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



 
    ANNUAL REPORT OF THE INTERNAL REVENUE SERVICE TAXPAYER ADVOCATE

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 25, 1997

                               __________

                             Serial 105-28

                               __________

         Printed for the use of the Committee on Ways and Means


                               


                      U.S. GOVERNMENT PRINTING OFFICE
 49634 cc                    WASHINGTON: 1998


                      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 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.



                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 13, 1997, announcing the hearing............     2

                               WITNESSES

Internal Revenue Service:
    Hon. Lee Monks, Taxpayer Advocate; accompanied by Tom 
      Tiffany, Executive Assistant...............................     7
    Hon. Fran Romano, District Taxpayer Advocate, Connecticut/
      Rhode Island District, Hartford, Connecticut...............    86
    Hon. Tom George, District Taxpayer Advocate, South Texas 
      District, Austin, Texas....................................    90
    Hon. Louis Romito, Associate Taxpayer Advocate, Pennsylvania 
      District-Pittsburgh, Pittsburgh, Pennsylvania..............    94
    Hon. Elayne M. Goldstein, District Taxpayer Advocate, Midwest 
      District, Milwaukee, Wisconsin.............................    98
    Hon. Jeanne Williams, District Taxpayer Advocate, North 
      Florida District, Jacksonville, Florida....................   101

                                 ______

                       SUBMISSION FOR THE RECORD

American Institute of Certified Public Accountants, statement....   117



    ANNUAL REPORT OF THE INTERNAL REVENUE SERVICE TAXPAYER ADVOCATE

                              ----------                              


                       TUESDAY, FEBRUARY 25, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:11 p.m., in 
room B-318, Rayburn 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
February 13, 1997
No. OV-1

                    Johnson Announces Hearing on the

                     Annual Report of the Internal

                   Revenue Service Taxypayer Advocate

    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 on the first Annual Report to Congress 
from the Internal Revenue Service (IRS) Taxpayer Advocate. The hearing 
will take place on Tuesday, February 25, 1997, in room B-318 Rayburn 
House Office Building, beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be heard from invited witnesses only. 
The Subcommittee will receive testimony from Lee Monks, the IRS 
Taxpayer Advocate, and from several IRS District Office Taxpayer 
Advocates who work on the front lines trying to resolve taxpayers' 
problems. 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.
      

BACKGROUND:

      
    Last year, Congress enacted the Taxpayer Bill of Rights 2 (TBOR2) 
(P.L. 104-168), which expanded upon existing safeguards available to 
taxpayers in their dealings with the IRS enacted in 1988 in the 
original Taxpayer Bill of Rights. Among other things, TBOR2 required 
the IRS Taxpayer Advocate to make an annual report to Congressional 
tax-writing committees identifying the initiatives undertaken by the 
Taxpayer Advocate in the previous fiscal year to improve taxpayer 
services and IRS responsiveness. The report would also have to identify 
the 20 most serious problems taxpayers experience in their dealings 
with the IRS, and to recommend appropriate administrative and 
legislative actions to address such recurring problems.
      
    The IRS created the Problem Resolution Program (PRP) in 1976 in an 
effort to better assist taxpayers in cutting through ``red tape'' and 
more quickly resolve tax disputes. In 1979, the IRS created the Office 
of the Taxpayer Ombudsman, an executive level position on the immediate 
staff of the IRS Commissioner, to head the PRP organization. The 
Taxpayer Ombudsman's chief responsibility was to serve as the primary 
advocate, within the IRS, for taxpayers.
      
    Throughout the Taxpayer Ombudsman's existence, the position has 
been held by a career civil servant selected by the IRS Commissioner. 
In response to a perception that the Taxpayer Ombudsman did not have 
sufficient stature and authority within the IRS to be an independent 
advocate for taxpayers, TBOR2 elevated this position within the IRS, 
renamed it the ``Taxpayer Advocate,'' and increased the Taxpayer 
Advocate's legal authority to intervene on behalf of taxpayers. Along 
with giving the Taxpayer Advocate expanded powers, Congress also wanted 
to exercise more oversight over how the Taxpayer Advocate was 
administering the PRP. Therefore, TBOR2 required the Taxpayer Advocate 
to make the above mentioned annual report to Congress.
      
    In announcing the hearing, Chairman Johnson stated: ``As taxpayers 
sit down to prepare their 1996 income tax returns, I want them to know 
that Congress is proactively examining ways to improve the quality of 
IRS' customer service. The Taxpayer Advocate's Annual Report is one 
means of helping us to identify and understand the most frequent 
problems taxpayers face in their dealings with the IRS, and to develop 
improvements to minimize the frictions that often occur between 
taxpayers and the nation's tax collector.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the details of the Taxpayer Advocate's 
``Annual Report to Congress'' covering fiscal year 1996, to identify 
what further administrative and legislative actions may be appropriate 
to reduce the burdens taxpayers experience in transacting business with 
the IRS.
      

