inviting a representative of
low-income taxpayers to be before your Subcommittee and I
encourage you to hear from representatives of that group more
often.
The Community Tax Law Project is a nonprofit organization
in Richmond, Virginia. We were founded in 1992. Our goals are
three. We represent low-income taxpayers who are Virginia
residents. We educate taxpayers about their rights and
responsibilities in the tax system. And we strive to increase
public awareness about the problems of low-income taxpayers.
We achieve that through the operation of a pro bono panel
of volunteer accountants, attorneys, and enrolled agents who
live throughout and practice throughout Virginia. We provide
them backup training and continuing education programs also. We
provide in-house support and we publish a national newsletter
of low-income taxation called ``The Community Tax Law Report.''
We also represent taxpayers before the Tax Court. And we
have an agreement with the Tax Court whereby they insert
letters about The Community Tax Law Project in trial calendar
notices that are scheduled in Virginia. And unrepresented
taxpayers can then contact us and see if they qualify for
representation.
Now, it is my experience in the 22 years that I have
practiced that I have never encountered a case such as what we
have heard the last 3 days in the Senate Finance Committee
hearings. I must say, though, that low-income taxpayers do have
problems. They are afraid. They often will get notices that
they find incomprehensible. They are not able to express their
facts favorably or clearly in the way that the IRS can process
them. They don't know the buzz words. They don't know to say
I'm currently not collectible. Or I want to talk to a Problem
Resolution Officer. They don't understand the burden of proof.
They don't understand what they need to prove. They don't
understand the process. And they don't understand the law.
So the solution to that is, in fact, a three-part thing. We
need to provide them access to representation. We need to
provide them education. And we need to make the IRS accountable
to them.
Now, in one respect, the tax system is adversarial from day
one. The government is proposing to take people's money and
people don't like that. But if they feel that they have to give
up their money, then they want to know that they were given
fair treatment. And that is where we come in.
Again, low-income taxpayer clinics provide representation
and they provide an advocate for the taxpayer. They also
provide a reality check. If the result is unfavorable to the
taxpayer, then at least they are hearing it from a party who
has their interests at heart. We are not the government trying
to collect their money. We are their advocates. We make the
system work better because we settle cases or achieve the
correct result a lot faster down the line. And we keep people
in the system.
Our goal is to resolve problems at the earliest level, the
appropriate level, so that you are not trying to adjudicate the
merits of a case at the collections level just because the
taxpayer hasn't understood the notices preceding it. And they
end up in collections.
Now, student tax clinics began in the seventies. There are
currently 14 student tax clinics at law schools and 2 student
tax clinics at accounting schools. Student tax clinics usually
are run with a faculty member. And they have a cap of $10,000
per year, the concern being with students that you don't want
to have too much of a liability at stake where students are
involved. Most of the student clinics are means tested. The
Community Tax Law Project places no cap on deficiency amounts.
We do means test, however. We represent taxpayers whose
income is up to 250 percent of Federal poverty level. Now, for
a family of four, 250 percent of Federal poverty level is
$40,000. That may seem like a lot of money to you, but we're
talking about four people here and we're talking about perhaps
an intensive Tax Court case where if they went to an attorney
they would be told you need to put down at least $10,000 and
maybe $20,000 to get through the door. Two-hundred-fifty
percent of Federal poverty level for a one-person family is
just shy of $20,000.
Now, if that person had to litigate an innocent spouse case
or just bring an innocent spouse refund request, we had a pro
bono attorney who spent 25 hours on an innocent spouse refund
request for a single taxpayer. Now, if that were just at $100
per hour, that is $2,500 and someone with $20,000 a year
doesn't have $2,500 to spend on that.
Now, another thing we use is an asset test. We are not
going to represent people who may have a quarter-of-a-million-
dollar house and may be on a fixed income, but have a house
that they could actually get some income from, some cash from
to pay an attorney. So we look at qualification.
Chairman Johnson. Ms. Olson, I'm sorry, but the red light
has gone on and if you could skip to the part of your testimony
that pertains to recommendations to improve taxpayers' rights.
Ms. Nina Olson. OK. I'll hit four. First, I think that, on
the low-income taxpayer clinic program, you need to expand the
definition so that it doesn't just include outreach to only
people who have English as a second language. You should target
traditionally low-income populations for education.
I think you also need to encourage the Service and require
the Service to report back to you about their methods of
publicizing the taxpayer clinics. We have serious problems
about getting them to cooperate with us about that.
I think you need to address whether tax protester cases are
going to be acceptable cases for these clinics to take up.
And you also need to address who will award these grants.
Will the IRS award them or who precisely? And my concern there
is if we take positions that the IRS doesn't like, will our
funding be cut off the next year?
With regard to offers in compromise, I support the
loosening of the national standards, but I must emphasize that
you should also apply that to installment agreements. These
standards are applicable in those situations and they affect
low-income taxpayers much more.
Third, I think it should be made clear that there is no
minimum amount for offers in compromise. In my district, they
will not accept an offer of $500 or $1,000 because it doesn't
cover the cost of processing them and that looks like if you
can't afford it, you can't get resolution. Whereas, someone who
has more money can pay the fee and get resolution.
And that's it. Thank you.
[The prepared statement follows:]

Statement of Nina E. Olson, Executive Director, the Community Tax Law
Project, Richmond, Virginia

Madame Chairwoman and Members of the Committee:
Thank you for providing me the opportunity to testify on
the issue of taxpayer rights. I comment in my capacity as the
Executive Director and staff attorney of The Community Tax Law
Project. CTLP is a 501(c)(3) organization founded in 1992 for
the purposes of (1) providing low income Virginia residents
with pro bono legal representation in federal, state and local
tax disputes; (2) educating low income individuals about their
rights and responsibilities as U.S. taxpayers; and (3)
increasing public awareness of and encouraging informed debate
about policy and practice issues impacting on low income
taxpayers.
CTLP accomplishes its goals in a variety of ways, including
in-house legal representation and a pro bono referral panel of
volunteer attorneys, accountants and enrolled agents. The
Project provides back-up training and technical support for its
volunteers and maintains a research library. Student interns
from local law schools receive course credit for working at the
clinic. It sponsors continuing legal education programs,
including one in June, 1995, on the representation of low
income newcomers. I frequently address groups of low income
parents and workers about tax issues impacting on their
families and their businesses. CTLP also publishes The
Community Tax Law Report, a national newsletter about low
income tax policy and practice.

Background

My remarks today are tinted from my perspective as a
Taxpayer Advocate, one who has daily contacts with all levels
of the Internal Revenue Service on behalf of low income
taxpayers. Perhaps even more important, I am the attorney who
answers taxpayers' calls for assistance and screens cases for
acceptance by the Project. I hear directly from low income
taxpayers about their own efforts in resolving tax disputes and
their treatment by IRS employees.
Let me unequivocally state that in my twenty-two years of
tax practice I have found IRS employees to be as a rule
considerate, helpful and genuinely interested in resolving
disputes. Even in the most adversarial of situations some
measure of decorum and mutual respect is present. However, and
this is a big ``however,'' the same cannot be said about
unrepresented taxpayers' treatment, particularly at the
collections level, and, specifically, with the automated
collection sites.
It is my experience that unrepresented taxpayers, in
particular low income taxpayers, receive inadequate assistance
from IRS employees. This is so despite the well-intentioned
efforts of many Service employees. The reasons for this
discrepancy in treatment are legion, but foremost among them
must simply be the fact that taxpayers feel frightened and
threatened by the IRS' power as a creditor. In large part these
feelings are encouraged by the Service's own notices, which
state that they may seize your vehicle, levy on accounts, etc.
While this fear may ultimately lead to taxpayer compliance, my
point here is that it also creates in many taxpayers a
``flight'' response. Taxpayers already expect the worst and act
in a manner that may bring ``the worst'' about. Nervous and
anxious, the taxpayer is often unable to convey vital
information that may enable the IRS to resolve the dispute.
Even when a taxpayer attempts to inform the Service about
his or her position, the taxpayer may not know the right
questions to ask, the right person to address them to, or the
appropriate procedure for relief. Some IRS employees do not
reach out to the taxpayer and attempt to elicit the necessary
information. In dealings with the Collections division,
taxpayers feel like quasi-criminals, rather than individuals
who are attempting to arrange payment of their taxes.
Taxpayers receive incomprehensible notices from the
Service. At the Project, we try to target our own publicity at
a fifth-grade reading level. Imagine what a taxpayer may think
who receives a five page letter from the IRS listing schedules
of interest calculations and only on page 2 or 3 discovers the
reason for a proposed adjustment to account. Even if the
taxpayer does not ignore the notice, he often cannot understand
the options open to him for protesting the notice. The
taxpayer's failure to communicate generates a 90-day letter;
his failure to file a Tax Court petition results in assessment;
and an issue which should have been resolved through
correspondence ends up in collection, where a taxpayer's
protests that ``I don't owe this tax'' fall on deaf ears.
District Counsel attorneys can only do so much for a pro se
petitioner in the United States Tax Court. A taxpayer may be in
Tax Court not because she has a winning side but because she
can't afford to pay the tax. The petitioner may not provide
enough facts for the district counsel attorney to determine the
appropriate tax treatment of an item. Settlement attempts may
be rebuffed by the taxpayer as a move to outsmart her. The IRS
is perceived as an enemy and that perception precludes
communication and cooperation.

Taxpayer Representation Issues

Section 313. LOW INCOME TAXPAYER CLINICS.

The Need for Clinics:

The problems described above make the case for passage of
Section 313, which addresses seed money funding for low income
taxpayer clinics. Taxpayers without access to representation
will receive vastly different and less favorable results in the
tax system than those who are represented by a tax
professional. The tax professional acts as an advocate but also
as a reality check. In fact, it may be that the most important
service representatives provide is educating taxpayers about
the tax system and their rights and responsibilities within
that system.
Student tax clinics have been operating since the late
1970's. Today, there are approximately 14 law school clinics
and 2 accounting school clinics. Student clinics are conducted
under the guidance of a faculty member; representation is
generally limited to taxpayers with $10,000 in tax liability or
deficiency per year. Most, if not all, impose some sort of
financial eligibility requirements for case acceptance. Some of
the clinics maintain active relationships with the members of
the private tax profession, arranging student mentor programs
and even case referrals.
My own program, The Community Tax Law Project, limits its
case acceptance to taxpayers whose income is at or below 250%
of the federal poverty level. Representation is free of charge
for taxpayers meeting Legal Services Corporation eligibility
(i.e., 125% of federal poverty level). We charge a $25 one time
administrative fee to taxpayers with income between 125% and
250% federal poverty level. Needless to say, no attorney
accepting a pro bono referral may accept a fee from the client,
even if the client's financial circumstances change for the
better. We are careful to protect the integrity of our
referrals and to ensure that our program cannot be used for the
private inurement of individuals.
Our clients come from all over Virginia, including
Chesapeake watermen, members of the Asian community in northern
Virginia, workers and elderly individuals from Richmond,
Roanoke, the Tidewater, and Harrisonburg. We have rural and
urban clients. Our pro bono panel of over 135 tax professionals
also covers the state. Thus, I am able to make client referrals
to tax professionals in the general geographic area closest to
the client.
Over the past year, The Community Tax Law Project handled
in-house or through pro bono referral approximately 30 to 40
cases each month--almost 400 cases on an annual basis. Of the
three Tax Court dockets held in Richmond and Roanoke, Virginia,
each year, we formally or informally participate in nine to
fifteen cases. These figures do not include the many phone
calls I field each week that are strictly informational.
Perhaps the most common misperception is that low income
taxpayers don't pay taxes so they can't have any tax problems.
Our clients have cases involving complex issues, such as
investment tax credits and depreciation deductions claimed by
rural farmers; the taxable nature of severance pay received by
a Navy pilot in combat status at the time of his retirement
from service; and the taxable nature of a payment received in
the settlement of a complicated suit alleging anti-trust
violations as well as personal and reputation injuries. Other
cases involve the responsible person penalty (IRC 6672) and
employee classification issues. All of the taxpayers involved
meet our income eligibility guidelines; their cases involve
serious issues of law and fact.
The Earned Income Credit, administered through our tax
system, may be the single most successful anti-poverty
initiative today. Yet the EIC and related dependency exemptions
and filing status determinations involve some of the most
intricate and complicated sections of the Code. Many of our
cases raise these very issues. We also see a fair number of
``innocent spouse'' cases, including one in which the ex-wife
failed to report nonemployee compensation from an astrological
900-number helpline, a job her ex-husband, our client, never
knew she held.
All of our clients in the above cases are struggling hard
to make ends meet. In many cases, their returns were prepared
by tax preparation services or by VITA programs. But who is
there to help with the problems that arise after the return is
filed?

The Need for Funding:

It would seem that low income tax clinics are an obvious
solution to the problems described above. Yet universities are
struggling to find funding for an enterprise that not only
provides its students with valuable practical experience and
instills in them a professional commitment to community
involvement but also offers substantial assistance to taxpayers
and the tax system. In its first year of operation, CTLP sent
out over thirty grant applications to national, state and local
foundations. All applauded our mission; all stated that tax
representation did not fall within their funding priorities.
CTLP currently operates on a $28,000 annual grant from the
Virginia Law Foundation.
Seed money support would go a long way toward encouraging
the charitable sector to recognize the need for tax
representation and the relationship of tax to a whole slew of
problems affecting low income individuals. As the tax system
becomes an agent of social policy and the source of initiatives
directed at encouraging taxpayers to work, attend higher
education, or to save for retirement, those individuals who
cannot afford professional advice will be increasingly left in
the dust. This is a social policy matter and is rightfully the
focus of private philanthropy.
But the federal government also has a stake in seeing that
low income taxpayers have access to representation. Our tax
system is a voluntary system, whereby taxpayers report their
own tax obligations. Taxes truly are the ``lifeblood'' of our
government and noncompliance with the tax system drains the
public coffers and alienates compliant taxpayers. However,
where a system is perceived as stacked against the taxpayer and
where their legitimate complaints, questions and requests are
handled brusquely, impolitely or incorrectly, taxpayer
compliance will suffer. Representation ameliorates this
situation by keeping the taxpayer within the tax system.
Representatives not only protect the taxpayer's rights but also
explain to him his responsibilities.
In short, it is in the government's interest to ensure that
taxpayers are adequately represented, regardless of their
income level. Despite initial misgivings about students and
private sector attorneys engaging in protracted disputes and
wasting government resources, IRS employees at all levels now
recognize the contribution clinics make to the smooth
administration of the tax law. Clinic representation speeds up
the dispute process, clarifies the issues, and facilitates
settlement where appropriate. Finally, clinic representation
saves expense because it often leads to case resolution at the
earliest, most appropriate level.