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) 
copies of their statement and a 3.5-inch diskette in WordPerfect or 
ASCII format, with their address and date of hearing noted, by the 
close of business, Tuesday, March 11, 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:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    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 202-225-1904 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. Good afternoon. The hearing will come to 
order. My apologies to my colleagues for being detained at the 
hearing of the Health Subcommittee, which went on a good deal 
longer than we thought.
    I want to welcome you all, though, to this first Oversight 
Subcommittee hearing of the 105th Congress. We have a 
challenging agenda ahead of us this year and we believe that by 
digging into it right off the bat, we can make a real 
difference in people's lives.
    Today's hearing is a good example of how we can help our 
constituents by working to improve the operation of the Federal 
Government. Congress and the executive branch have a long 
history of working together to try to solve taxpayers' 
problems, to help taxpayers with their disputes with the IRS. 
The IRS established a Problem Resolution Program in 1976 which 
was headed by a Taxpayer Ombudsman. While this effort is 
commendable, there are limits to what the IRS can do for 
taxpayers, based on its administrative authority. The really 
meaningful taxpayer safeguards usually require changes in the 
law and this is what happened in the original 1988 Taxpayer 
Bill of Rights and last year's sequel, the Taxpayer Bill of 
Rights 2, or TBOR2, as we call it.
    Congress passed TBOR2 in July 1996. It improved the 
procedural rights of taxpayers in dealing with the IRS. For 
example, it gave taxpayers who prevail over the IRS in court 
the upper hand in getting their attorneys' fees reimbursed by 
the IRS. It required the IRS to make reasonable efforts to 
corroborate the accuracy of disputed information. It also gave 
the IRS the legal authority to abate interest on tax 
deficiencies and to return improperly seized property to the 
taxpayer.
    None of these provisions is flashy or glamorous, but 
frankly, these are the type of nitty-gritty details that can 
make a taxpayer miserable or happy, bankrupt or solvent when he 
or she has a dispute with the IRS. So in the individual lives 
of people with problems, these changes make a dramatic 
difference.
    But TBOR2 did more than just enact several dozen procedural 
safeguards for taxpayers. It strengthened the IRS' own 
administrative program for helping taxpayers. It established 
the position of Taxpayer Advocate within the IRS to replace the 
Taxpayer Ombudsman. It increased this office's legal authority 
to help taxpayers. But along with this increased authority, 
Congress also wanted increased accountability. Therefore, TBOR2 
requires the Taxpayer Advocate to submit an annual report to 
Congress.
    The annual report is supposed to summarize the activities 
of the Taxpayer Advocate for the preceding fiscal year. In 
particular, it is to discuss the top 20 problems which 
taxpayers are experiencing in dealing with the IRS as well as 
providing recommendations on how to address these problems 
either through administrative or legislative changes.
    Therefore, the annual report should pinpoint where 
taxpayers are experiencing the most serious problems with the 
IRS and present us with possible legislative changes that might 
address these problems.
    As taxpayers begin filling out their 1996 Federal income 
tax returns, we should continue to try to make the experience 
as smooth as possible, not one necessarily enjoys, as few enjoy 
paying taxes, but the operational mechanics of obeying the law 
to be as user friendly as possible. I hope that the Taxpayer 
Advocate's Annual Report will give us many good ideas on how to 
improve the tax system.
    I welcome our witnesses. I look forward to their testimony 
and I yield to my Ranking Member, Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman.
    Today's hearing will be one of the most important and 
interesting sessions that the Oversight Subcommittee will have 
this year.
    First, I want to welcome Lee Monks, the current IRS 
Taxpayer Advocate and thank him for his 1996 report. I look 
forward to our discussion of the issues he has raised about, 
number one, the most serious problems facing taxpayers 
throughout the country, number two, his recommendations for 
legislative and administrative reform, and number three, the 
IRS' Problem Resolution Program.
    The 1996 Advocate's Report provides us with a good 
assessment of what needs to be done to make the IRS a more 
taxpayer-friendly and customer-oriented operation. Of 
particular interest to me are several problem areas highlighted 
by the Advocate in his report, such as tax law complexity, 
problems in researching IRS rules by telephone, reaching the 
IRS by telephone, erroneous IRS notices, administration of the 
earned income tax credit, lack of clarity in IRS letters and 
notices, and the IRS' failure to understand taxpayers' 
concerns.
    Clearly, it is our responsibility on the Oversight 
Subcommittee to make certain that the IRS, in fact, does take 
all necessary steps to make it easier and less frustrating for 
taxpayers to fulfill their tax obligations.
    Also, before we begin, I want to give a warm welcome to the 
five Problem Resolution Officers who have come from many parts 
of the country to share with us their thoughts and experiences 
in providing assistance to the Nation's taxpayers. 
Particularly, I want to thank Louis Romito for coming here 
today. Mr. Romito is the Associate District Taxpayer Advocate 
for the Pittsburgh area. He will provide the Subcommittee with 
his insight into various aspects of the Taxpayer Advocate's 
1996 Report, his experiences in acting on behalf of taxpayers 
with the IRS and his suggestions for improving the IRS and the 
Problem Resolution Program, PRP.
    Let me conclude by saying that the Problem Resolution 
Program staff are the backbone of fairness within the IRS. All 
of us here today appreciate your commitment and continued 
efforts to resolve taxpayers' problems. After reading the 
Advocate's Report, maybe one of the major problems taxpayers 
face is a shortage of PRP staff.
    I look forward to working with the Chairwoman and other 
Subcommittee Members in our effort to address each of the 
problem areas under discussion here today, and I would ask that 
my full statement be included in the record.
    Chairman Johnson. So ordered.
    [The prepared statement follows:]

Statement of Hon. William J. Coyne, a Representative in Congress from 
the State of Pennsylvania

    Today's hearing will be one of the most important sessions 
of the Ways and Means Oversight Subcommittee.
    I want to welcome, as our lead witness, the current IRS 
Taxpayer Advocate. Mr. Lee Monks will testify on the ``Taxpayer 
Advocate's Annual Report to the Congress--Fiscal Year 1996.''
    The Report discusses (1) the twenty most serious problems 
facing taxpayers in dealing with the IRS, (2) the Advocate's 
recommendations for administrative and legislative actions to 
address the problems, and (3) the activities of the IRS Problem 
Resolution Program.
    Also, I want to give a warm welcome to the five Problem 
Resolution Officers who have come from all over the country to 
share with us their thoughts and experiences in providing 
assistance to taxpayers.
    Particularly, I want to thank Lou Romito for coming today. 
Mr. Romito is the Associate District Taxpayer Advocate for the 
Pittsburgh, Pennsylvania area.
    Importantly, Mr. Romito will provide the Subcommittee with 
his insight into various aspects of the Taxpayer Advocate's 
1996 Report, his experiences in acting on behalf of taxpayers 
within the IRS, and his suggestions for improving the Problem 
Resolution Program.
    As a result of the Oversight Subcommittee's work last year, 
the Taxpayer Bill of Rights 2 legislation included a 
requirement that the Taxpayer Advocate report to the Congress 
on the major problems facing taxpayers. Today, we will receive 
his Report.
    The Report is a good assessment of what the IRS needs to do 
to make itself a more taxpayer-friendly, customer-oriented 
operation. Accordingly, the Report can be used by the Oversight 
Subcommittee, the IRS, and the Treasury Department as a tool 
for helping the IRS address the more day-to-day, yet critically 
important, problems taxpayers face in dealing with the IRS.
    Clearly, the Problem Resolution Program staff are the 
backbone of fairness at the IRS. I know that all of us here 
today appreciate their continued efforts to work out all those 
problem cases dropped in their laps by other IRS employees, by 
Congressional offices, or directly from taxpayers.
    Frankly, I think that the biggest problem taxpayers face in 
dealing with the IRS is that there are not enough Problem 
Resolution staff employed by the IRS. I hope to work with the 
Subcommittee Chair and Members to see what we can do to insure 
the proper and necessary level of Problem Resolution staffing.
    Finally, there are several issues of particular concern to 
me which I want to raise at today's hearing. They are: lack of 
clarity and inappropriate tone of IRS communications; lack of 
understanding of taxpayers' concerns; problems maintaining 
taxpayers' current addresses; problems in the administration of 
the earned income tax credit; and inconvenient times and 
locations for doing business with the IRS.
    I commend the Chairwoman for her interest in the operations 
of the Taxpayer Advocate and his staff, and look forward to 
working with all Members of the Subcommittee to develop pro-
taxpayer legislation where needed, to recommend administrative 
changes within the IRS, and to consider funding issues with 
regard to our annual recommendations to the Appropriations 
Committee.

                                

    Chairman Johnson. If other Members have a brief comment, I 
will recognize them, but we do want to move forward.
    Mr. Ramstad.
    Mr. Ramstad. Madam Chair, very briefly, I want to thank you 
for convening this important hearing on the Annual Report of 
the Taxpayer Advocate. It certainly will be useful for this 
Subcommittee to learn whether the reforms that we passed last 
year in the Taxpayer Bill of Rights 2 are actually helping to 
protect taxpayers in their disputes with the IRS.
    Earlier this month, Madam Chair, I met with several tax 
experts who serve on my tax advisory committee back home in 
Minnesota. These are true tax experts representing a lot of the 
Fortune 500 corporations and so forth. They are working right 
now on drafting a State version of the Taxpayer Bill of Rights 
for Minnesota based on what we did here in Washington. They are 
anxious to see a copy of the annual report to guide them in 
their deliberations. They expect it to be very, very helpful.
    I certainly must say, I was disappointed that the report 
has no specific legislative recommendations for addressing 
certain pressing taxpayer problems, but I hope this hearing 
today will propel us toward greater protections and better 
services for the American taxpayers.
    So again, Madam Chair, thank you for your leadership in 
holding this hearing and I thank the witnesses, as well.
    Mr. Kleczka. Madam Chair.
    Chairman Johnson. Mr. Kleczka.
    Mr. Kleczka. Madam Chair, very briefly, on the second 
panel, we also have Elayne Goldstein who is from Milwaukee and 
is the Midwest District Taxpayer Advocate, and I should say 
that she and her colleagues have been very helpful to my office 
in Milwaukee and not only my office but also my constituents, 
so I welcome Elayne here today and we look forward to your 
testimony.
    Chairman Johnson. Are there other Members who wish to 
comment?
    Mrs. Thurman. Madam Chairman.
    Chairman Johnson. Yes.
    Mrs. Thurman. I would like to take this opportunity also to 
welcome Jeanne Williams, who is from North Florida and is our 
Taxpayer Advocate. Jeanne, I bring lots of hellos from my 
office in Inverness who have talked about you so fondly and 
what you have been able to accomplish for many of our 
constituents and our taxpayers, and we understand that you are 
going to be retiring soon, so we look forward to some very 
candid remarks from you this afternoon. Thank you for being 
here.
    Chairman Johnson. Thank you.
    Mr. Monks, welcome to you and please proceed with your 
testimony.

   STATEMENT OF HON. LEE MONKS, TAXPAYER ADVOCATE, INTERNAL 
    REVENUE SERVICE; ACCOMPANIED BY TOM TIFFANY, EXECUTIVE 
                           ASSISTANT