Outreach and Education:

I applaud the sponsors of this bill for emphasizing the
need for outreach and education efforts in those communities
where English is a second language. Newcomers to the United
States from other countries often are completely unfamiliar
with the concept of an income tax and have never had to file a
tax return before. Members of such communities are highly
entrepreneurial and may be unaware of self-employment tax
rules. They may work as household employees and are not aware
that their employers are not withholding social security tax on
their behalf. They may fall into the hands of unscrupulous
preparers who claim erroneous dependents or qualifying children
for purposes of the Earned Income Credit.
I recommend to your Committee, however, that clinic
outreach not be limited to those communities specifically but
be expanded to include ``traditionally low income
populations.'' For example, CTLP is working on a program to
train welfare-to-work program participants and their case
workers throughout Virginia about basic tax issues, including
dependency exemptions, the advanced earned income credit, self-
employment issues, and dependent care credit. Many members of
this population have never had a bank account before much less
filed an income tax return. As a taxpayer advocate, I look at
the number of people entering the workforce and see the
problems three years down the line when the Service begins to
issue notices about improperly filed (or nonfiled) returns. An
ounce of prevention goes a long way.
Further, I encourage you to add a provision requiring the
Secretary of the Treasury, or his delegate, to develop methods
for publicizing the clinics, including, but not limited to,
posters and brochures displayed in taxpayer service offices and
examination, appeals and district counsel office waiting rooms,
and notices inserted in pre- and post-examination
correspondence. Currently, Internal Revenue Manual 6570 Chapter
(17)48 provides for such publicity on behalf of student tax
clinics. (See also IRM Exhibits (17)00-1 through -7 for
examples of ``stuffer'' notices.) There are no such provisions
applicable to independent nonprofit clinics such as CTLP. To
date the Service has not agreed to supply such publicity on
CTLP's behalf, despite numerous requests over the last four
years.
It is interesting to note that CTLP is handling 30-40 cases
each month without any publicity from the Internal Revenue
Service. The Community Tax Law Project originally requested
such publicity in February, 1993, and we are still without any
formal assistance from the Service. Most recently a pilot
proposal to the National Appeals Office was met with opposition
from Appeals on the ground that Appeals has a satisfactory case
closing rate. I am advised that Appeals is in favor of pro bono
representation but that they believe it should occur earlier in
the dispute process. I concur with the idea of reaching
taxpayers at the earliest level, but I do not view any of these
methods as mutually exclusive. As the Service well knows,
sometimes it takes several attempts to get a person's
attention.
My concern here is for those taxpayers who drop out and
never take their cases to Appeals because they do not have
representatives. I am also concerned about the quality of case
closings where taxpayers are unrepresented. We should try to
reach these individuals along with taxpayers in exam or in
collections.
There are many employees at all levels of the Service, from
the Commissioner and Chief Counsel to Collections employees,
who support the concept of pro bono representation. Student tax
clinics and CTLP would not be as successful as they are today
without the support of IRS employees. I view the clinic
publicity boondoggle as another classic example of ``not in my
backyard'' concerns. Thus, an unequivocal direction from
Congress about the development of publicity measures for tax
clinics, along with the imposition of a deadline for reporting
back with such a plan, should overcome any footdragging on the
Service's part.
Section 314. TAX COURT JURISDICTION.
As of June 1997, over 50% of the Tax Court's docket
consisted of ``small tax cases,'' i.e., cases in which the
deficiency (including penalties) at issue is greater than
$10,000 per year. The S-case docket affords taxpayers an
opportunity to have their day in court without prepayment of
the deficiency.
According to Chief Counsel's office, as of September 30,
1996, the Tax Court docket consisted of 30.2% of cases in the
range of $10,000 to $100,000. It is difficult to project how
many of those will elect the S-case docket. One significant
drawback to S-case litigation is the lack of an appeal. $25,000
is a large enough sum to suggest to me that many taxpayers
would not elect the S calendar thereby forgoing an avenue for
appeal.
Because of this appellate path restraint I do not think
there will be a flood of S-case petitions in this deficiency
range. However, it is possible that more pro se taxpayers in
this deficiency range will be inclined to bring S-case
petitions where the cost of litigating a regular Tax Court case
led them not to file under the existing rules. This observation
only serves to emphasize the importance of providing funding
for more clinical programs to assist in such representation.
Section 302. ATTORNEY FEES.
To date, I have not personally encountered a case in which
I would request attorney fees. However, I feel that the system
is fundamentally flawed if the Service can be punished for its
``not substantially justified'' positions in cases involving
taxpayers with the ability to pay for representation, but the
exact same behavior will go unpunished if the taxpayer is
represented on a pro bono basis.
Section 7430 is modelled after the Equal Access to Justice
Act, 28 U.S.C. Sec. 2412. Under the EAJA, attorney fees are
awarded to pro bono representatives. (See, e.g., Cornella v.
Schweiker, 728 F.2d 978 (8th Cir. 1984).) There is a slight
difference in wording between Sec. 7430 and the EAJA, namely,
the former statute defines ``reasonable litigation costs'' as
``reasonable fees paid or incurred for the services of
attorneys in connection with the court proceeding.'' IRC
Sec. 7430(c)(1)(B)(iii) (Italics added.) This language has been
cited as grounds for denial of pro bono attorney fees in tax
litigation. (See Gaskins v. Commissioner, 71 T.C.M. (CCH) 3165
(1996).)
It is interesting to note, however, that the Joint
Committee's General Explanation of TEFRA 82 clearly states
Congress' intentions in enacting Sec. 7430 to cover the award
of attorney fees to pro bono organizations: ``[I]f an attorney
is employed on behalf of the taxpayer by a third party such as
a section 501(c)(3) organization, those attorney's fees may be
recovered by the taxpayer even though the organization
initially incurred the expense of retaining the counsel.''
To me, then, this amendment to section Sec. 7430 reflects
Congress' willingness to provide all taxpayers with access to
justice, as well as a desire to penalize the Internal Revenue
Service when it takes positions not substantially justified in
cases, regardless of the income level of the litigants.

Employee Accountability Issues

302(b). AWARD OF ADMINISTRATIVE COSTS INCURRED AFTER 30-DAY
LETTER.
Most Appeals Officers are willing to reverse unreasonable
positions advanced in the examination stage. However, I support
the proposal for including administrative costs incurred after
the issuance of the 30-day letter in attorney fees awards under
Section 7430. Appeals officers serve as the dividing line
between settlement and litigation. The Appeals officer is the
first IRS employee in any tax dispute who can consider hazards
and risks of litigation. For this reason I believe they should
be held to the standard of taking positions that are
supportable; if they do not, they do violence to the system,
forcing the taxpayer and the government to further expense,
either through litigation or the collections process. Appeals
officers must be held accountable for meeting the high
standards they profess. They have nothing to fear if they live
up to such standards.
Section 303. CIVIL DAMAGES FOR NEGLIGENCE IN COLLECTION
ACTIONS.
Although the vast majority of CTLP's calls involve
collection actions, I cannot support the imposition of civil
damages for negligence in collection actions. I am concerned
that the undertrained, understaffed, and beleaguered employees
in the IRS Collections Division will become even more
demoralized. I fear that this provision may result in some
truly outrageous actions being punished but that the overall
level of service will decline even further as employees feel
subject to allegations of negligence. It is much more effective
to provide better training and support for first-level customer
service employees so that they can feel some professionalism
about their jobs than it is to make all employees the possible
targets of irate taxpayer allegations.
Section 315. CATALOGING COMPLAINTS.
I support H.R. 2292's provisions requiring procedures for
cataloging and reviewing taxpayer complaints about IRS employee
misconduct and the establishment of a toll-free hotline for
taxpayers to register such complaints. Such a system would lead
to employee accountability without subjecting the employee to
the demoralizing provisions described in Section 303, as
outlined above.
Precisely because the tax system is the one federal agency
with which Americans have the longest and most frequent
contact, its employees must conduct themselves in a highly
professional manner. To this end, they should be held
accountable for their actions. A workable grievance system
should provide taxpayers with the ability to report what they
perceive as employee misconduct while respecting the rights of
IRS employees and taking into consideration the negative public
perception all tax collectors must face.
Even where complaints are not sustained, the information
gleaned from the cataloging effort will provide tax
administrators with concrete data of what taxpayers themselves
perceive as abuses. This, in turn, can provide direction for
publicity campaigns to inform the public about certain
procedures or can lead to systemic change that can avoid the
perceived problem.

Collection Issues

Section 308. OFFERS-IN-COMPROMISE.
As a general proposition, low income individuals rarely
qualify for offers-in-compromise. I have clients who, under the
Service's own guidelines, have no net equity in assets nor any
present value of their five-year income stream. Yet because
they can offer only $500 to $1,000, often using funds loaned
from family members, the Service will not accept the offer. It
is in the Service's interest to sit back and wait for
collection from possible future tax refund offsets rather than
to accept an offer which will not even cover the cost of
employee time expended in processing the offer.
While this may make economic sense, it has the unfortunate
effect of saying to low income taxpayers that they cannot
receive finality on an outstanding tax liability, despite years
of continuing compliance, whereas someone with greater means
can. This unintended consequence smacks a little bit too much
like ``buying'' justice, and, I believe, reinforces the feeling
among low income taxpayers that they are being abandoned by
their government.
I recommend to this Committee that the Service be directed
to accept valid, workable offers despite the quantitative cost
to the system. An improved perception of equal treatment of all
taxpayers will redound to the benefit of the Treasury.
Section 308 of this bill addresses the use of national and
local allowances only within the offers-in-compromise program.
I encourage this Committee to extend its coverage to the use of
such allowances in installment payment arrangements. While the
motivation behind the use of allowances--the avoidance of wild
fluctuations between districts and the resulting forum
shopping--is laudable in theory, in practice the results are
impractical and ignore the reality of many people's lives.
For example, the national standard for food allowances
increases depending on one's income level. It is well
documented that citizens of the inner city often have the
highest food prices--they do not have large supersaver grocery
stores in their areas, and often shop at convenience stores
with high mark-ups. This fact defies the ``logic'' of the
national standards. Yet in one installment arrangement
negotiation, the revenue officer refused to allow my client an
extra bus trip fare in order to go shopping at a supersaver
store. In short, she condemned him to spending less money on
food than he was actually spending and denied him a valid
expense that would have enabled him to keep his actual food
costs within the national allowance. This posture is impossible
to justify and again makes the tax agency appear to ignore the
real needs of the rank-and-file taxpayer.
Section 310. ELIMINATION OF APPLICATION OF FAILURE TO PAY
PENALTY DURING PERIOD OF INSTALLMENT AGREEMENT.
This provision will go a long way toward bringing people
back into the system. I receive at least one call each week
from someone complaining that despite the payments they are
making under an installment plan, the balance never declines.
They invariably state that they don't know how much longer they
will keep up the payments, since they aren't getting ahead.
In the commercial sector, applying a failure to pay penalty
while receiving payments and charging interest on a past debt
would be called ``usurious.'' The rationale for the failure to
pay penalty is to punish the defaulted debtor for not paying
the debt. If the taxpayer is making installment payments and,
more importantly, is fulfilling the compliance conditions of
the installment agreement, then that taxpayer should be
encouraged to remain within the agreement and within the tax
system. He or she should not continue to be financially
penalized. The Treasury's interests could be protected by
reinstatement of the penalty upon taxpayer default.
Section 311. SAFE HARBOR FOR QUALIFICATION FOR INSTALLMENT
AGREEMENTS.
I view this provision as helpful and of very limited
application. Many delinquent taxpayers are tardy for several
years running. In such cases, it is my opinion that they should
undergo close financial scrutiny prior to entering into or
modifying installment plans. (As noted above, the standards
used to evaluate one's financial needs should be revised for
greater flexibility.) However, for the taxpayer who has
remained compliant except for an isolated instance, usually
attributable to some catastrophic event in the taxpayer's
personal or professional life, this provision will encourage
him to remedy his delinquency and will give him a sense that
his government has his interests at heart.

Taxpayer Information and Education

The Service simply must do a better job of advising the
taxpaying public about tax procedures and about potential traps
for the unwary. At the same time, the public must be made aware
that the tax laws are not created by the Service, nor does the
IRS itself receive the tax monies. Attempts to better educate
and inform the taxpayer about such matters will go a long way
toward reducing (not eliminating) animosity toward the IRS.
Section 316. PROCEDURES INVOLVING TAXPAYER INTERVIEWS.
Taxpayers need to understand the procedures relating to
examination and collection of tax before the commencement of
any interviews. It is not enough to simply insert a notice in
an otherwise incomprehensible mailing. The IRS employee should
also explain the process in understandable terms to the
taxpayer. This description will not only help the taxpayer
understand the process and his rights, but it will also serve
to remind the IRS employee of the entire process and his own
role within it.
This section should also state that an unrepresented
taxpayer shall be advised of the availability of any
organizations providing pro bono representation prior to the
commencement of an interview. If the individual expresses a
desire to contact such an organization, the interview should be
rescheduled for a later time, unless the taxpayer consents to
the continuation of the interview.
Section 304. DISCLOSURE OF CRITERIA FOR EXAMINATION
SELECTION.
A large part of the current disaffection with the IRS is
simply attributable to the lack of information about its
activities, most notably the audit examination. Providing
greater information about the criteria for audit, in a manner
that will not disclose any items ``detrimental to law
enforcement,'' will help erode the aura of secrecy surrounding
the Service. It will dispel myths about how returns are
selected. Greater information will lighten the task of those of
us in the private sector who defend the integrity of the IRS.
This information must be graphically as well as
grammatically legible. It should be available in numerous
languages, and it must be accompanied by an education outreach
campaign involving IRS employees and private sector
professionals. It is not enough for the criteria to be buried
in a densely worded publication; the Service must make a good
faith effort to publicize the information. Again, professional
groups and tax clinics can be of assistance here; creative
thinking and efforts are called for.
Section 317. EXPLANATION OF JOINT AND SEVERAL LIABILITY.
No problem bedevils the tax practitioner more than the
consequences of joint and several liability for taxes on a
joint return. Innocent spouse cases are some of the most
frustrating and tragic I have personally encountered. It is my
experience that many taxpayers look back with hindsight and say
that had they but known they were signing on to a joint debt,
they would not have filed a joint return.
Although I do not think that a well-publicized explanation
of the consequences of joint and several liability will
eradicate the innocent spouse problem in the most tragic of
cases, for a large number of filers it will make them stop and
think twice before signing joint returns. Furthermore, if such
an explanation were included in notices from the examination or
even the collections division, the taxpayer will be alerted to
the need for attending the meeting himself or to the need for
possible separate representation. Thus innocent spouse issues
will be raised earlier in the dispute process.
Unfortunately, this proposal would be rendered meaningless
in practice if a spouse does not receive notice of the IRS
exam, appeals or collection action. It can only be fully
effective if the Service has accurate and updated taxpayer
addresses, which would be facilitated by granting the Service
access to the postal service's address files. IRS employees
must also be instructed to require consent from an absent
spouse to representation by the present spouse prior to
conducting an examination or other interview. This consent can
be supplied on the existing Form 2848, Power of Attorney and
Declaration of Representative. Alternatively, the Service could
develop a separate form for consent which includes the joint
and several liability explanation and on which the absent
spouse acknowledges having received and reviewed said
explanation prior to consenting to representation by the
present spouse. This notification, along with information about
the availability of pro bono representation, will protect many
spouses.

Conclusion

In concluding my remarks, I wish to emphasize again the
importance of providing taxpayers with information, assistance,
and access to representation. Without these elements our
voluntary tax system will fail. Further, the Internal Revenue
Service must be adequately funded in all its operations in
order meet its tax administration and enforcement
responsibilities. New customer service initiatives, including
low income taxpayer clinics, should not be excuses for
underfunding other IRS functions.
H.R. 2292 goes a long way toward crafting a tax system that
fulfills its revenue raising mission in a manner that respects
the average citizen's person and property. The bill is posited
on the assumption that taxpayers wish to comply with their tax
obligations and enables them to do so with dignity. The low
income individuals I represent ask no more than that.

Chairman Johnson. Thank you very much. I would now like to
recognize my colleague from Texas, Congressman Johnson, who is
a valued Member of the Ways and Means Committee, but not a
formal Member of this Subcommittee. It is a pleasure to have
you join us today.
Mr. Johnson of Texas. Thank you, Madam Chairman. I would
like to take the time to introduce Stephen Winn. He is the
president and chief executive officer of Computer Language
Research, Inc., and I bet one of my valued constituents from
Dallas, the Dallas area. And I just wanted you to note that he
is testifying on behalf of the Software Publishers Association,
which has about 1,200 members on an issue that ought to
interest every Member of the Subcommittee.
Chairman Johnson. Thank you. And welcome, Mr. Winn.

STATEMENT OF STEPHEN T. WINN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COMPUTER LANGUAGE RESEARCH, INC., CARROLLTON, TEXAS;
ON BEHALF OF SOFTWARE PUBLISHERS ASSOCIATION

Mr. Winn. Madam Chairman and Members of the Subcommittee,
thank you for that introduction. I know I will not be confused
with Steve Wynn, owner of the Golden Nugget now. I am president
of the Computer Language Research and am testifying today on
behalf of the Software Publishers Association, representing
1,200 companies in my industry.
I would like to enter my prepared statement into the record
and give our views on three important elements of the IRS
restructuring debate. First, we are strong supporters of the
electronic filing and believe that increased usage of
electronic filing will occur if the IRS provides incentives to
taxpayers and transmitters of electronic tax returns.
Second, the proposal to eliminate the differential between
interest owed by the government and owed by the taxpayer with
the taxpayer getting the lower rate is long overdue.
My third topic is one of extreme concern to my firm and all
software publishers in general. To our dismay, the IRS is
attempting to seize the single most important asset that we
own, our intellectual property, through prolonged and ruinous
litigation without compensation and without offering even basic
trade secret protections.
First, let me give you a quick primer on software. It is
created by a programmer who writes out instructions for the
computer in a human readable form called source code. Source
code is a recipe, if you will, for our products. Source code
contains all of the trade secrets and know-how that sets one
firm's products apart from another.
Once source code is developed by a programmer, it is then
turned into machine readable or executable code. Executable
code is what the computer understands. It is what we license to
our customers in the form of CD-ROM disk. So source code is the
recipe to the project. And the executable code is the actual
product that we license to our customers. This brings us to the
present problem.
The IRS has demanded access to the executable version of
our software claiming that it is a book and record. Now, while
we disagree with this interpretation, we nevertheless have
complied with the government's demands and have granted access
to the executable code in those instances where the IRS has
agreed to protect our trade secrets.
Once the IRS has access to the executable code, they are on
equal footing with the taxpayer. Now, it appears that the IRS
wants more. They want source code or the recipe for our
software. Mr. Brown testified that decisions are embodied in
the software. This is not accurate. Software does not decide
anything. The people who drive the software make decisions. In
other words, the taxpayers. These decisions or inputs control
what result is generated by the software. And these discussions
are fully disclosed to the IRS during the examination process.
No one disputes that a company's books and records are
necessary both to prepare and audit its tax return. In order to
audit the tax return, the IRS must be able to establish an
audit trail that shows them how each number in the finished
return flows back to the corporation's financial accounting
systems.
Ordinarily, the audit trail is provided in the form of
workpapers. All tax preparation software packages produce
workpapers to facilitate mapping source data to the finished
return.
The IRS would have us believe that numbers on the return
are produced by a black box without support. Now, do you
honestly believe any corporation would accept numbers that
magically appear out of a black box with no support? Of course
not, because how would they know whether or not they were
paying too much tax? Corporations demand to know exactly how
every number in the return is derived and how it ties back to
their financial accounting systems. Our executable code gives
them this information and that information is shared with the
IRS during the examination process. So you might ask, so what,
just give them the source code.
Well, one problem with this is the IRS is not willing to
provide protections for our trade secret information. If they
are going to look at the recipe, the basis for our competitive
advantage in the market, then they have to be willing to keep
it a secret. And they are not willing to do this. We are very
pleased that Congressman Sam Johnson plans to introduce
legislation to address this problem. The bill is quite modest
and merely prevents the IRS from seizing third-party source
code.
It permits the IRS to gain access to the executable code
under conditions designed to minimize the risk of disclosure to
a third party. Finally, it gives the IRS unfettered access to
the software in any criminal proceeding. I strongly urge the
Subcommittee to give Congressman Johnson's bill every
consideration and to include it in any taxpayer rights
legislation.
This concludes my statement, Madam Chair. I would be happy
to take any questions.
[The prepared statement follows:]

Statement of Stephen T. Winn, President and Chief Executive Officer,
Computer Language Research, Inc., Carrollton, Texas; on behalf of
Software Publishers Association

Madam Chairwoman and members of the subcommittee:
My name is Stephen T. Winn and I am President and Chief
Executive Officer of Computer Language Research, Incorporated,
a tax return preparation software company headquartered in
Carrollton, Texas. I am testifying today on behalf of the
Software Publishers Association, the leading software trade
association composed of 1200 companies, ranging from the
largest and best known to many other, smaller firms. Thank you
for giving the SPA and me the opportunity to give you our views
on three important elements of the IRS restructuring debate.
First, we are strong supporters of electronic filing. Tax
software publishers have been helping the Fortune 1000
corporations process and file their returns in electronic
formats for many years. Further, millions of individuals are
now using computers and our software to fill out their tax
returns. The next logical step, of having those returns filed
electronically, is only a relatively small step away. Providing
incentives, including a longer time period for filing--which is
logical given that it takes the IRS less time to process an
electronic return--and financial incentives for transmitters,
are both good ideas which would accelerate the movement away
from paper-filing. The IRS study commission was correct in
their view that electronic filing will be far more efficient,
less prone to error, and cheaper over the long run than paper-
based returns. Eliminating paper returns for millions of
individual filers, and for thousands of small and medium sized
businesses, will dramatically lower IRS error rates and enhance
taxpayer--customer--faith in our tax collection process.
Concrete steps beyond mere platitudes are called for and the
Commission's recommendations are a good start.
Second, the proposal to eliminate the differential between
interest owed the government and that owed the taxpayer--with
the taxpayer getting the lower rate--is long overdue. Whatever
revenue was raised from this artifice was too much. At the same
time, I understand the problems of ``revenue neutrality'' and
will leave suggestions for solving the controversial aspects of
this proposal to others.
My third topic is one of extreme concern to my firm and
other business software publishers. To our dismay and over our
objections, the IRS, during audits of licensees of business
software, is attempting to seize the software industry's single
most important asset, its intellectual property, through
prolonged and potentially ruinous litigation, without
compensation, without offering even the most basic protections
to the publisher. In my view, the IRS is on a wrong-headed
crusade based on a fundamental misunderstanding of what
software is and what it does.
First, let me give you a quick primer on software. It is
created by a programmer, who writes out instructions for a
computer in human-readable form called ``source code.'' A
corporate tax program, such as those published by my firm, may
have 300,000 pages of source code, as well as notes the
programmer makes as he proceeds, and comments from users who
call in during the tax season with ideas and problems with the
software.
The source code is then taken to a ``compiler,'' which
turns it into machine-readable, ``executable'' or ``object
code.'' When you buy software at your local computer store, it
usually comes in the form of CD-ROM disks; this is executable
code.
Source code is the crown jewel of any software company. It
contains all the trade secrets, know-how, and tricks of the
trade that set one firm's product apart from another firm's. We
do not share our source code with anyone and we guard it by
aggressively prosecuting any infringement of copyright,
trademark, and trade secret laws.
This then brings us to the present problem. The IRS wants
our software and is using the audits of our corporate customers
to try and get it. In two cases now being litigated, as well as
in at least another 5 cases about to begin the litigation
process, the IRS has issued Information Document Requests
(IDR's) and summonses for the software. In some instances, the
IRS has issued ``designated summonses'' demanding that the
taxpayer turn over the tax software. A designated summons is a
powerful tool, in that it stops the running of the statute of
limitations until lifted. Unfortunately for our customers, a
standard software licensing agreement prohibits the licensee
from giving it to anyone, including the IRS. In response, the
IRS has issued summonses to the software publishers demanding
the software. The most recent summons that CLR has received
demands both the executable code--the CD-ROM disks--as well as
the voluminous and highly sensitive source code versions of the
software.
At CLR, which has been creating tax return software in one
form or another for 30 years, our first thought was to find out
what problems the IRS was having understanding our customers'
tax returns so that we could help them find a solution. That is
the way we have worked with the IRS since our inception and the
IRS and the taxpayer had always come away satisfied. The IRS
responded that they did not have a particular problem with the
software but that the IRS National Office wants it anyway.
Further, the IRS said that they have such broad powers under
Section 7602 that they can take whatever they want on audit
from either the taxpayer or from a third party software
publisher. They then refused to negotiate with us further
concerning a national accord which would allow the IRS to do
its job while protecting our key asset.
The tax production software we publish is not customized or
produced specifically for one company. It is merely a set of
algorithms for calculating a return. The taxpayer must enter
its financial data onto the return, usually relying on a
general ledger software package for the financial numbers. No
one disputes that a company's books and records are necessary
both to prepare and audit the return. In order to audit that
return, the IRS must be able to establish an audit trail that
shows them how a number flows from the final tax return to the
general ledger. Ordinarily, this audit trail is provided in the
form of work papers. All tax preparation software packages
produce work papers to facilitate this mapping of source data
to the finished return. If a tax software program did not
produce these reconciling work papers, no one would use our
software because no one--not the taxpayer, who has the highest
interest in making sure his return is correct, or his
auditors--could ascertain how a number on the return tied back
to company's financial books.
The IRS is arguing that the software has somehow replaced
the reconciling work papers so that the only way that they can
track a number from general ledger to the final return is to
access the software itself. This is simply not true, however.
The fact is, in every instance of which we are aware, the
taxpayer has been able to provide the IRS with an audit trail
from final return to financial books without access to the
software.
So if the taxpayer can demonstrate a clear audit trail from
source data to the finished return, why does the IRS persist in
demanding access to tax return production software?
We believe the IRS wants access to 3rd party software so
that they can process alternative scenarios through the
software. In other words, they want to use the software rather
than examine it. They want to be able to improve the efficiency
and effectiveness of their auditing process by confiscating
software rather than using their own. (I should note here that
CLR won a competitive bid two years ago to license an
international tax program to the IRS at a cost of $2 million.
We also trained 100 IRS examiners in the program just so they
would have their own audit software). As much as we all
appreciate the need for an efficient IRS, the SPA strongly
believes that stealing software is not a proper reason to issue
an IRS summons--especially a designated summons, which stops
the running of the statute of limitations and makes our
customers very unhappy.
We also think that the IRS is suspicious that a computer
might be used to substitute for audit work papers that
reconcile financial books to the tax return. Although I can
understand that the IRS has to deal with some tough cases, this
is really a little paranoid. If the computer software does not
produce a reconciling work paper for a particular number, then
it isn't going to do the Service any good to review the
software because the support is simply not there. If the
computer software does produce a reconciling work paper for a
particular number, then all the taxpayer has to do is print it.
The IRS doesn't need access to the software to obtain audit
work papers.
We think that another more sinister motive is emerging.
Rather than deal with specific audit issues pertaining to
specific taxpayers, the IRS seems to be positioning itself to
go on a fishing expedition to study all taxpayers that have
used particular features in the software. If the IRS wins
access to source code and programmer notes, can we expect a
John Doe summons to follow requesting that we turn over
information about who is using what feature in the software?
The SPA is also concerned that the next summons offensive
will target the publishers of general ledger and accounting
programs. It is those programs, after all, that generate the
numbers that are used in the tax return. If, as the IRS claims,
it cannot be expected to rely on numbers on a return produced
by a computer, then the source of those numbers must also be
suspect. And what about the company's network for collecting
those numbers? The list of potential summons targets could
easily go on and on and on.
What would the IRS get if they did win access to a
publisher's source code?
They would get nothing usable by a field agent. Indeed,
there are very few programmers with a tax background. The IRS
would have to hire one of our competitors or someone capable of
becoming a competitor to understand the source code. Only a
part of the code deals with tax matters; the other part is
instructions to the computer regarding the operating system,
printing, what color the screens should be, etc. It is those
hard-won tricks-of-the-trade that a competitor would find very
interesting.
It is my understanding that no IRS audit of any taxpayer
has to this day ever included the seizure and unrestricted use
of third party tax compliance software by the IRS. Yet now the
IRS would have us believe that it is impossible for it to
perform an audit without such seizure and unrestricted use. The
SPA believes such an assertion is without merit.
We are very pleased that Congressman Sam Johnson has
introduced legislation to address this problem. The bill is
quite modest and is not IRS-bashing by any means. It merely
prevents the IRS from seizing third party, computer source code
from a tax preparation or accounting program in examination. It
also permits the IRS to gain access to the executable version
of software under conditions designed to minimize the risk of
disclosure to a third party. The bill would also clarify that
courts have the power to protect a publisher's intellectual
property rights in any IRS summons enforcement action. Finally,
it gives the IRS unfettered access to the software in any
criminal proceeding. I strongly urge this committee to give
Congressman Johnson's bill every consideration and to include
it in any taxpayer rights legislation that you pass.
This concludes my statement, Madam Chairwoman. I would be
happy to answer any questions that you or the committee may
have.