    Mr. Monks. Thank you, Madam Chair and distinguished Members 
of the Subcommittee.
    I am very pleased to be here today to discuss the role of 
the Taxpayer Advocate and the Problem Resolution Program in 
serving the needs of the taxpayers of our country and also the 
First Annual Taxpayer Advocate's Report to the Congress.
    My name is Lee Monks and I am currently the Taxpayer 
Advocate for the IRS and with me is Tom Tiffany, my Executive 
Assistant, as well as the five field Taxpayer Advocates from 
five of our district offices. I will try to summarize from my 
written testimony, which, of course, represents my own thoughts 
and not the official position of the IRS.
    As was alluded to, 1997 marks an important anniversary for 
the Problem Resolution Program, or PRP, for short. PRP was 
officially implemented 20 years ago, in 1977, following a test 
of the program in four of our district offices during 1976. The 
program was originally established to assist taxpayers with 
problems that seemingly could not be resolved elsewhere within 
the Service.
    The continuing success of the program during that time span 
has never been more evident than during the past few years. We 
continue to provide assistance to thousands of taxpayers on a 
weekly basis with their problems with the IRS and we pay 
particular attention to those situations involving significant 
hardship.
    In addition, we also play a major role in the 
identification of internal systems, policies, procedures, and 
so on, that cause problems for taxpayers and try to determine 
the underlying causes of those specific problems.
    Organizationally, I report directly to the Commissioner and 
serve as a member of the IRS Executive Committee. In each IRS 
region, district, and service center, there is a Problem 
Resolution Officer, PRO, who reports directly to the head of 
office and receives functional program direction and oversight 
from the Taxpayer Advocate.
    Just to give you a feel for the magnitude of our program, 
during fiscal year 1996, PRP received over 282,000 regular PRP 
cases and over 30,000 Taxpayer Assistance Orders requests. A 
majority of our cases are referred and identified by Service 
employees, over 50 percent, with the balance split between 
referrals from tax preparers and those received directly from 
taxpayers.
    The Taxpayer Bill of Rights 2, or TBOR2, provided a number 
of enhancements to PRP and to the position of Taxpayer 
Advocate. First of all, of course, the title of the position 
was changed to Taxpayer Advocate and the Advocate was provided 
with additional authority to assist taxpayers in hardship 
situations.
    In addition, the Advocate was designated to participate in 
the selection and evaluation of all field PROs and the 
authority to modify or rescind Taxpayer Assistance Orders was 
limited to the Commissioner, Deputy Commissioner, and the 
Taxpayer Advocate. It is my belief that these actions provided 
both additional authority to the Advocate and our field PROs 
and also served to strengthen the lines of authority and the 
working relationships between the PROs in the field and the 
Taxpayer Advocate.
    One of the most significant aspects of TBOR2 as it impacted 
on my position was the requirement to issue two reports 
annually to the Congress. One report, which is due June 30 of 
this year, will detail the objectives and activities of my 
office for the coming fiscal year.
    The primary report, the subject of this hearing, was 
published at the end of the year and focuses on the major 
activities of my office and that of our field PROs for the past 
fiscal year. It includes a number of areas that were 
specifically required by TBOR2 legislation. For example, the 
Advocate is required to identify the initiates undertaken to 
improve service to taxpayers along with a summary of at least 
the 20 most significant problems encountered by taxpayers. A 
list of specific recommendations for dealing with the problems 
identified and the Service's response to those recommendations 
is also required. This report provides a mechanism for the 
Taxpayer Advocate to elevate continuing problems, issues, and 
gain support for organizationally driven improvement 
activities.
    As a result of the first report to the Congress and the 
data provided by my office to the members of the IRS Executive 
Committee, a number of improvement initiatives are already 
underway, all of which should have a positive impact on 
taxpayers, and I'll touch on some of that activity a little 
later in my remarks.
    Other areas required to be reported on include Taxpayer 
Assistance Orders not honored in a timely manner and the extent 
to which regional PROs participate in the selection and 
evaluation of local PROs.
    As specified in TBOR2, the Advocate is required to submit 
this report directly to the Congress without prior review by 
officials of the IRS, the Department of Treasury, or the Office 
of Management and Budget.
    My office has also been highly involved with a number of 
other elements of TBOR2, including the lien and levy provisions 
and the requirement that IRS provide an annual report to the 
Congress on allegations of misconduct by IRS employees. The 
chief management and administration and I were designated by 
the Deputy Commissioner to take the lead in establishing what 
we now refer to as the Customer Feedback System.
    Information from that system will reside on the same data 
base that we use to currently capture data on our PRP casework, 
the Problem Resolution Management Information System, or 
PROMIS, for short. We recently completed modifications required 
to house this data on the PROMIS system and are currently 
completing input of data for October through December 1996. 
Following the input and our analysis of this input, we expect 
to be able to pinpoint any trends that may be present and to 
recommend appropriation actions to the Commissioner. Our first 
report on allegations of misconduct is due to the Congress on 
June 30 of this year.
    I was appointed to the position of Taxpayer Advocate in 
June 1993 and am the fifth individual to serve in this 
capacity, although, of course, the first to hold the title of 
Taxpayer Advocate, and I view this change as certainly a more 
descriptive depiction of my role and for that of our field 
PROs, as well.
    And, in fact, I've recently approved a name change for our 
field PROs. Their new titles are now Regional Taxpayer 
Advocate, District Taxpayer Advocate, and Service Center 
Taxpayer Advocate. They will still be responsible for managing 
the Problem Resolution Program within their areas of 
responsibility but will also be responsible for supporting 
national, regional, and local advocacy initiatives and 
providing input to the Advocate's report. This is a role that I 
think that they're well suited for and one which many, if not 
all, have been engaged in for several years.
    Following my appointment to the position of Taxpayer 
Advocate, the Commissioner and Deputy Commissioner made 
advocacy one of my top priorities. In order to be effective in 
this particular area, however, you need to have data on the 
types of problems that taxpayers are experiencing with the 
Service and the sources of those problems.
    We began to revamp our PROMIS system, which at the time was 
a loose configuration of local data bases primarily designed to 
serve as an inventory control system for our local offices. 
While data was rolled up at the regional and national level, it 
did not provide top-level management with the ability to track 
and trend problem areas, the ability that we have today.
    We initiated a change to our case codes to help us better 
reflect major problems taxpayers were experiencing with the 
IRS, and over the past 18 months have completed a major 
transition, from 75 local data bases in each of our districts 
and service centers to a single national system housed in the 
Kansas City Service Center. This system was the source of the 
information provided to the IRS Executive Committee on the top 
10 categories for PRP casework within each region and for the 
service centers and from which the charts in the Advocate's 
Report to the Congress were derived.
    The information on the top 10 sources of PRP casework on a 
national level is outlined in my report. I'm not going to go 
over those because they are in my report, but the number one 
and number two items deal with requests for audit 
reconsiderations and refund inquiries and requests.
    I've asked the Regional Commissioners to review the data 
for their respective regions in order to prioritize potential 
improvement initiatives and report back on their findings. My 
office will provide whatever coordination is necessary with the 
regional offices to assure that we are not duplicating efforts 
and to maximize coverage of the problem issues that taxpayers 
are facing in their dealings with the IRS. This activity, of 
course, will be included in my next report to the Congress. We 
are also establishing a process to ensure that ongoing feedback 
is received from local Taxpayer Advocates on their individual 
initiatives and recommendations.
    I mentioned earlier that I would comment on some of the 
activity underway as a result of my first report and the data 
provided on problem issues. First of all, each region has 
established a Regional Advocacy Council to serve as the arm for 
the Regional Commissioner in reviewing the data that we provide 
for each area. Each Regional Advocate will be a key member of 
that council.
    In addition, the Advocacy Councils will be responsible for 
determining, in conjunction with my office, which issues are 
the most important and for conducting an analysis of the 
casework in their areas to determine underlying causes for 
problems and then for making recommendations to correct any 
deficiencies that they identify. Several specific issues are 
currently being reviewed which are a direct result of their 
being included either in the top 10 sources for PRP casework or 
in the list of the most significant problems that taxpayers 
face in dealing with the IRS. These include collection issues, 
failure to deposit penalties associated with Federal tax 
deposit requirements, taxpayer access to toll free, notice 
clarity, audit reconsiderations, and so on.
    In addition to this activity, my staff is constantly 
reviewing implementation of various IRS programs, such as the 
Revenue Protection Strategy, which was designed to deal with 
refund fraud, and the recently enacted legislation on math 
errors and individual tax identification numbers to ensure that 
taxpayer rights are being protected and that procedures are 
developed to expeditiously handle any cases involving taxpayers 
that are inadvertently caught up in these processes.
    I also indicated in my first report that we have developed 
plans to secure direct input from taxpayers through a series of 
focus groups cosponsored by our Strategic Planning Division. 
Tentative plans are to conduct 10 focus groups in 5 locations 
with 5 of these focus groups devoted to individual taxpayers 
and the balance to small businesses.
    In addition, we plan to also include input from key 
stakeholders by working with the various liaison committees 
that meet periodically with the Commissioner. This, in my 
opinion, will provide a more comprehensive approach to the 
identification of problem areas affecting taxpayers in their 
dealings with the IRS as well as provide potential sources for 
recommendations to correct any deficiencies that we can include 
in subsequent reports to the Congress.
    One area that I was specifically asked to comment on deals 
with the most common problems facing taxpayers in their 
dealings with the IRS, and while there is not time to cover 
each of the 20 items included in my report, I would like to at 
least address the first three items.
    The first deals with the complexity that taxpayers face in 
complying with the tax law. In dealing with the issue of 
complexity, it is interesting to note that over 70 percent of 
individual filers use the standard deduction, which means that 
they are filing a relatively simple return. We are also trying, 
of course, to make this process easier for taxpayers by 
offering more methods of electronic filing, such as the 
TeleFile Program, which is available to approximately 26 
million taxpayers and has already surpassed last year's totals 
for the full filing period.
    I think it is important to keep complexity in perspective. 
Yes, the tax system is complex, and yes, we need to continue to 
work with the Congress to make it easier for individual 
taxpayers and small businesses to comply with their filing 
obligations, but our tax system is viewed by others outside 
this country as the model for the world. We receive over 200 
million returns and collect over $1.4 trillion annually. In 
striving to make this system easier to deal with, we must 
recognize that equity and simplicity are often competing 
factors and the more we strive to achieve equity in the tax 
system, we may be adding complexity.
    In my report, I included a proposal that would assist in 
determining and perhaps limiting burden by establishing a 
methodology to score burden, much as is done for revenue. This 
would ensure that burden is given full consideration by the 
Congress at the time new tax law is being considered.
    The second item that I want to discuss is taxpayer access 
to toll free. This has been a problem for several years and has 
been the subject of much concern both inside and outside of 
IRS. A number of actions have been and are being taken to move 
us in the right direction in this program.
    First, we have established task groups to identify 
specifically why taxpayers are calling us so often for 
information that is readily available in their tax packages or 
other information forms. The hope is that we will be able to 
reduce some of this demand on our system or move certain 
traffic to automated systems so that we can provide better 
access to those live assisters that actually need to talk to a 
live assister to achieve service.
    Second, we have put more resources into our toll-free 
program this year and the results have been very positive. 
Service or access levels are up this year by up to 68 percent, 
compared to 48.6 percent last filing period. Obviously, we are 
not where we want to be yet, but it is a move in the right 
direction. We are also looking at the best in the industry in 
the private sector to learn what we can from them in improving 
the effectiveness of our toll-free services.
    Third, I want to just briefly discuss the progress that is 
being made in the improvement of our forms and notices. We have 
had a reengineering team reviewing all of our forms and 
notices, particularly those identified as high volume or 
needing clarification. This task group has identified a number 
of changes to improve the wording of our notices and has 
proposed eliminating or the combining of notices that cause 
confusion for taxpayers. We estimate that we have eliminated 
somewhere in the neighborhood of 16 to 18 million notices that 
will be issued on an annual basis.
    My staff also works closely with the notice review area to 
review proposed modifications, trying to look at it from a 
taxpayer's perspective. Obviously, there is still much to be 
done in this area and we are also interested in input from our 
stakeholders. I will be including this as a discussion item 
with our taxpayer focus groups and also with our tax 
practitioner group discussions later this year.
    In closing, I want to stress again the important role that 
PRP plays in addressing the needs of taxpayers who experience 
problems in their dealing with the IRS. We want them to know 
that their concerns are important to us and that they will be 
addressed as quickly as possible. Once we fix their problems, 
we also want to be able to move forward and fix the systems 
that created the problems in the first place.
    To meet this challenge, we recognize we need a lot of 
assistance. We need the support of the organization in 
providing resources to address systemic concerns. We need the 
support of our stakeholders to elevate problems to our 
attention and to assist in coming up with potential solutions 
to identified problems. And, most importantly, we need the 
support of the American taxpayers to let us know how we are 
doing in serving as their advocate within the IRS.
    This ends my prepared comments and I am willing to address 
any questions that you might have at this time.
    [The prepared statement and report follow:]