Chairman Johnson. Thank you. I assure you that
Congresswoman Johnson will give Congressman Johnson's bill a
consideration. First of all, I want to thank the panel for your
input and for the specificness of your testimony. Your
recommendations will be looked at very carefully.
This is a real opportunity for us. We now have a couple of
years of closeup experience ourselves. This is our third year
as a Subcommittee. With the Commission's indepth work, we are,
in a sense, kind of uniquely situated to do some good work
here. And we appreciate your input today and will look forward
to working with you.
I did want to go back to something that a number of you
brought up that I didn't get to pursue earlier just to make
clear that it is very much on the table. This issue of how
people are treated after divorce is a very big issue. And in my
interest in moving on to this panel, I did not call on Mr.
Lubick for his comments. But it should be noted for the record
that, in April 1996, more than 1 year ago, in response to our
Taxpayer Bill of Rights 2, the IRS did issue a manual, a manual
of instructions to the field offices that modified their
proceeding for dealing with cases involving a claim for relief
based on the innocent spouse provisions.
In other words, they did respond. They did start the
process. And that more than 1 year later well after the date
that the report is due, we still have no report is indeed cause
for concern. We will be moving ahead. I would like to ask--I
was pleased that many of you do have comments on that issue and
suggestions for us.
I agree, Mr. Lane, we did talk about prorated. I mean,
there are some solutions here that we should be looking at. So
I will invite your specific input on that as we move forward.
But I also would like to know whether any of you are conscious
of these new instructions in the panel and have they made any
difference to your knowledge out there.
Ms. Olson, thank you very much for your comments in regard
to this particular group of people that you work with and the
focus on the importance of outreach through the proper vehicles
and in the proper language when trying to service people who we
see as low income, but do pay taxes.
Mr. Lane. I have a comment on that. One of the problems we
are running into, as I understand it, from a number of comments
to us in the last several months, the provisions of the
Taxpayer Bill of Rights that were signed into law last year by
the President specify that with respect to ex-spouses and with
respect to people who may have also been asserted the trust
fund recovery penalty, that the taxpayer has the right to
request information as to what efforts are being taken in that
regard.
We have had several Members come to us who have valid
powers of attorney from the taxpayer. So according to the bill
of rights that was passed in 1988, they should be able to stand
in the shoes of the taxpayer and get any information the
taxpayer would be entitled to have. The Service is now taking
the position that because they are not the taxpayer, they
cannot get this information that the Taxpayer Bill of Rights 2
enables the taxpayer to get, and they are requiring the
taxpayer themselves come in with the application to receive the
information. That is ludicrous. And that should change.
Chairman Johnson. Thank you very much. Anyone else have any
comment on how those regulations are affecting the practice?
Mr. Kamman. I think a journey of a thousand miles must
start with a single step and this is a single step. I think
what I heard earlier today is IRS pointing out, well, we don't
want anybody to believe that what is in the manual is
enforceable or actually anything close to being law. It would
be nice if that were put in--whatever IRS is doing would be put
in their publication one, the publication that goes to
taxpayers who are subject to this kind of collection procedure.
If the taxpayers don't know about it, maybe taxpayers with
representatives know about it, but most taxpayers who are
contacted by the Collection Division do not have
representatives. They need to be told what their rights are, if
they have any rights, or if there is even any administrative
grace, tell them about it.
Mr. Lane. Could I raise a question on that?
Chairman Johnson. Yes.
Mr. Lane. One of the things that bothers us and has
continued to bother us for years is we run into issues where we
have got a case being worked in the field, the Internal Revenue
manual has a specific comment about how that case should be
handled, and we are told by the local office, well, that is
only a guideline. We are not required to follow it. That
doesn't have the force of law.
And we have raised this several times with a variety of
Commissioners and a variety of administrations. And the
question we have to ask is, You know, who runs the Internal
Revenue Service? Does the Commissioner make the policy, and the
national office promulgate that policy, then the field is
required to follow it? I mean did God give Moses the Ten
Commandments or the ten suggestions? What's the answer?
Chairman Johnson. So the issue of the standing in the
manuals is a very----
Mr. Lane. Exactly. The manual says something. And we are
training practitioners on how to represent their clients by
relying on what the guidebook says. And then they run into a
situation in the office where they are told, Well, we don't pay
attention to the manual. It is only a guideline. Well, they
can't have it both ways.
Chairman Johnson. Thank you for that point. I want to go to
a point raised by Mr. Harris in his testimony. You think it is
a good idea to require that any person, that Taxpayer Advocates
take an oath not to work for the IRS for 5 years. This has
struck me as a very two-edged sword.
You certainly want people who are experienced, who know the
process, who know tax law and so on and so forth to be your
Taxpayer Advocates. But if you don't--I mean, are you saying,
then, after they are done being a Taxpayer Advocate they can
never work in any other job in the IRS?
Mr. Harris. We made a suggestion to the Restructuring
Commission about our concern about the independence of the
Advocate. The Commission came up with this solution to that
problem. I think it is the best solution. You know, are there
others out there that might work as well? But I think what we
have to ensure upon is that the person who is charged with
these very important roles of valuating the issues that are of
concern in the Service is not still concerned about their
future movement within that organization, because it would
certainly potentially cause them to hesitate in an honest
response.
I think this is a fair solution to the problem. We are
prepared to support it. I understand that, you know, it could
be a concern that no one would take the job, because at the end
of their term, they have to go seek employment elsewhere. But
hopefully they will do a good enough job and they will be there
until they are ready to retire and can be independent for that
length of time.
Chairman Johnson. I read that recommendation of the
Commission with some concern, because in a way this is the
right kind of person who should be heading the IRS. And after
they have really been there for a while and seen what the
problems are at the bottom, they might be the very best person
to be Deputy Commissioner.
Mr. Harris. Maybe we should say except for Commissioner.
Mr. Lane. Can I comment on that? We included a comment in
our governance submission for your hearing on the 16th
specifically on this issue. What we suggest in our resolution,
because we have the same concerns Roger has about not having a
career IRS official be put in this position and be wondering
about where he goes next after this job, and, as a result, he
doesn't want to offend the powers that he's got to deal with.
We suggested that the law ought to be rewritten that
prohibits the appointment of an IRS employee to this position
in the first place. In other words, if it was a career
executive and someone made the decision, the President made the
decision to appoint that person to that Taxpayer Advocate's
Office, they would have to resign from the government so they
would be truly independent when they went into that slot.
I agree with you. I think that an excellent potential
candidate for Commissioner and designee would be somebody who
has performed well as a Taxpayer Advocate. And we would not
want to see that person precluded because that technically is
an area considered employment with the IRS.
Chairman Johnson. I do think this is a very difficult
issue. And in the Taxpayer Bill of Rights 2, while we gave
greater independence to the Taxpayer Advocates, we did not go
as far as some would have liked us to go. And we didn't because
there is a real concern about creating a confrontational
relationship between the advocate system and the IRS system. If
there is anything that sort of continuous improvement shows you
out of every other sector of the economy, it's people working
together to solve problems. That is really powerful. While you
want the Advocate to be independent enough to provide an
outside view or at least to report directly to us so that the
Advocate doesn't have to go through all the bureaucracy, which
isn't necessarily malicious or ill intended but slow, laborious
and has other priorities; I'm not at all convinced, in my own
mind, that the degree of independence that this report is
seeking creates the strong independent Taxpayer Advocates.
One of the problems that you create, then, is what is the
Advocate's need for next employment? How is this going to
affect their service of constituents? Will they get
particularly interested in one kind of case and be a good
Advocate and then get employed by that sector? So you set up a
whole different dynamic. I'm not so sure we aren't better off
dealing with the dynamic we know, which is the need for
independence, but the need for good information, trustworthy
relationships, that is a very big issue here. Can you trust
them? If the Advocate has their own next job in mind and may be
making a public display of how much stuff they can reveal, I
worry about this.
Mr. Lane. We share your concerns about this. I mean, we
have switched positions on this. If you recall, when we
testified in March 1995, we were vehement about not making the
Advocate an independent individual, but keeping it in the
career IRS executive corps. The problem is, with all the
additional responsibilities and rights that you gave that
Taxpayer Advocate, you created an untenable situation for a
career executive to survive in.
A career executive that fully used all of the independence
that you gave that position would find themselves crosswise
with the Commissioner and Treasury often. And so you are
putting this person in really an untenable position. He is
going to try and want to go out into another job with the
Service.
Chairman Johnson. This is a longer discussion. But surely
if he saw that much abuse, he would put himself at odds. With
the new board in mind, that is not so agency dependent, I think
that that conflict would be seen much earlier. I think we have
to look at the reforms as a whole. I personally think that the
outside board bringing in the private sector and a more
independent voice helps the Advocates to maintain their
independence. I do hear what you are saying. As we go forward,
anyone who wants to comment on this or call me and talk to me
about it on the phone, my jury is really out. I am not at all
convinced.
Because in the legislative area and in the executive
branch, we have really made it impossible for us to get some of
the quality people we need because we have now built so many
parameters around service. One of the biggest barriers are the
parameters that we have put in place in regard to what you can
do after you leave your Cabinet position or your Deputy
Assistant position or even your legislative position. I am
sensitive on that issue.
Mr. Coyne.
Mr. Coyne. I have no questions.
Chairman Johnson. Mr. Portman. Oh, Mr. Johnson, would you
like to ask questions?
Mr. Johnson of Texas. Thank you. Just one, if you don't
mind. I would like to ask the question based on the fact that
the IRS is opposing what you want to do; that is, protect your
property rights.
Is there a difference between the head office here in
Washington and the district office that you deal with directly?
And could you explain real specifically why they don't need
that source code?
Mr. Winn. All right. In 30 years of doing business, my
company has helped--or our executable software has been used to
prepare probably 50 million tax returns. Not one time, not one
time in 30 years and 50 million tax returns have we ever been
asked for source code. And the reason for that is the software
executable version is all you need to determine how the
software functions.
The IRS has testified that they believe the software makes
decisions. I guess that would mean it would have to assume a
life form. Software does not make decisions. It is instructed
by people who tell it what to do. All of the decisions that the
people, namely the taxpayer, entered into that software are
fully accessible by the IRS. All of the workpapers they need to
determine how every single number in that tax return was
generated are available and are produced by the taxpayer. So to
come after third-party source code, which the taxpayer has
never had access to, is overreaching, in my opinion, and the
Software Publishing Association's opinion.
Mr. Johnson of Texas. But is there a difference between the
way the district people treat you and the offices in
Washington?
Mr. Winn. Well, we have never had a problem with the IRS
for 30 years. We always worked with them any time they had a
question in the field about a tax return that they wanted us to
help them with.
About a year ago, the national office seems to have changed
that policy, and they now want access to source code, and it is
unclear to us why they feel they have to have it. What is
interesting is they have their own audit software, which we
coincidentally license to them. And under that license they are
not entitled to source code, and they have not asked for source
code for that software package when they licensed it from us.
Mr. Johnson of Texas. Thank you, sir.
Thank you, Madam Chairman.
Chairman Johnson. Mr. Portman.
Mr. Portman [presiding]. Thank you, Madam Chair, and thanks
to all the witnesses. We have had a lot of good input today,
and I know we are going to have a lot of followthrough. We
can't get into all the details today, but let me just see how
far we can get.
Pam Olson, Ms. Olson number one, thanks for the support of
most of the taxpayer rights provisions. In fact, much of what
you say even outside of the legislative recommendations, I
think, is very helpful to us because of some of these other
issues we will be dealing with. I am eagerly anticipating the
full support of the bar for this legislation so you can
actually help us get this through the process. I know you will
support the vast majority of what we are doing, including the
taxpayer rights section. I know that is coming.
Let me ask about one specific one, if I can get your input
on it, because it is one that I think AICPA feels strongly
about. I will ask Mr. Mares in a second about it. It has to do
with whether practitioners who are able to practice before the
IRS would be allowed to represent a taxpayer in the Tax Court's
small case procedures? And as you know, we have some procedures
in the bill to raise the caps on the so-called S calendar.
Assuming that CPAs, and enrolled agents for that matter,
agree to abide by the Tax Court's rule of practice, how does
the ABA feel about that proposal?
Ms. Pam Olson. Well, it is not something on which we have
any position, but it seems to me that it is something that the
section would and should support. The Tax Court has a number of
problems with S cases with taxpayers being unrepresented, and
oftentimes, as Ms. Olson number two indicated, the problem with
taxpayers is that they don't believe the IRS, or they don't
quite understand.
Mr. Portman. Right.
Ms. Pam Olson. And oftentimes, if you can put somebody in
that situation to explain things to them, you can eliminate the
dispute entirely and eliminate the need for a proceeding at
all. So it seems to me that allowing that to happen is
something that would be a good change and something we should
support.
Mr. Portman. OK. Thank you very much.
So much of what Ms. Olson number two said about taxpayers
who are less than 125 percent of poverty would relate to many
of those taxpayers, which is the same degree of confusion and
lack of representation.
Ms. Pam Olson. Yes, definitely.
Mr. Portman. Mr. Mares, I again appreciate all the support
AICPA has given this whole process. This is what it requires to
make some of these changes, to get that kind of wholesale
support. I also agree with your suggestions on the taxpayer
rights front. A lot of them, as you know, we have heard during
the Commission process. But the rubber hits the road now, and
we actually have to come up with a Chairman's mark, and this
Subcommittee is charged with doing that.
Is abiding by the Tax Court's rules a problem for your
members?
Mr. Mares. No, not at all. As a matter of fact, we would
expect that anyone admitted to practice before the Tax Court
would be bound by their rules and regulations, so that is not a
problem at all.
Mr. Portman. OK. All right. Well, again, thanks. We have
your testimony here on the other provisions, which we are all
going to look at.
Joe Lane, you have given us a whole lot of information
today, some of which we have had through the Commission, some
of which is new. One thing I wanted to ask about but which you
didn't get into was this whole issue of the IRS deemphasizing
its program for intervening early when a business, particularly
a small business, misses a payroll tax deposit. I have heard
about this back home. I know it came up during the Commission's
proceedings.
What are your views about this, and do you have any
recommendations for improving the FTD Alert Program?
Mr. Lane. One of the reasons that the FTD Alert Program--
and basically, for those who don't know what that is, I will
just give you a little explanation. When companies are required
to give a payroll tax deposit, and if they miss a payroll tax
deposit and they haven't been showing up, the IRS hasn't heard
from them, they send out an alert to the field that says there
is some missed FTDs, and then hopefully they would get on top
of that case faster so you didn't have two or three quarters'
worth of payroll tax liability run up.
One of the problems is that that is a program that
frequently slips back in terms of priority because they have
got other inventory that has already been assessed and that is
getting old or sitting out there, and they have got offers in
compromise, or they have got other things to work on.
I have looked at that issue for years, both as a Collection
Division Chief who had problems managing FTD alerts because of
those other competing demands and also as a practitioner now
for 18 years. And I think you could actually do a statutory--a
statutory tweak on a couple of Code sections and establish a
new procedure that might really help get that high-risk
taxpayer that I would say typically is your person who just
starts a business or is in the first couple of years of
business, is not adequately capitalized, and they start to use
the trust fund withholdings they withhold from their employees
as operating capital. That is the typical scenario in these
situations.
You have two Code sections, 7512 and 7215, which basically
allow the IRS to put the taxpayer on a monthly filing
requirement for 941 taxes instead of quarterly.
Now, in the past, the taxpayer is required under that
provision to set up a separate bank account, make deposits into
that bank account, and if they provide--if they don't follow
that regime once they have been put on that process, then they
have the ability--the IRS has the ability to actually prosecute
these people criminally.
I would suggest that what might make an appropriate fix to
that--those cases very rarely are worked, and you very rarely
see that program emphasized because the Department of Justice
hates working them. OK? So you wind up getting this disconnect
where IRS tries to transfer this stuff up, and they send it
back.
What I would suggest you do is have the IRS consider
contracting, go out with a request for proposal, contract with
one of the large payroll companies like an ADP or Paychecks or
something like that nationwide, and have a contract that
provides statutory authority for the IRS to take--identify a
high-risk taxpayer and require that taxpayer to use that
contract for the first 2 years of business, or if they have
missed FTDs, the first time they miss the FTD or have a
delinquent quarter from 941 taxes.
Mr. Portman. Because the record with the ADPs of the world
is that there aren't the delinquencies, even though it is
quarterly, not monthly.
Mr. Lane. Well, I am not so much talking about--once you
identified that person, then what you would do is require
statutorily in the language that under that contract, what that
employer would have to do is deposit the gross payroll each pay
period with that payroll processing company, and then those
people would take care of making the deposits on time and
preparing the tax returns quarterly and filing that stuff.
The key thing is to get the taxpayer into a business
environment where the tax returns are being paid and fully
filed on time, and if he is on that process, probation, for
example, for want of a better word, for 24 months or 36 months,
then you have got a scenario where the guy comes out of that,
he goes into keeping track on his own. He has already got his
cash flow situation ironed out. He is used to dealing with
that. He is used to paying his taxes on time. And that is the
high-risk taxpayer. That is what causes all of those problems.
It is a double problem for IRS because they have to pay the
refunds out to employees even if they didn't get the money sent
to them.
Mr. Portman. Any other members of the panel who have
comments on that, I would ask you to give them to us in written
form. I know, Mike, you may have some thoughts on that as well,
because I think at some point you might want to look into it in
this legislation if there is a statutory fix, maybe a couple of
tweaks, as you said.
I have one other thing for you, Joe. I got a letter from
Diana Thompson, who is an enrolled agent back in my district,
about this issue of the bypass procedure, and I think this is
an important one for us to address. You know, is this prevalent
of the IRS going to a taxpayer directly rather than going
through the enrolled agent or another representative of the
taxpayer? And if so, what should we do about it, either in the
statutory language or report language?
Mr. Lane. It is so prevalent that we have had to develop
training materials for our people, when we teach our national
practices institute, on what they do when their power of
attorney is illegally bypassed.
Mr. Portman. It is covered in the Taxpayer Bill of Rights.
Mr. Lane. Absolutely.
Mr. Portman. But do you think that needs to be clarified,
or do you think it needs to be strengthened, or do you think
there needs to just be an emphasis on adhering to current law?
Mr. Lane. I think there ought to be monetary sanctions
against an employee who bypassed the power of attorney without
following the IRS manual procedures.
There are provisions in there to bypass when the
representative is being uncooperative.
Mr. Portman. Yes.
Mr. Lane. And they are supposed to go and get a letter
approved by their group manager. That letter is sent out to the
practitioner giving them one last chance to cooperate. Then
they go to--they have the right to go to the taxpayer.
They are not following that, and this emphasis on these
economic reality audits, financial status auditing, is what is
driving it. And the IRS is telling their agents to talk to the
taxpayers, get--talk to the taxpayers directly.
The case with Brian Hughes is an egregious example of this.
Mr. Portman. It seems like it.
Mr. Lane. This is happening every day.
Mr. Portman. Again, any other comments that people have on
the bypass, let us know. That is another issue we may want to
take up in addition to what is already in the legislation.
Mr. Kamman, thank you.
David Keating, as you know, is on the Commission and gave
us a lot of input for these 21 provisions. In fact, he was the
author of many of them, and I appreciate your additional
thoughts here. You would like us to go a lot further in some
ways, and one that I am interested in is the TAOs.
We had a discussion, as you know, earlier with Mr. Brown
where Mr. Brown and I were disagreeing over the requirement
that is in the legislation that a violation of the rules of the
IRS would be considered as part of hardship, and your point is
that it is hardship. I guess another way to look at that is
just to have that be a separate criteria. How do you feel about
that; in other words, have hardship be defined one way, maybe
in a more precise way for taxpayer hardship, but also have a
violation of internal rules as being another reason for a TAO
to be issued?
Mr. Kamman. One, I think it is clear from the language of
the proposed statute that these are factors to be considered. I
don't think there is any way a reasonable person could read
this and say that it is limiting the issuance of taxpayer
assistance orders. Sometimes I wonder if the people from IRS
are reasonable.
But if that is a concern, if that particular issue is a
concern, then just add a line saying this should not be
construed as limiting--as giving any legal limit in the manual.
Even if the manual is wrong, the taxpayer should be entitled to
have the enforcement agent follow it until the manual is fixed.
Mr. Portman. OK. Well, I think that is something again we
might want to talk to you about in terms of clarifying that
language, either the way you suggest or perhaps pulling out the
violation of a manual as one of the criteria.
Mr. Harris, again, I understand, has been a great supporter
of this whole effort, and you have given us some input today
with regard to the low-income taxpayer clinics which we will
get into in a second.
Ms. Olson, you made the suggestion, I think, in your
testimony that it be limited to taxpayers of 125 percent of the
poverty level. I just wonder how you come up with that
recommendation? And in your experience, are there a lot of
taxpayers at that income level, and how often are there
problems with the IRS?
Mr. Harris. I think our concern was the directing the
resources to the people who need it the most. Obviously, the
lower the income, the more difficulty they are going to have
affording any kind of representation. You know, the flip side
of it, of course, is that you would hope that most low-income
taxpayers are in a relatively simple situation and should be
able to resolve their disputes with the IRS without
representation.
It concerns me that low-income, simple-filing taxpayers are
having to use representation of any type to solve their
disputes. I would hope that the system would be able to
accommodate them easier. But it was really just an allocation
of resources, trying to make sure that the people who needed
the help the most got it as opposed to other people who maybe
could afford it aren't taking away the limited resources.
Mr. Portman. I would just suggest that based on the
Taxpayer Relief Act of 1997, there will be more, not less,
confusion because of the EITC and tax credit overlapping
provisions.
One other question for you, if I might. You recommended
that the IRS establish a new numbering system for tax
preparers. And as you know, the Commission looked at the issue
of registration, regulation, and so on. Do you support the
registration of all preparers? In our Commission
recommendations, in the legislation, we require regulation, but
not registration.
Mr. Harris. I have no problem at all with the regulation,
and I think to the extent that it can even accomplish this
goal, I just don't see why all people who are going to be
prepared to file a tax return can't send in a 1-page form with
their name and address and be issued some form of number other
than a Social Security number to put on that tax return. We do
it all the time with other people, and certainly I think anyone
who prepares tax returns should be on a level field with regard
to Circular 230. But I also think in return for that we should
be able to be issued some reporting number outside of our
Social Security number.
Mr. Portman. OK. Any other comments, Mr. Mares, others, on
the issue of registration versus certification?
Mr. Mares. Well, I think one of the issues that you can
look at with registration is, instead of registration of every
individual preparer, particularly for larger firms where you
are talking about several individuals who may have the ultimate
responsibility under Circular 230, whether or not there should
be registration of firms. This could ease administration.
For example, in our practice--as a matter of fact, I was up
here testifying on a day when some returns were due that had my
Social Security number on them, and it took some time and
effort to get those Social Security numbers changed.
Mr. Portman. Ms. Olson number two, I appreciate the
testimony on the support of the low-income provisions. Your
suggestion that it be publicized more, the issue as to who
controls funding, I think, are appropriate concerns for the
Subcommittee to look at for the final legislation.
In terms of the overall issue of representation of low-
income taxpayers, one of the issues we have run into is that
there may be some State limitations, like State bar
limitations, on representation. To your knowledge, nationally,
Virginia included, of course, have you run into any of these
concerns in developing clinics or setting up clinics? Is there
a need for uniform rules in this area?
Ms. Nina Olson. I think that each bar--State bar, the
difference within them is whether you can be an independent
501(c)(3), or do you need to be a licensed legal aid society in
representation?
The statutes for a licensed legal aid society are very--
they vary from State to State. I know of two States where an
organization ran into a problem with that. Connecticut is one.
But I don't know that they are insurmountable, and I do think
that that is a State issue. It deals with such--you know, such
things as the bar regulating itself as an agency of the State
and its members.
Mr. Portman. So you don't see the need for national
standards to be developed?
Ms. Nina Olson. No, I don't.
Mr. Portman. OK.
Mr. Winn, I know you have really answered the questions
that I have through your conversations with Mr. Johnson and in
our discussion prior to the hearing. I guess all I can say is
this seems to me to be a legitimate problem on the face of it.
Your proposal seems reasonable. Whether it fits into the
taxpayer rights section or not, I am not sure.
One of the concerns we have had is the potential
involvement of the Judiciary Committee because this may involve
some issues that relate to its jurisdiction.
And I may be the one that should answer this question for
you, but have you had an opportunity to look into that issue to
see whether there are other jurisdictional problems with this
kind of an approach outside of this Subcommittee?
Mr. Winn. No, I have not.
Mr. Portman. OK. Well, that is something that I will have
to look into. That is my job after all.
Thank you all very much for being here. I am going to
adjourn the hearing now. I will be around. If you have an
opportunity to stay around, I would like to talk to some of the
panelists. This hearing is adjourned.
[Whereupon, at 2:50 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

Statement of Mortimer M. Caplin, Caplin & Drysdale

My name is Mortimer Caplin and I served as Commissioner of
Internal Revenue from 1961 into 1964. For some 30 years I
taught tax law at the University of Virginia Law School, and
have represented clients on tax matters for over 40 years.
It would be unwise, as the IRS Restructuring Commission
recommends, to put control of the Internal Revenue Service into
the hands of an independent, mostly private-sector board of
directors--comprised of seven business and professional
executives, one IRS union representative and the Treasury
Secretary or Deputy Secretary. Such extreme experimentation in
virtually privatizing a basic government agency risks unhinging
a tax system that finances our government and is crucial to our
national commitment to balance the budget.
Legal and constitutional issues aside, board control on a
part-time basis is no way to run the IRS. A business style
corporate model just does not suit the administration of a
large government agency which, with over 100,000 career
employees, is called on year after year to collect $1.5
trillion in taxes, process 200 million tax returns and match
1.2 billion information returns. Indeed a General Accounting
Office study concluded: ``in practice, the board form of
organization has not proven effective in providing stable
leadership, [or] in insulating decisions from political
pressures.''
Raising taxes is not comparable to manufacturing widgets,
selling toothpaste or marketing financial services. In fact,
very few people like the product in the case of the IRS--one of
the real reasons why the agency is such a familiar whipping
boy.
The rare exception may have been Justice Oliver Wendell
Holmes who said that he liked to pay taxes. To him, it was the
price of civilization--the price we are called upon to pay for
the privilege of being a member of this democratic society. And
despite much grousing and groaning, Americans do a remarkably
good and honorable job in meeting this obligation.
Unfortunately, there will always be those who do not meet
their full tax responsibilities, thus shifting the costs of
government onto the backs of others. To see that they do, and
to assure fair treatment for everyone, the IRS must of
necessity carry out its enforcement role--whether by examining
tax returns, collection procedures or even criminal
investigations and prosecutions.
Difficult and unpopular as these monitoring tasks are, no
tax system will work without them--whether it be a flat tax,
unlimited savings account (``USA'') tax, national sales tax,
value-added tax or any other form of consumption tax. Moreover,
they are not the kind of tasks that typically concern corporate
board rooms. Nor are they the focus of credit card companies or
other financial institutions in their constant quest for new
accounts and enhanced earnings-per-share.
The IRS is not a ``for-profit,'' bottom-line business.
Like many other government agencies, it has had its share
of management errors and poor judgment. And major changes are
long overdue: improving education and services for taxpayers,
better training for employees, modernizing computer networks,
and greater efforts to simplify and streamline the entire tax
process--notwithstanding the impenetrable constraints imposed
by our unbelievably complex tax laws.
But only some changes are within IRS' own control; others,
like budgetary restraints and legislative changes, are solely
within the control of Congress. Tax returns unescapably mirror
the tax law, and until Congress takes serious steps to
eliminate complexities--preferences, exceptions, phaseouts and
backdoor financing of social and economic goals--tax returns
and tax administration cannot achieve simplicity.
Distorted ``Vision''

The proposed overhaul designed by the Restructuring
Commission and its statutory offspring (H.R. 2292 and S. 1096)
is deeply flawed. It would obscure the core focus of the IRS,
blur the lines of authority and hamstring improved efficiency.
The Commission proclaims as a ``guiding principle'' that
``taxpayer satisfaction must become paramount at the new IRS'':
its ``key recommendations are all geared toward making the IRS
more user friendly.'' Often found are the words ``customer''
and ``customer service,'' terms hardly descriptive of the true
relationship that exists between taxpayer and tax collector.
Topping it all off, the pending legislation asserts with a
straight face: ``The job of the Internal Revenue Service is to
operate as an efficient financial management organization.''
Is this a portrayal of the real tax world?
One searches hard in the Commission's report for emphasis
on citizens' responsibility to meet their tax obligations, on
the importance of improving voluntary compliance and on the
need for enforcement activities to assure that all are paying
their way.
And what about the law enforcement assistance IRS provides
to the Justice Department in combating organized crime,
narcotics trafficking and money laundering? Hardly work for an
``efficient financial management organization.''