Statement of Lee Monks, Taxpayer Advocate, Internal Revenue Service

    I am very pleased to be here today to discuss the role of 
the Taxpayer Advocate and the Problem Resolution Program (PRP) 
in serving the needs of our taxpayers and the first annual 
Taxpayer Advocate's Report to the Congress. I want to make it 
clear that this testimony reflects my own thoughts and does not 
represent the official position of the IRS. As you may be 
aware, 1997 marks an important anniversary for PRP. PRP was 
officially implemented 20 years ago in 1977 following a test of 
the program in four district offices during 1976. The program 
was originally designed to assist taxpayers with problems that 
seemingly couldn't be resolved elsewhere within the Service. 
The continuing success of the program throughout that time span 
has never been more evident than during the past few years. PRP 
continues to provide assistance to thousands of taxpayers on a 
weekly basis with their problems with the IRS. We pay 
particular attention to those situations involving significant 
hardship. In addition, we also play a major role in the 
identification of internal systems, policies and procedures 
that cause problems for taxpayers and try to determine the 
underlying causes of those problems.
    Organizationally, the Taxpayer Advocate reports directly to 
the Commissioner and serves as a member of the IRS Executive 
Committee. In each IRS region, district and service center, 
there is a Problem Resolution Officer (PRO) who reports 
directly to the head of the office and receives functional 
program direction and oversight from the Taxpayer Advocate. To 
give you a feel for the magnitude of the program, during Fiscal 
Year 1996 PRP received over 282,000 regular PRP cases and over 
30,000 Taxpayer Assistance Orders (TAOs). The majority of our 
cases are identified and referred to PRP by Service employees 
(over 50 percent) with the remaining total split between tax 
preparer referrals and those received directly from taxpayers.
    The Taxpayer Bill of Rights 2 (TBOR2) provided several 
enhancements to PRP and to the position of Taxpayer Advocate. 
First, the title of the position of Taxpayer Ombudsman was 
changed to Taxpayer Advocate and the Advocate was provided with 
additional authority to assist taxpayers in hardship 
situations. In addition, the Advocate was designated to 
participate in the selection and evaluation of all field PROs 
and the authority to modify or rescind TAOs was limited to the 
Commissioner, Deputy Commissioner and the Taxpayer Advocate. 
These actions provided both additional authority to the 
Advocate and field PROs, and also served to strengthen the line 
of authority and the working relationship between field PROs 
and the Taxpayer Advocate.
    One of the most significant aspects of TBOR2, as it 
impacted on the Taxpayer Advocate, was the requirement to issue 
two reports annually to the House Ways and Means Committee and 
the Senate Finance Committee. One report, due on June 30th of 
this year, will detail the objectives and activities of the 
Taxpayer Advocate for the coming fiscal year. The other report, 
which was due December 31st of last year, focused on the major 
activities of the Taxpayer Advocate for the past fiscal year 
and includes a number of areas as specified by the legislation. 
For example, the Advocate is required to identify the 
initiatives undertaken to improve service to taxpayers, along 
with a summary of at least the 20 most significant problems 
encountered by taxpayers. A list of specific recommendations 
for dealing with the problems identified and the Service's 
response to those recommendations is also required. This report 
provides a mechanism for the Taxpayer Advocate to elevate 
continuing problem issues and gain support for organizationally 
driven improvement activities. As a result of the first Report 
to the Congress and the data provided by the Taxpayer Advocate 
to members of the IRS Executive Committee, a number of 
improvement initiatives are underway, all of which should have 
a positive impact on taxpayers. I will touch on some of that 
activity later in my remarks.
    Other areas required to be reported on include TAOs not 
honored in a timely manner and the extent to which regional 
PROs participated in the selection and evaluation of local 
PROs. As specified in TBOR2, the Advocate is required to submit 
this report directly to the Congressional Committees without 
prior review by officials of the IRS, the Department of 
Treasury or the Office of Management and Budget.
    My office has also been highly involved with a number of 
other elements of TBOR2, including the lien and levy provisions 
and the requirement that the IRS provide an annual report of 
allegations of misconduct by IRS employees. The Chief 
Management and Administration and I were designated by the 
Deputy Commissioner to take the lead in establishing what we 
now refer to as the Customer Feedback System. Information from 
that system will reside on the same data base used to capture 
trend data on PRP casework, the Problem Resolution Office 
Management Information System, or PROMIS for short. We recently 
completed the modifications required to house the data on the 
PROMIS system and are currently completing input of data for 
October through December 1996. Following input and our 
analysis, we expect to be able to pinpoint any trends that may 
be present and to recommend appropriate actions to the 
Commissioner. Our first report on allegations of misconduct is 
due to the Congress June 30, 1997.
    I was appointed to the position of Taxpayer Ombudsman in 
June 1993, following a three month detail to that position 
after Damon Holmes' retirement in February 1993. I am the fifth 
individual to serve in this capacity, although the first to 
hold the title of Taxpayer Advocate. I view the change in my 
title as certainly a more descriptive depiction of my role and 
for that of our field PROs as well. And in fact, I have 
recently approved a name change for the field PROs. Their new 
titles are Regional Taxpayer Advocate, District Taxpayer 
Advocate and Service Center Taxpayer Advocate. They will still 
be responsible for managing the problem resolution program 
within their areas of responsibility but will also be 
responsible for supporting national, regional and local 
advocacy initiatives and providing input to the Advocate's 
report. This is a role they are well suited for and one which 
many, if not all, have been engaged in for several years.
    Following my appointment to the position of Taxpayer 
Ombudsman, the Commissioner and Deputy Commissioner made 
advocacy one of my top priorities. In order to be effective on 
a national scale, however, you need data on the types of 
problems that taxpayers are experiencing and the sources of 
those problems. We began to revamp the PROMIS system, which at 
the time, was a loose configuration of local data bases, 
primarily designed to serve as an inventory control system for 
the local offices. While data was rolled up at the regional and 
national level, it did not provide top-level management of PRP 
or the IRS the ability to track and trend problem areas that we 
have today. We implemented a change to our case codes to better 
reflect major issues or problem areas experienced by taxpayers 
and over the past 18 months have completed a major transition 
from 75 local data bases to a single national system housed in 
the Kansas City Service Center. This system was the source of 
the information provided to the IRS Executive Committee on the 
top ten categories for PRP casework within each region and for 
the service centers and from which the charts in the Advocate's 
Report to Congress were derived. The information on the top ten 
sources of PRP casework on a national level is outlined on page 
7 of my report to the Congress. To recap they are:

    1. Requests for audit reconsideration
    2. Refund inquiries/requests
    3. Lost or misapplied payments
    4. Problems in processing of individual returns
    5. Processing of claims or amended returns
    6. Other penalties (other than FTD penalties)
    7. FTD penalties
    8. Earned Income Credit issues
    9. Revenue Protection cases
    10. Installment agreements

    I have asked the Regional Commissioners to review the data 
for their respective regions in order to prioritize potential 
improvement initiatives and report back on their findings. My 
office will provide the necessary coordination with the 
regional offices to ensure we are not duplicating efforts and 
to maximize coverage of the problem issues taxpayers are facing 
in their dealings with IRS. This activity will be included in 
my next report to the Congress. We are also establishing a 
process to ensure ongoing feedback is received from local PROs 
on their individual initiatives and recommendations.
    I mentioned earlier that I would comment on some of the 
activity underway as a result of my first report and the data 
provided on problem issues. First, each region has established 
a Regional Advocacy Council to serve as the arm for the 
Regional Commissioner in reviewing the data we provided for 
their region. Each Regional Advocate will be a key member of 
their council. In addition, the Advocacy Councils will be 
responsible for determining, in conjunction with my office, 
which issues are the most important and for conducting an 
analysis of casework to determine underlying causes for 
problems and then making recommendations to correct any 
deficiencies identified. Several specific issues are currently 
being reviewed which are a direct result of their being 
included either in the top ten sources for PRP casework or in 
the list of the most significant problems taxpayers face in 
dealing with the IRS. These include collection issues, Failure 
to Deposit penalties associated with federal tax deposit 
requirements, taxpayer access to toll-free, the Earned Income 
Credit, audit reconsideration and penalty administration. In 
addition to this activity, my headquarters staff is constantly 
reviewing implementation of various IRS programs such as the 
Revenue Protection Strategy to deal with refund fraud and the 
recently enacted legislation on math error and Individual Tax 
Identification Numbers (ITINs) to ensure that taxpayer rights 
are being protected and that procedures are developed to 
expeditiously handle cases involving taxpayers inadvertently 
caught up in these processes.
    I had also indicated in my first report that we have 
developed plans to secure direct input from taxpayers through a 
series of focus groups co-sponsored by our Strategic Planning 
Division. Tentative plans are to conduct ten focus groups in 
five locations with five devoted to individual taxpayers and 
the balance to small businesses. In addition, we plan to also 
include input from key stakeholders by working with the liaison 
groups that meet periodically with the Commissioner. This will 
provide a more comprehensive approach to the identification of 
problem areas affecting taxpayers in their dealings with the 
IRS as well as a potential source for recommendations to 
correct any deficiencies identified.
    Although not specifically asked to testify about the 
organizational placement of the position of Taxpayer Advocate 
or the reporting of field PROs to either the local head of 
office or the Taxpayer Advocate, I would like to comment 
briefly on both of those issues.
    To be truly effective as the Taxpayer Advocate, the 
individual in that position must have the support of both the 
Commissioner and the Deputy Commissioner. This is true from 
several perspectives. First, you must feel free to be able to 
identify situations where Service action or inaction has the 
potential to harm taxpayers. This may be as the result of 
planned changes in policies and procedures by the Service or 
when IRS systems fail to perform as expected. Second, you must 
be able, through your actions, to provide immediate relief to 
taxpayers and/or cause the organization to review the way in 
which their systems are operating and take corrective actions. 
That latter area is a more difficult task since, although one 
may be granted the freedom to point out systemic problems, you 
must rely on others, who have ownership of the operational 
systems, to assist in or actually conduct the reviews and 
analysis of problem areas and then to implement the appropriate 
corrective actions.
    This points out an important third element of support 
required for this job. You must be able to work in conjunction 
with and have the support of the operational entities to get 
the things done that you feel are critical. I feel that the 
Commissioner and the Deputy Commissioner have provided me the 
necessary support to accomplish my job. This support has been 
highly visible throughout the executive ranks and the 
organization. Improved data from the PROMIS system to validate 
the volume and types of taxpayer problems have helped gain the 
support needed from operational areas to review and correct 
systems deficiencies. The additional leverage for systems 
improvement provided by TBOR2 and the Advocate's Report should 
elevate the organization's efforts in this area to an even 
higher level. As a result, I feel strongly that the position of 
Taxpayer Advocate should remain within the IRS since we have 
demonstrated our capability to be extremely effective in both 
assisting taxpayers with their immediate problems and then in 
dealing with the underlying causes of those problems and 
causing systems improvement activities to take place. Also, by 
remaining and working within the organization, we can be more 
actively involved in the front end planning of new systems and 
procedures (such as the math error and ITIN processes mentioned 
earlier), thus reducing the possibility of adverse consequences 
to taxpayers.
    On the issue of where the field PROs should report, I would 
point to some recent testimony by our PRO in the Indiana 
District, Rena Girinakis, on January 8th before the National 
Commission on Restucturing the IRS. In her testimony, she 
indicated that she receives the full support necessary from her 
District Director and from the functional division chiefs in 
accomplishing her duties as an advocate for taxpayers in the 
State of Indiana. To change her status by having her report 
directly to the Taxpayer Advocate in Washington D.C. could 
potentially jeopardize the current level of support and 
cooperation she receives by being a member of the director's 
immediate staff and a general peer of the division chiefs. I 
daresay you would get the same reaction from each of our field 
PROs. We have also received feedback from a number of our 
stakeholder groups supporting the current reporting alignment. 
The changes brought about by TBOR2 to strengthen the 
independence and linkage of field PROs to the Advocate's office 
should greatly assist in alleviating any other concerns in this 
area. If there are specific concerns, however, that are raised 
as a result of the current reporting structure, either now or 
in the future, I would suggest they be brought to my attention 
in order to ensure they are promptly addressed.
    In closing, I want to stress the important role PRP plays 
in addressing the need of taxpayers who experience problems in 
their dealings with the IRS. We want them to know that their 
concerns are important to us and they need to be addressed as 
quickly as possible. Once we fix their problems, we want to be 
able to move forward and also fix the systems that created the 
problems in the first place. To meet this challenge we 
recognize we need a lot of assistance. We need the support of 
the organization in providing resources to address systems 
concerns. We need the support of our stakeholders to elevate 
problems to our attention and to assist in coming up with 
potential solutions to identified problems. And most 
importantly, we need the support of the American taxpayer to 
let us know how we are doing in serving as their advocate 
within the IRS.
      