Private Sector Control

It seems very clear that the privately-controlled board
will dominate IRS administration. Just about every major
managerial decision will require its endorsement: selection and
removal of the Commissioner; approval of top level appointments
and promotions; review of strategic and operational plans;
and--of key importance--approval of IRS budgets and allocation
of resources. And to underscore the importance of its role, the
proposed restructuring statute requires that the board's
version of the IRS budget be sent directly to Congress
``without revision.''
To add to its powers, the board will have its own staff
along with outside experts and consultants. One is reminded
that when former Supreme Court Justice (and former UN
Ambassador) Arthur J. Goldberg suggested a similar regime for
ordinary business boards, he was excoriated by hordes of CEOs
and board room brethren.
Power is like a magnet, and the wary and sensitive IRS
management team will undoubtedly be looking in many directions
to see who is truly calling the decision-making shots. All this
is aggravated by the void in the proposed statute concerning
the Commissioner's relationship and reporting responsibilities
vis-a-vis the Secretary of the Treasury.
Senator Charles Grassley conceives of this new body as ``a
real board with real independence, authority, and teeth.'' And
House Speaker Newt Gingrich wants it to be ``a real management
driven from the citizen level.''
But yet, the seven private-sector board members--as
``special government employees''--will still be able to keep
their outside jobs and salaries, and still be allowed to
represent private interests before any federal agency other
than the IRS. Will this satisfy the public that the tax law is
being administered in an impartial manner, free from any
conflicts?
Of major concern is the proposed legislation's diminution
of the Commissioner's role in tax law administration. No longer
would the Commissioner be a Presidential appointee confirmed by
the Senate. No longer would the Commissioner be actually in
charge of administering and managing the agency. Instead, prior
board approval would be required for each significant decision.
To leave no fissures in the oversight regime, the proposed
statute also obliges the Commissioner to ``convene'' a separate
Financial Management Group and to procure its advice on all
major financial management issues.
And what of the Commissioner's many real and symbolic roles
which are of such crucial importance to the sound operation of
our tax system: the leader and chief administrator of this
major governmental agency; the source of final administrative
appeals, ``the court of last resort;'' the IRS' nexus with tens
of thousand of tax professionals, lawyers and accountants, all
of whom are so vital to enhancing nationwide voluntary
compliance; and the IRS' chief communicator--in dealing with
the Congress and the President, in coordinating with the
Treasury in carrying out tax policy, and in negotiating with
foreign officials for better cooperation and improved worldwide
tax compliance?
The proposed legislation inordinately reduces the
Commissioner's position and standing at all these levels, much
to the detriment of the entire self-assessment system.

Reject Risky Experiment

The Commission's proposed administrative maze--coupled with
endlessly overlapping oversight by the GAO and a long string of
congressional committees and subcommittees--amounts to a
radical governance plan.
Let us not make this risky attempt to separate the
Treasury-IRS historic governmental ties, as the Commission
would. Tax policy and tax administration are inextricably
intertwined; and the intrusion of a part-time, business-
dominated board--controlling the selection and removal of IRS
Commissioners, as well as controlling IRS budgets and resource
allocations--threatens the sensitive balance in the basic
operation of our tax system.
Better that we first insist that Congress meet its
fundamental responsibility for ``simplifying the tax law
wherever possible''--making it more understandable, easier to
comply with, easier to reflect on a tax return, easier to
administer. Frequent changes in the law, with mountains and
mountains of added complexity, are at the very center of IRS
difficulties and taxpayer frustration.
And let us give the Treasury the opportunity to refine and
test its new initiatives, which call for strengthening
Treasury's oversight role, providing the IRS with more flexible
budgeting and management tools, making greater use of outside
computer and management experts, and placing heightened
emphasis on taxpayer education and service.
Already announced by the administration is the proposed
formation of a new ``watchdog entity,'' a citizen review panel
to perform an explicit oversight role and to advise the
Secretary of the Treasury on improving IRS' overall
administration of the tax law. Included is the formation of 33
local review boards--to monitor the actions of each IRS
district office and to coordinate their efforts with the work
of the new national citizen review body.
With the recent congressional and public focus on some of
IRS' failings, and with the publicized constructive steps now
underway, the IRS should be given the chance to institute
fundamental changes to serve the best interest of taxpayers and
the nation at large.

Portions of this testimony are taken from my Washington Post
Op-Ed piece, September 23, 1997.

Unsworn Statement of George Christian

Mr. Chairman, in commiseration with the uncounted thousands
of Americans abused at the hands of the IRS, I thank you for
this unprecedented opportunity to have my statement placed in
the record. I voluntarily make this statement under penalty of
perjury pursuant to 28 U.S.C. 1746. My wife and I also take
this opportunity to commend you for the courage to hold these
hearings in light of the tremendous fear that has been
expressed here by taxpayers, IRS employees, and even you, our
elected representatives. Although, we began this nightmare more
than twelve (12) years ago with a tax attorney, we necessarily
became pro se when our attorney David L. Snyder withdrew at the
suggestion of the Special Trial Judge Peter J. Panuthos, and
then sued us for approximately six (6) times the agreed upon
fee while our case was still pending.
Given the admitted abuses by the IRS, the apology of IRS'
Acting Commissioner Michael Dolan, for the first time in twelve
(12) years, My wife and I have hope that someone in government
will acknowledge that we have been targeted by the IRS under
the ``color of law,'' in deprivation of our civil and
constitutional rights. Given the testimonies of fear and abuse
expressed here by white Americans, I ask that you accept my
statement that:
Our file was illegally re-opened and we became targets of
the IRS only after it was discovered that we are African
Americans.
Prior to the discovery that we were African Americans, our
fully disclosed personal and business returns were examined and
closed without question or deficiency. This strongly suggests
that the same tax position taken by a white entrepreneur would
have been accepted as filed. Furthermore, we can document that
the IRS, against African American entrepreneurs, illegally and
maliciously fabricated a 1983 ``TEFRA'' partnership in
violation of 26 CFR 301.7701-1(c). The fabrication was
facilitated by the IRS fraudulently changing the date on a 1984
Georgetowne Sound/Christian-Hall distribution agreement and
then circulating that agreement to misrepresent partnership
activity in 1983. This TEFRA partnership was fabricated for the
purpose of circumventing the three (3) year Statute of
Limitations, but more tragically, for the purpose of depriving
vulnerable African American entrepreneurs of their right to
pre-deprivation litigation in the Tax Court. Accordingly, no
valid Statutory Notices of Deficiency were issued;
consequently, forced collections were made and many African
American families were destroyed or permanently damaged,
without any opportunity to be heard.
** Here, it must be noted that the IRS lied about the
existence of an abusive tax shelter. The fraudulent ``Abusive
Tax Shelter National Litigation Project'' was conceived without
the required Sec. 6700 penalty, and did not cover the disputed
1983 tax year. Therefore, because the IRS had little chance of
succeeding in Tax Court, it then conspired with the Tax Court
to deprive vulnerable African Americans of the rights afforded
every other American Citizen. Under the color of law, the IRS
then claimed that the partnership ``failed to file a return'';
thus, leaving open the limitations period forever. All of this
occurred after the statutory three (3) year period for
assessing these minorities had expired. **
I will not attempt to specify each of the many illegalities
we have suffered. However, I must state emphatically that no
legislation to reform the tax code, or to stop IRS abuses, will
be effective unless Congress acknowledges that the United
States Tax Court is necessarily an integral part of the illegal
abuses suffered by the American people. When we discovered that
the Tax Court and the IRS had illegally conceived a national
litigation project in violation of specific Congressional
guidelines pursuant to Sec. 6700 IRC and Rev. Proc. 84-84, we
became prime targets not only of the IRS, but the Tax Court as
well.
Arguably, any national tax litigation project may be found
unconstitutional even though properly conceived under strict
guidelines set by Congress. However, where those strict
guidelines mandated by Congressional Act are intentionally
violated, there can be no doubt as to the litigation project's
unconstitutionality. To support our position that the project
was unconstitutional, we challenge this committee, the judicial
committees, or any concerned entity, to examine our Tax Court
case and determine the validity of this entire administrative
and judicial process. We think you will find this process a
total sham.
The intentionally obfuscated record will show that the
Fourth Circuit Court of Appeals dismissed our appeal for
reasons unrelated to the merits of the case, but on the
technicality of filing the appeal late. However, the record
will also show that we did not intentionally delay the appeals
process, but were seeking to correct the ``record on appeal''
which was fraudulently edited to conceal an illegal,
unconstitutional conspiracy by the IRS and the United States'
Tax Court. Here it is very revealing to note that it took one
and one-half (1) years before the 4th Circuit decided our pro
se appeal was late, and that the Court did not have
jurisdiction to hear our allegations of fraud and
constitutional violations. TO THIS DATE, NO ONE WITHIN THE
GOVERNMENT HAS DENIED OUR ALLEGATION THAT THE TRIAL TRANSCRIPT
HAS BEEN CRIMINALLY EDITED.
Special Trial Judge Peter J. Panuthos was removed from our
case ``for cause'' after we alleged that he either directed the
editing of our trial transcript or, at the very least, had
personal knowledge of the fraudulent editing. In a mandamus
appeal to the U.S. 4th Circuit Court of Appeals, seeking not to
possess the original tapes but only unedited copies, we allege
that ST Judge Panuthos took possession of the court reporter's
audio tapes ``recorded as the sole record'' of our Tax Court
trial for the purpose of concealing the criminal actions of the
IRS attorneys Arnold Gould, Pamela S. Wilson, Rajiv Madan and
himself. The 4th Circuit concluded that mandamus action was too
extreme a measure and that I should seek my rights to the tapes
in some unspecified manner. To date, we are still unable to
verify the authenticity and accuracy of the trial transcript
for which we paid more than Two Thousand Dollars ($2,000). The
Judicial Conference of the United States, having jurisdiction
over courts of the United States, recommends that any ``court
reporter's audio tapes recorded as the sole record'' of the
trial should be made available for sale. However, unreasonably,
court reporter Ann Riley and Associates threatened to sue us
when we merely insisted on our right to purchase copies of the
original tapes. Why????
We specifically allege that ST Judge Peter J. Panuthos, IRS
attorneys Arnold Gould, Pamela S. Wilson and Rajiv Madan,
edited the testimony of IRS auditor Jacob Haas to conceal his
testimony. Under oath he admitted that he audited us and issued
deficiencies because he got a phone call from the IRS' New York
District Counsel office making that request. He also admitted
that because of that phone call he failed to inquire as to our
profit motivation or to check the validity of our personal
return.
We also allege that, IRS attorneys Arnold Gould, Pamela S.
Wilson, Rajiv Madan, and ST Judge Peter J. Panuthos criminally
conspired to conceal the editing of my personal un-rebutted
testimony. My testimony, supported by evidence, was that the
Georgetowne Maryland partnership was not a tax shelter and that
my sole proprietorship Electronic Services was in fact
profitable, as a direct result of the business activities of
Georgetowne Sound. All of this was illegally affected to secure
a ``lead case'' decision adverse to the many taxpayers
fraudulently ``herded'' into this national tax litigation
project conceived unconstitutionally in defiance of specific
Congressionally mandated guidelines.
To support our assertion that there was a conspiracy to
violate our rights, we direct the committee to the verifiable
fact that ST Judge Panuthos, for the single purpose of
hindering any subsequent effort to sue for redress in the
Maryland Courts, refused to grant our right to designate
Baltimore, Maryland as a place for trial. The designated place
of trial was properly filed by our tax attorney pursuant to Tax
Court Rule 140. We maintain that this deceitful opposition to
Baltimore as the designated place of trial, was self serving
and is an undoubted indication of the premeditated conspiracy
to violate Internal Revenue Law. The trial transcript will show
that we raised this issue and insisted that we have waived none
of the rights afforded us had the trial been held in Baltimore,
Maryland. We assert that the only reason for ST Judge Panuthos
to refuse to follow this very basic Tax Court procedure was to
provide a huge jurisdictional obstacle for us to file suit;
thus, legal immunity for the IRS attorneys and himself.
There is no way for us to know how wide spread are these
illegal conspiracies to violate taxpayers rights. We can only
say that we are currently suffering because we are one of the
``targets'' familiar to Revenue Agent Jennifer Long as she
bravely testified before this committee. After unsuccessfully
seeking the services of one former IRS agent, now tax attorney,
he responded with ``so they just raped you.'' As he then
quickly suggested that we forget it and file for bankruptcy, I
could not help but feel that he was too familiar with the
public ``raping'' by the IRS in the United States Tax Court.
As I was forced to defend my family pro se, because the IRS
tactics include running up the cost of attorneys' fees through
bogus delay due to ``legitimate'' case back load, and because
my attorney withdrew at the suggestion of ST Judge Panuthos, I
discovered a most disturbing fact. That is that tax attorneys
cannot practice before the Tax Court without certification by
the Treasury Department. What's wrong with this picture?? How
many Americans are aware that the tax attorney, on whom they
are so totally dependent, is himself dependent upon the
``parent'' agency of the IRS for his livelihood. Realistically,
what chance is there that an average tax attorney for a mere
fee of Five to Ten Thousand Dollars ($5000-$10,000) would risk
his livelihood by exposing an illegal conspiracy of the IRS in
the Tax Court? Answer this question in the context of the fear
that is exhibited here by IRS employees who come to this
hearing so afraid of reprisal that they must conceal their
identities before they testify to the United States Senate. It
is a fact; taxpayers stand a better chance of winning in the
District Courts rather than in the Tax Court. It is a dis-
service to the American people to call the United States Tax
Court the ``Peoples Court'' when the reality is an average tax
payer targeted by the IRS has no chance whatsoever to succeed.
Imagine going to the United States Tax Court and having the
``Judge'' rule that your former accountant, who prepared the
disputed tax return is not allowed to testify, even though he
is under subpoena to attend the trial. Or imagine that your
present accountant is not allowed to testify because he was not
the accountant of record for that one particular year. Imagine
that the Judge excuses IRS officials from a subpoena because he
deemed your case not significant enough to interrupt their busy
schedules. Imagine also, that the expert witness report which
you must have time to study for rebuttal is handed to you on
the day of trial in violation of Tax Court Rule 143(f) and the
Federal Rules Of Civil Procedure. Or imagine the charade as the
Tax Court Judge pretends to admonish the IRS attorneys because
they have failed to provide the perfunctory task of providing
you with copies of your administrative files because the files
just happen to be ``missing.'' We were intended, targeted
victims of all of these abuses and more.
Given the lawlessness of the IRS as exposed in the Senate
Finance hearing, the profound timidity of the tax attorneys
who, for all practical purposes are certified by the IRS, and
the failure of the Tax Court to uphold the law, you have the
problem before you. A taxing system that does not foster trust
and volunteerism, but instead has betrayed and entrapped the
American people. A system that provides the guilty with the
unlimited funds to abuse their victims and provides judicial
cover for those abuses in the United States Tax Court. You have
your work cut out for you.
If you are truly responsive to the American people, I
challenge you to publicly investigate our allegations. I ask
that you restore our rights as American citizens and give
public notice to the IRS, and the judiciary that the hideous
``Black Codes'' are forever banned.
Pursuant to 28 U.S.C. 1746, I state under penalty of
perjury that the foregoing is true and correct.
Date: September 30, 1997

Signed:
George Christian
U.S. Citizen/Taxpayer

Statement of Wallace M. Dillon, Jr., Blauvelt, NY

The 1% Freedom Fee for 1998

What Should Government Cost?

If what we paid for government were limited to what is fair
and adequate for the basic functions of government--to
establish Justice, insure domestic Tranquility, provide for the
common defense, promote the general Welfare,\1\ secure the
Blessings of Liberty to ourselves and our Posterity, and
without interference, to protect our privacy and rights to
property--no one could have a valid objection to the cost. The
legitimate function of government is protection!
---------------------------------------------------------------------------
\1\ Take notice this says promote Welfare, not provide Welfare.

---------------------------------------------------------------------------
What should each of us pay?

Life, liberty and property are worthless without government
protection and there is an equitable way to pay for that
protection.
We can divide the cost of providing protection so that
everyone pays their fair share. All life and property are
acquired through a trade; a price is paid for whatever is
traded. If we divide total government expenses in a year by the
total annual value of all trade, we would define the percentage
of trade that would finance the cost of government for a year--
and if each trade paid that same percentage toward the support
of government, we would all be paying our share, equitably and
fairly--producing the revenue the government takes now with
taxes, except we would no longer need those taxes. That's
exactly what the Freedom Fee will do when it becomes law and
replaces all forms of taxation! It's a Trade Charge based on a
small percentage \2\ of the total trade retail, wholesale, and
commercial on all goods and services.
---------------------------------------------------------------------------
\2\ Studies show that 2% maximum would cover all Federal, State,
and local revenue requirements. In our examples we will use 1% for the
new state and local tax rates.
---------------------------------------------------------------------------
Annual trade in this country can be calculated fairly
accurately by adding up all the checks paid in a year. In the
banking industry, that simple sum is called ``debits.''.. the
total amount of checks cashed by the banks.\3\
---------------------------------------------------------------------------
\3\ What about cash purchases, goods and services bought with paper
and coin money and not with checks? These purchases are sizeable, of
course, but remember some checks are not purchases. When you write a
check to get cash, or to transfer money from one account to another,
that is not a purchase. You haven't traded anything and there should be
no trade charge for government services. The two--the transfer checks
and the cash purchases--could easily cancel each other out, so we will
consider just the checks cashed, the debits.
---------------------------------------------------------------------------
Debits, according to the Federal Reserve Bulletin dated
December 1994 are running about 360 trillion dollars a year and
the cost of Federal Outlays are about 1.5 trillion dollars a
year. Now divide the $1.5 trillion cost of government by the
$360 trillion to determine the percentage each of us should pay
to support the government in a fair and equitable way. That
fair share is just over 4 tenths of one percent!
Now you can see that a tax based on 1% of Trade is not only
adequate, it is too much! That's why there is a cap on it to
prevent exceeding 110% of taxes. It is a fair and equitable way
to pay for government service. No one gets a free ride and no
one gets gouged. It's a Freedom Fee ... and everyone is a
winner ... and protected. The Freedom Fee!

Tax Definitions

Value-Added Taxation (VAT) (Rep. Gibbons proposal)

In a value-added tax, the tax base consists of the total value
added by all firms. Stated less abstrusely, value added is measured
simply by the total sales of a company's products or services less the
cost of all its purchases from other firms subject to the tax.
It is usually calculated by applying its tax rate to a company's
sales with a credit against its taxes for the taxes shown on the
invoices for all its purchases.\4\ Value-added taxes, usually 15%-20%--
and usually added on top of other taxes--only affects goods, not
services. This additional tax is passed along to consumers in the form
of increased prices.
---------------------------------------------------------------------------
\4\ ...from Encyclopedia of Economics, by Douglas Greenwald,
McGraw-Hill 1982
---------------------------------------------------------------------------
(Note--This is but a different way of camouflaging an income tax
... a tax which is imposed on our productivity and our gains from our
enterprise. It punishes enterprise and producers--it rewards parasites
and encourages welfare.)

Sales Taxes

Familiar mostly as the state and local taxes we pay on sales of
selected goods and services at one or more stages of distribution.
These taxes are paid in addition to all others taxes, fees and
surcharges. For example:
the tax may be levied on the sale of a commodity every
time it changes hands. Such a tax is commonly called a turnover or
transaction tax;
or the tax may be levied on the sale of a commodity only
upon its transfer of ownership at one particular time--thus, only the
sale of manufacturers may be taxed when those sales represent completed
products; only the sales of wholesalers may be taxed when goods pass
into the hands of retailers; or only retail sales may be taxed as the
goods pass into the hands of consumers.\5\
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\5\ ...Dictionary of Economics Sloan and Zurcher.
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Tax Reform Proposals

The ``Freedom Fee'' (Based on a Trade Charge)

The Freedom Fee replaces all other revenue sources. In
their place, we pay a small percentage of every purchase to
support our state and federal governments--1% to each is fair
and adequate. The Freedom Fee is simple. All citizens will save
money--individuals and businesses of all classes. Income will
no longer be in the equation nor shall it be of any concern of
government; the IRS can be eliminated. Our property and wealth
will be protected, and we will regain our privacy.
The cleanest, and perhaps the only way to implement this
reform is by way of Federal and State Constitutional
Amendments. A draft of a State Freedom Fee Amendment is
included along with a fuller description of the Freedom Fee
Plan.
(The following proposals need further examination and
definition)

National Sales Tax, Federal (Sen. Lugar proposal)

This proposal would eliminate the federal income tax and
abolish the IRS. States would collect, and forward to the
government, a 17% national retail sales tax on goods and
services. Purchase of homes and investment securities would be
exempt. Annual federal tax returns would be eliminated. The
National Sales Tax would be paid in addition to state and local
income taxes as well as all other federal, state, and local
taxes, fees, and surcharges.

Consumption Taxes

Tax base and rate are unclear--believed to replace FIT
only--is collected in addition to all other federal, state, and
local taxes.

The ``Flat Tax'' (Rep. Dick Armey proposal)

Fundamentally, a tax on income based on a 20% \6\ flat rate
after allowing for certain exemptions. It has the advantage of
simplicity for individuals and reduced complexity for
businesses. The Flat Tax would be paid in addition to state and
local income taxes as well as all other federal, state, and
local taxes, fees, and surcharges.
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\6\ ...after 3 years, the rate would drop to 17%.
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Q&A

Isn't ``Trade Charge'' a tax?

A tax is what the government says you have to pay. A Trade
Charge is what We the People, the voters, tell the government
what we are willing to pay. The difference is--a Trade Charge
is democratic, while taxes are dictatorial.

Is 1% enough money?

Actually, the 1% Trade Charge will generate too much
revenue. That is why the Trade Charge is limited to 110% of all
existing taxes. See Appendix A. [..need to develop explanation
for Federal and State--each participating in a 1% Freedom Fee
by way of their own Constitutional amendments.]

How will the 1% Trade Charge affect you?

You will be paying your state 1% instead of 20% (average
state taxes). There is no charge on income. You pay the trade
charge based only on what you spend. You will never have to pay
property, sales, income, or any other state tax again. (The
same rationale applies to Federal taxes. See Appendix B.)

Who will pay the 1% Trade Charge?

Only the buyer pays. That means everyone who makes
purchases for goods or services of any kind--wholesale, retail,
money-market, loans, stocks, rents, leases, imports,
investments, manufacturing, distribution, transportation,
utilities,--pays the trade charge on everything purchased.

Won't I pay Trade Charge on top of Trade Charge?

Taxes pyramid now! When you buy a loaf of bread you are
paying the tax for the farmer, the miller, the baker, the
storekeeper and everyone connected with producing and
distributing that loaf. The difference is that now we pay about
20% more for hidden taxes. A dollar loaf of bread has about 20
cents tax in it. Under the Trade Charge, the rate is only 1%.
The accumulated charges cannot be more than about 3% if
everyone passes the Trade Charge along to the next person in
line. Certainly the Trade Charge is better!

How is the Trade Charge collected?

The buyer pays it to the seller and the seller turns it in
to the government. Stamps will be available for payment of
Trade Charges for private purchases.

Can legislatures take funds from schools, roads, etc?

No. The 1% Trade Charge Initiative sets up 1998 as a base
year. All government agencies that get money in 1998 must get
money thereafter according to section 18 of the (State) Freedom
Fee Initiative.

Will the 1% Trade Charge really save me money?

You be the judge. Use the forms in Appendix C. One is for
individuals, another for businesses. Fill in all your taxes.
Don't forget the hidden taxes you pay for other people. Notice
the difference!

Consequences & Comments

If fully implemented in first year, the trade
charge would produce a federal surplus approaching a trillion
dollars.
With two-year implementation period, deficit spending could
be eliminated within three years--and the national debt paid
off in five years.
For every year implementation is delayed (while debating
and testing other alternatives) at least a trillion dollars is
lost--forever--not to mentioned the additional interest paid
for maintaining the debt burden.
Lobbying for tax breaks, loop holes and shelters
has become a monstrous industry in itself, targeting every
politician for special considerations and aborting the entire
campaign finance and legislative processes.
Milton Friedman agrees with me in identifying
those who will be among the opponents to the Freedom Fee, and
that's why ``they'' must be told what plan We the People want--
not what ``they'' want/need to survive as a species. So--We
design and they, our representatives support us . . . by
implementing the People's plan!
This is only plan where an individual's wealth can
grow, even on a low, fixed income. Economy grows ... Savings
grow.
Only plan where increased spending in private
sector also provides more revenue for supporting government
operations, without pain or sacrifice, without pitting class
against class. It destroys use of envy and divisiveness as
tools to justify arbitrary social reforms and increasing taxes
to increase government encroachment.
Cuts compliance burden, direct and indirect by
more than $ 700 billion according to Cost of Government Day
1997 studies.
Eliminates IRS bureaucracy--a larger economy can
absorb the ``down-sized'' in the producer sector, out of the
parasitic burden.
Eliminates many of the debates currently raging in
Congress, and the media, about how, and where, and how much to
change depressingly complex existing legislation. With passage
of the Fair Tax, those issues and debates become either moot or
irrelevant.
I believe that it can be substantiated that most
loss of jobs, and industry migration, can be traced to business
``survivors'' adjusting to the increased burden of government
interference and regulation adding to cost of doing business.
Stealing their profits is dangerous for their health. Let 'em
fail, or succeed ... on their own!

Benefits

Makes the funding of government equitable for all!
You pay exactly your share of the cost of
government--not a penny more nor less.
Brings in adequate government revenue.
Stops deficit spending.
Make government affordable.
Pays you a dividend if you vote.
Disables government interference in the free
marketplace.
Prohibits new taxes.
Simplifies government funding.
Reduces cost of collecting funds.
Eliminates IRS bureaucracy.
Cuts compliance burden--direct and indirect.
Self-regulating law.
Only plan where wealth can grow--even on a fixed
income.
Restores opportunity ... most jobs are lost due to
government interference in free market, increasing the cost of
doing business.
Only plan where increased spending in private
sector automatically provides more revenue to support
government functions.
As economy grows, savings grow.
Eliminates many of the heated debates about how
and where and how much to change existing legislation. With
enactment of Freedom Fee, they become either moot or
irrelevant.
Restores privacy. Government shall have no right--
nor access--to information regarding our income and wealth
...how much, how we came by it, where we keep it, or what we do
with it.