                                

         Taxpayer Advocate's Annual Report to Congress FY 1996

                                Foreword

    This is the first Taxpayer Advocate Report to the Congress 
as required by the recently enacted Taxpayer Bill of Rights 
(TBOR2). The mission of the Taxpayer Advocate is relatively 
simple and has two primary facets. First, we work with 
taxpayers to address their immediate problems or concerns and 
to provide appropriate relief. Second, we have a responsibility 
to address continuing systemic problems through analysis of 
their underlying causes and to recommend appropriate corrective 
actions. This element of our program is generally referred to 
as advocacy.
    An ongoing role for Problem Resolution Program (PRP) and 
the Taxpayer Ombudsman, now the Taxpayer Advocate, for many 
years has been advocating for taxpayers through reviewing the 
impact of new programs and the source and causes of PRP 
casework. While advocacy can take many forms, the primary focus 
is to determine potential impacts on taxpayers, and then 
working with functional officials to take appropriate 
corrective actions. TBOR2 takes advocacy to a higher level by 
requiring the establishment of formal monitoring and reporting 
systems to track and follow-up on recommendations, as 
appropriate. I have also established a more formal process of 
conveying PRP recommendations to operational areas through the 
use of ``Advocacy Memoranda'' which require a response within 
90 days. These memoranda are not intended to replace the 
ongoing advocacy activity that takes place at the staff level, 
but, in fact, will supplement and expand on those efforts.
    Since TBOR2 was not enacted until the end of the tenth 
month of the fiscal year, we had a relatively short timeframe 
in which to gather input and develop this report. The focus of 
the report, therefore, has been placed on activity that had 
been documented by the end of the fiscal year and where 
responses had been requested from officials responsible for 
responding to the recommendations. Feedback on our current list 
of the most significant problems facing taxpayers in dealing 
with the IRS was gathered from our regional offices and 
responses were requested from appropriate operational 
officials. Other areas included in the report reflect ongoing 
problems with our attempts to locate and ensure we have that 
taxpayer's last known address as well as more recent efforts to 
reduce the potential for adverse impact of the Service's 
Revenue Protection Strategy on taxpayers.
    In future reports, I plan to also include direct feedback 
from both taxpayers and the tax practitioner community on the 
most serious problems that taxpayers face in dealing with the 
IRS. I have already initiated a dialogue through the various 
Commissioner's liaison committees to start the process of 
gathering direct feedback from the following organizations on 
areas of importance to their constituents: the National 
Association of Tax Practitioners, the American Society of 
Certified Public Accountants, the National Association of 
Enrolled Agents, the National Association of Accountants, the 
American Bar Association, and the Tax Executive Institute. In 
addition, I have requested the assistance of our Strategic 
Planning Division in conducting a series of focus groups 
designed to gather feedback from individual taxpayers and small 
businesses on their concerns.
    I recently provided members of the IRS Executive Committee 
with a copy of the Taxpayer Advocate's analysis of our FY 1996 
casework activity. This report identified the top ten sources 
of PRP casework for each region, for our ten service centers, 
and for the nation. The Deputy Commissioner has asked each 
Regional Commissioner and the Service Center Executive Officer 
to work with me to identify critical areas of concern, and to 
establish teams to review the underlying causes for taxpayer 
problems in those areas and to recommend improvements to the 
operations of those systems. Each of the regional PRP staffs 
will participate in that process and will develop 
recommendations in other key program areas as well.
    While this initial report represents, from my perspective, 
a good beginning, there is much to be done. The inclusion of 
direct input from taxpayers and the practitioner community 
along with enhanced analysis on the primary sources of PRP 
casework will form the basis for a more comprehensive systems 
improvement effort that will benefit both the taxpaying public 
and the Service.
                                               Lee R. Monks
                                                  Taxpayer Advocate
                                                  December 31, 1996

                            I. Introduction

    This report by the Taxpayer Advocate to the House Ways and 
Means and Senate Finance Committees is mandated by section 
101(a) of the Taxpayer Bill of Rights 2 (public law 104-168), 
enacted on July 30, 1996.

A. Program Overview

    The newly created position of Taxpayer Advocate and the 
Office of the Taxpayer Advocate replace the former position of 
the Taxpayer Ombudsman and the Headquarters Problem Resolution 
Program staff, while enhancing the authority of the position 
and expanding the office's scope and responsibilities. This is 
the latest enhancement, including those mandated by Congress, 
to a longstanding, and, we believe, highly effective program of 
taxpayer advocacy and assistance.
    The Problem Resolution Program (PRP) was founded in 1976 as 
part of the Taxpayer Service organization and was reorganized 
as a separate organizational component the following year. 
Initially, Problem Resolution Officer (PRO) positions were 
established only at the Service's district offices. In 1979, 
recognizing that many of the taxpayer problems that reached 
district PRP offices related to service center operations, the 
program was expanded and PROs were established in each of the 
service centers. In both districts and service centers, the PRO 
is a member of the Director's immediate staff.
    In late 1979, the Taxpayer Ombudsman, an executive level 
position on the Commissioner's immediate staff, was created to 
head the PRP organization and to provide greater authority and 
visibility to PRP both inside and outside the IRS. In 1980, 
Regional Problem Resolution Officer positions were established 
on the immediate staffs of each Regional Commissioner to 
provide program oversight and assistance to the PROs in 
districts and service centers.
    Since its inception, PRP has provided assistance to 
taxpayers who have been unable to get their problems resolved 
through normal channels. PRP assured the timely and effective 
resolution of more than 325,000 such cases during FY 1996. In 
1988, the Omnibus Taxpayer Bill of Rights (TBOR) expanded PRP's 
ability to assist taxpayers by providing statutory authority 
under section 7811 of the Internal Revenue Code for the 
Taxpayer Advocate or his designees, the Problem Resolution 
Officers, to issue a Taxpayer Assistance Order (TAO). A TAO may 
be issued when necessary to relieve an imminent, significant 
hardship as a result of the manner in which the tax laws are 
being administered. The original statute authorized issuance of 
a TAO to require the release of property from levy or to cease 
or refrain from taking actions in certain situations. The 
following year, the Commissioner administratively expanded TAO 
authority to include relief of hardship in situations beyond 
those specified in the law. TBOR2 included this expanded 
authority and also allowed the Taxpayer Advocate or PRO to 
specify in a TAO a time period by which the ordered actions 
must be completed.
    During FY 1996, more than 32,150 Applications for Taxpayer 
Assistance Order were processed. Of these, 76.5% were granted 
relief or appropriate assistance was otherwise provided. Only 
five cases required an enforced TAO, in which Problem 
Resolution Officers formally exerted their statutory authority 
to order relief for the taxpayer. In all five cases, the relief 
was provided timely.
    Assistance could not be provided in 23.5 percent of the 
applications because:
     It was determined that relief was not appropriate 
(17.3%)
     The law prevented the Service from providing 
relief (3.6%)
     The ATAO did not meet significant hardship 
criteria (2.6%)
    Relief may be determined to be innapropriate when the 
remedy the taxpayer is seeking is not justifiable; e.g., when a 
taxpayer requests abatement of an additional tax assessment but 
provides no supporting documentation to justify the abatement; 
or when granting a request for release of levy would jeopardize 
ultimate payment of the tax when the taxpayer has neglected or 
refused to make other arrangements with the Service to resolve 
their delinquency.
    Many denials of relief due to the law preventing Service 
action were related to returning levy proceeds or releasing tax 
liens. The levy and lien provisions of TBOR2, which were 
supported by the Taxpayer Advocate, eliminated prior statutory 
constraints in these areas and should increase taxpayer relief 
actions during FY 1997.
    Over the years, the program's focus has shifted from one of 
primarily identifying and resolving instances when taxpayers 
have not been able to solve tax problems through normal 
channels, or when they were suffering significant hardships. 
The focus now is to first assist the taxpayer with their 
immediate problem, and then determine the primary sources or 
underlying causes of those problems in order to work with IRS 
functional areas to initiate corrective actions and prevent the 
occurrence of similar problems in the future.
    More significantly, TBOR2 enhanced the authority of the 
Taxpayer Advocate to ensure that IRS gives appropriate 
attention to the underlying causes of problems taxpayers 
encounter and that responsible IRS officials seriously consider 
and formally respond to recommendations by the Taxpayer 
Advocate to improve customer service and IRS responsiveness. 
TBOR2 requires the establishment of internal procedures, 
referred to as the ``Commissioner's Reporting System,'' for 
ensuring a formal IRS response within three months to all 
Taxpayer Advocate recommendations, and requires that the 
Taxpayer Advocate report directly to Congress on the office's 
activities for the past year, including a summary of the 
actions taken to implement recommendations and to address the 
most serious problems faced by taxpayers.