It Will Eliminate All of the Following:

Property Taxes
Income Taxes
Sales Taxes
Selective Sales Taxes
Gasoline Taxes
School Taxes
Vehicle Registration Fees
Gross Receipt Taxes
Corporation Taxes
Utility Taxes
Insurance Taxes
Tobacco & Alcohol Taxes
Severance Taxes
All License Fees
Building permit Fees
Driver's License Fees
Inheritance Taxes
Sewer Taxes
Street Taxes
Interest Taxes
Special Assessments
Bed Taxes
Toll Road and Bridge Fees
Government Parking Fees
Trash & Collection Fees
Park and Beach Fees
... among others

The following Charts, Tables, Examples of Comparative
Outcomes, and References--integral parts of the Freedom Fee
Proposal--were omitted due to space restrictions. However, to
understand the benefits of this plan they are essential as
references to data sources and for demonstrating, by example,
how the Freedom Fee will operate.
The complete set of these references, charts, and
worksheets are available for downloading on the Freedom Fee's
Homepage on the Internet Web: http://www14.pair.com/samrigel/
taxing.htm ...and a link may be found also on Liberty Matter's
homepage: http://www.libertymatters.org
Estimated Government Revenue Based on 2% Trade
Charge
Trade Charge Revenue by State
Example: Trade Charge vs Income-based System for
$6.50/hr wage earner
Sample Worksheet for Reader--Trade Charge vs
Income Tax
Example: Trade Charge vs Income-based ``Flat Tax''
Sample Worksheet for Reader--Trade Charge vs
``Flat Tax''
Example: Trade Charge vs Sales Tax
Example: Projected Trade Charge--a large
manufacturer (Ford)

Statement of the Price Waterhouse LLP, Interest Netting Coalition

Price Waterhouse LLP, on behalf of a group of companies,
appreciates the opportunity to respond to the Chair's request
for comments on ways to strengthen taxpayer protections and
rights in dealings with the IRS. We commend the Oversight
Subcommittee for examining these issues in its review of
recommendations by the National Commission on Restructuring the
Internal Revenue Service, embodied in legislation (H.R. 2292)
introduced by Reps. Rob Portman (R-OH) and Ben Cardin (D-MD).
Our statement focuses on IRS policies regarding the netting of
interest on tax overpayments and underpayments--an issue that
goes to the heart of fair treatment of taxpayers and sound tax
administration.

The Problem

The issue of interest netting became important after the
Tax Reform Act of 1986, which imposed a higher rate of interest
owed to the government on underpayments than on interest owed
to taxpayers on overpayments. This rate differential has twice
been increased for corporations, first by the Omnibus Budget
Reconciliation Act of 1990 and again by 1994 GATT
implementation legislation. The current interest rate
differential for corporations is as large as 4.5 percent.
This differential penalizes taxpayers during periods of
``mutual indebtedness''--i.e., where a taxpayer owes debit
interest on a deficiency and at the same time is allowed credit
interest on a separate overpayment. During these periods,
taxpayers may owe interest to the government even though they
have no net tax liability for that time. Given the large sums
involved in determining corporate income tax liabilities and
the difference between the overpayment and underpayment rates,
the potential cost to taxpayers in these situations can be
significant.
A simplified example helps to illustrate the impact of the
interest rate differential on taxpayers. Assume that a taxpayer
in 1996 is audited on its 1992 tax year and is found to have a
$1 million overpayment, which the IRS refunds, plus interest at
the overpayment rate, on June 30, 1996. Assume that the
taxpayer in 1997 is audited on its 1993 tax year and is found
to have a $1 million underpayment, which it pays, plus interest
at the deficiency rate, on June 30, 1997. In this example, the
period of mutual indebtedness is March 15, 1994 (the due date
of the 1993 tax year return), through June 30, 1996 (when the
1992 tax year's overpayment was refunded). Although the
taxpayer owes the IRS the same amount it is owed by the IRS
during this period, the taxpayer is subject to an interest
charge--i.e., the difference between the overpayment and
underpayment rates.

IRS Position, Consequences

For purposes of determining interest, the IRS currently
will net underpayments and overpayments within a single tax
year (referred to simply as ``netting'') and where taxpayers
have outstanding underpayments and overpayments for different
years (referred to as ``offsetting''). However, in situations
involving more than one tax year, the IRS takes the position
that it will not perform netting for periods of mutual
indebtedness where either the overpayment or underpayment
already has been satisfied by refund or payment (referred to as
``global interest netting'').\1\ In the example above, the IRS
would not take into account the 1992 tax year overpayment for
purposes of determining interest to be charged on the 1993 tax
year deficiency. This is because the 1992 refund already has
been paid at the time interest is determined for the 1993 tax
year.
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\1\ The IRS's position on global interest netting was the subject
of litigation in Northern States Power Co. v. United States, 73 F. 3d
764 (8th Cir.), cert. denied, 117 S.Ct. 168 (1996).
---------------------------------------------------------------------------
Perversely, the government's refusal to perform global
netting creates a strong incentive for taxpayers to delay
closing accounts. In the example above, the taxpayer could
minimize the impact of the interest rate differential by
waiting to close the 1992 tax year until the IRS's audit of the
1993 tax year was completed. By the same token, taxpayers have
an incentive to delay payments of deficiencies as long as
possible if there is a possibility of a subsequent
determination that a separate tax overpayment might run
concurrently with the underpayment. Thus, the IRS's current
policies discourage prompt payment of deficiencies. Ironically,
this can have a negative impact on the stream of federal
revenues.

Congressional Mandate, Treasury Response

When it first enacted an interest rate differential,
Congress recognized that taxpayers should not be subject to an
interest cost during periods of mutual indebtedness. The
Conference Report to the Tax Reform Act of 1986 called on the
IRS to implement ``the most comprehensive netting procedures
that are consistent with sound administrative practice.'' \2\
Congress repeated this call each time it subsequently increased
the interest rate differential (i.e., in both the Omnibus
Budget Reconciliation Act of 1990 and 1994 GATT implementation
legislation). Congress in the ``Taxpayer Bill of Rights II,''
enacted in 1996, expressed concern that the IRS had failed to
implement comprehensive interest netting procedures and called
on the Treasury Department to study and report on these issues.
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\2\ H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess., 1986-3 C.B.
(Vol. 4) 785.
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In its April 1997 report back to Congress,\3\ Treasury
concludes that global interest netting would be consistent with
the intent expressed by Congress. Treasury explains that the
IRS has not adopted global netting procedures because of
administrative difficulties involved and because of uncertainty
over whether it has the statutory authority to perform such
procedures. The report concludes that legislation authorizing
global netting procedures would be ``appropriate.'' \4\
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\3\ Report to the Congress on Netting of Interest on Tax
Overpayments and Underpayments, Department of the Treasury, Office of
Tax Policy, April 1997.
\4\ Id, at 2.
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In conjunction with the study, Treasury outlined a global
netting proposal as part of a proposed ``Taxpayer Bill of
Rights 3'' initiative unveiled by the Administration on April
14, 1997. Under the proposal, interest on income tax
overpayments and underpayments would be equalized where a
taxpayer reasonably identifies and establishes an overlapping
period of mutual indebtedness to the extent of, and for the
time of, the overlapping amount. As a result of revenue
concerns, Treasury proposed a prospective effective date--
netting would be allowed only for periods of mutual
indebtedness occurring after the date of enactment.
The Price Waterhouse Interest Netting Coalition applauds
the Treasury global netting proposal. We believe legislation is
a prudent means of resolving more than ten years of dispute in
this area and perhaps unanswerable questions over statutory
authority to perform global netting. We also believe Treasury's
recommended mechanism for implementing global netting--i.e.,
placing the burden on taxpayers to identify applicable periods
of mutual indebtedness--strikes a reasoned balance between the
needs of taxpayers and concerns over the IRS's ability to
administer global netting procedures.
We do have concerns over some aspects of the Treasury
proposal. Foremost, we believe global netting should be allowed
for any post-1986 tax years that remain open under the
applicable statute of limitation. Failure to apply global
netting to past periods of mutual indebtedness would leave in
place an impediment to efforts to close these years and ``get
current'' on audit cycles. Moreover, retroactive application
would be consistent with the stated intent of Congress when it
enacted an interest rate differential. We also see no reason
why the global netting proposal should be limited to income
taxes. Global netting is equally appropriate, and just as
administrable, with respect to excise and employment tax
overpayments and underpayments.

Action under H.R. 2292

The Price Waterhouse Interest Netting Coalition believes
the issue of global interest netting is plainly germane to the
current legislative initiative to restructure the IRS and
strengthen taxpayer protections in their dealings with the
Service. Indeed, we note that section 309 of H.R. 2292 includes
a proposal to eliminate the interest rate differential
altogether, which would obviate, going forward, the need for
global interest netting. We support this proposal. However, in
the event that such a proposal is not adopted by the Ways and
Means Committee, we strongly would urge members to consider
authorizing global interest netting procedures along the lines
of the Treasury proposal.
We have now reached a point where all sides--Congress, the
Administration, and taxpayers--are united in the view that
global interest netting is justified and administrable. We
believe legislative action should be taken now. Taxpayers stand
ready to continue working with Congress and Treasury to reach
final resolution of this issue.

Statement of the Securities Industry Association (``SIA'')

The Securities Industry Association (``SIA'') appreciates
the opportunity to submit written testimony on the
recommendation of the National Committee on Restructuring the
IRS.
The SIA brings together the shared interests of about 700
securities firms throughout North America to accomplish common
goals. SIA members--including broker-dealers, investment banks,
specialists, and mutual fund companies--are active in all
markets and in all phases of corporate and public finance. Many
of these firms are small businesses that affiliate with
entrepreneurs who provide financial planning and/or accounting
services as well as stock brokerage services. In the United
States, SIA members collectively account for approximately 90
percent, or $100 billion, of securities firms' revenues. They
manage the accounts of more than 50 million investors directly
and tens of millions of investments indirectly through
corporate, thrift, and pension plans.
SIA commends Chairman Archer and all the members of the
Committee for holding these extensive hearings on the
recommendations of the National Commission on Restructuring the
IRS. We also want to take this opportunity to commend the
members of the Commission for a job well done.
The securities industry plays a very important role in the
tax filing process providing taxpayers with information that
enables them to file timely and accurate returns. We also
provide the IRS with similar information that enhances the
ability of the agency to administer the federal tax laws. We
firmly believe that the tax filing process could be
substantially improved by changing the current information
return deadline, which would benefit both taxpayers and the
IRS. We urge the Committee to thoroughly review the process and
timetable for delivering information returns.

Role of Securities Firms In Tax Filing Process

The securities industry is a major filer of information
returns, providing returns each year to 50 million investors.
The firms in our industry pride themselves on their track
records for accuracy and timeliness. Nevertheless, there are a
number of factors that contribute to the need for payers to
file amended and corrected returns after the original due date.
Amended and corrected returns are a processing and compliance
nightmare, which cost taxpayers, financial firms, and the
Service a tremendous amount of money, time, and effort.
The most significant contributing factor is the tight time
frame that information must be processed and provided to
taxpayers. Even under optimal circumstances, it is difficult to
meet the current deadlines. While payers have until January 31
to mail information returns to payees, most large firms must
cease processing on or about January 15. This is necessary to
ensure sufficient time to print, insert and mail millions of
consolidated information reporting forms by the required mail
date. Since this information is not available before year end,
it does not leave a lot of time to review the integrity of the
information being sent. If processing problems arise, and they
frequently do, securities firms have little time to correct
such problems, before they are required to provide amended and
corrected returns.
Secondly, the financial information required to be reported
is not only generated internally, it is collected from outside
sources. The most significant outside information relates to
the characterization of distributions from Regulated Investment
Companies (RICs) and Real Estate Investment Trusts (REITs).
Income classifications (e.g., capital gain versus ordinary
dividend) are normally not available from the companies
themselves until the second week in January, leaving very
little time to process. Moreover, these initial
classifications/allocations are frequently wrong, causing
mutual funds and securities firms alike to file amended returns
with their shareholders and investors.
Classification information is not only limited to REITs and
RICs, but extends to corporations as well. Corporations may
also change the taxability of their distributions due to
insufficient earnings and profits or other corporate actions
(e.g., taxable mergers, exchanges, spinoffs and other
reorganizations). Again, the securities industry is at the
mercy of these companies to provide this tax reporting
information during the first two weeks of January. If such
firms fail to provide this information, corrected and amended
returns must be sent to payees and the IRS.
Finally, the information that is provided from outside
sources is provided on paper, and not in a uniform format. Once
received, securities firms must take the information, format
it, create computer readable files to analyze, and use the
information in preparing Forms 1099. While the securities
industry has worked with other industry groups and vendors to
provide a standardized flow of information, the result has been
less than perfect. Consequently, this limitation adds further
stress to a process that is already overburdened.

Need To Change Information Return Deadline

Beginning with the Revenue Act of 1962, payers have been
required to provide information returns to the Service and
payees. Since then, information reporting requirements have
exploded in scope and complexity. Most recently, for example,
the Tax Reform Act of 1997 required that capital gain
distributions from RICs and REITs be classified for 1997 as
either long term, mid-term, and unrecaptured Section 1250
capital gains. Obtaining this information from all RICs and
REITs, and developing a means of effectively conveying this
information to the investors, will be a tremendous challenge,
since current 1099 Forms do not accommodate this type of
information.
While reporting requirements have increased, so too have
the number of taxpayers receiving the information. For example,
the total number of mutual fund shareholder accounts increased
from 24.6 million in 1983 to 151.0 million in 1996. In light of
the ever increasing complexity of reporting, increasing numbers
of investors, and time frames for providing information that
are already inadequate, there is little doubt that if the
deadline for providing returns is not extended, the trend
towards amended and corrected returns will continue.

Recommendation

Accordingly, the SIA recommends that Congress facilitate
the flow of timely and accurate information returns to
taxpayers and the Service by changing the mailing date of Forms
1099 to February 15 from January 31, and the filing due date to
the Service from February 28 to April 15. This recommendation
is consistent with the proposal contained in the National
Commission on Restructuring the Internal Revenue Service. These
changes in the mailing and filing dates would dramatically
reduce the numbers of amended and corrected returns provided to
taxpayers and the Service, since payers will have more time to
ensure the integrity of the information provided. This
reduction in corrected returns will enable taxpayers to file
their tax returns correctly the first time, instead of having
to file amended returns in order to ``get it right.''
Similarly, such a reduction will minimize the number of IRS
inquiries due to mismatched income amounts, as well as reduce
the processing that multiple tax filings require of the IRS. In
short, such a change will save taxpayers, financial firms and
the Service, a great deal of time, money and confusion, and
make the entire process more efficient.