                          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%                                                        


B. Sources of FY 1996 Casework

    In January 1995 the Taxpayer Advocate initiated a change in 
the coding process for each case meeting PRP or ATAO criteria 
by type of issue (major issue code). The major issue code 
represents the issue or process that should be looked at for 
the purpose of determining the source or cause of various 
problems and then for initiating action to correct systems 
deficiencies, address unfair treatment, reduce program cycle 
time, or improving customer service.
    In FY 1996 enhancements to the Problem Resolution 
Management Information System (PROMIS) resulted in creation of 
a single nationwide database of PRP/ATAO casework enabling 
collection and analysis of PRP's 55 major issue codes with far 
more ease and greater reliability than ever before.
    The most recent analysis of closed PRP/ATAO cases provided:
     A picture of the vital few issues involved in a 
significant portion of PRP/ATAO casework throughout the IRS,
     An FY 1996 and FY 1995 comparison of major issue 
codes,
     A breakdown of major issue codes by IRS function 
with primary oversight,
     Major issue codes by centers, regions and 
districts, and for A/C (International)
    The Taxpayer Advocate, at a recent meeting of the executive 
Committee, shared his staff's analysis of PRP casework for FY 
1996, which included charts summarizing the top ten major issue 
codes, in terms of PRP casework volume, nationally, for each 
geographical region, and for the ten service centers. The 
charts that immediately follow this section (pages 7 and 8) 
provide a sample of the analysis being conducted by the 
Advocate's staff. Chart A reflects the top ten issues or 
processes that are the cause of PRP cases on a nationwide 
basis. Chart B depicts a distribution of all 55 PRP case codes 
for districts, as a whole, and for service centers. Charts C 
and D reflect the top ten issues for districts and service 
centers, respectively.
    Our analysis indicated that the top ten major issue codes, 
by volume, for FY 1996, were, as follows:

    1. Audit Reconsiderations
    2. Refund Inquiries/Requests
    3. Lost/Misapplied Payments
    4. Processing Individual Returns
    5. Processing Claims/Amended Returns
    6. Penalties Other Than Federal Tax Deposit (FTD) Penalties
    7. Federal Tax Deposit Penalties
    8. Earned Income Credit (EIC) Issues
    9. Revenue Protection Strategy (RPS)
    10. Installment Agreements

    Executives in the field and at the Headquarters Office are 
expected to provide support to the Taxpayer Advocate through 
encouragement of functional participation in the analysis and 
systems improvement efforts initiated by their local and 
regional PROs. Regional Commissioners have been asked to review 
the data for their respective organizations and to initiate 
appropriate actions. The Taxpayer Advocate has strongly 
encouraged the establishment of Regional Advocacy Councils to 
serve as the primary focal point for reviewing PRP problem data 
and initiating corrective actions. All four regions have 
established councils with cross-functional representation 
including PRP.
    The Advocate's staff has analyzed the FY 1995 and FY 1996 
major issue code data to identify and quantify the most 
frequent and most time consuming taxpayer problems. We will 
continue to analyze the major issue code data on a quarterly 
basis during FY 1997 to identify trends, patterns, aberrations, 
and possible anomalies. This analysis, which represents actual 
data from PRP casework, will form the basis for the majority of 
the advocacy activities undertaken by PRP. We also plan to 
supplement this data with input from taxpayer focus groups and 
from practitioner stakeholder groups in order to develop a 
comprehensive approach to dealing with the problems faced by 
taxpayers in dealing with the Service. This process will allow 
the Office of the Taxpayer Advocate to:
     Better understand the most frequent problems 
facing taxpayers,
     Rank or categorize problems according to their 
potential significance,
     Develop data research and analysis project plans 
to be assigned to selected regions for completion,
     Confirm and quantify the seriousness of each major 
issue code problem,
     Uncover underlying cause(s) for the most serious 
problem codes,
     Develop recommendations to prevent such problems 
or mitigate their impact on taxpayers.
     Convey recommendations in advocacy memoranda from 
the Taxpayer Advocate to responsible IRS officials,
     Track recommendations in the Commissioner's 
Reporting System, and
     Report on the of recommendations in the Taxpayer 
Advocate's annual report to Congress.
    This, in turn, will assist responsible officials in 
developing appropriate improvement initiatives that will:
     Reduce taxpayer burden in transacting business 
with the IRS,
     Reduce rework, including PRP/ATAO cases,
     Improve IRS efficiency in delivering products and 
services, and
    Free up resources to be applied to more productive 
programs.
    Four specific advocacy projects have already been initiated 
by our regional offices as a result of our data analysis. The 
four projects deal with taxpayer access to toll-free, 
collection related issues, earned income credit, and FTD 
penalties. Progress on these initiatives and recommendations 
will be reported on in my FY 1997 report.


                          II. Program Support

A. Taxpayer Assistance Orders (TAOs)

    TBOR2 provides codified the Taxpayer Advocate's and PRO's 
authority to set time periods for completing actions required 
by and Taxpayer Assistance Order.
    During FY 1996, five enforced TAOs were issued by Problem 
Resolution Officers; two in Western Region and three in 
Midstates Region. All five TAOs were honored timely by the 
receiving officials.

B. Selection and Evaluation of Problem Resolution Officers

    In January 1996, the Commissioner issued a directive to all 
IRS Heads of Office that the Taxpayer Advocate or his designee, 
the Regional PRO, would participate in the selection and 
evaluation of all Problem Resolution Officers. TBOR2 
subsequently codified that requirement.
    Eight Problem Resolution Officers (PROs) were selected 
during FY 1996 with a Regional PRO participating and concurring 
in each selection; two PROs were selected at the Atlanta and 
Fresno Service Center, and an Assistant PRO was selected at the 
Brookhaven Service Center; two PROs were selected in the 
Brooklyn and Houston Districts, and three Associate PROs were 
selected in the Augusta, Portland, and Sacramento posts of 
duty. No Regional PROs were selected this year.
    The Taxpayer Advocate provided input and gave concurrence 
to each Regional Commissioner on the performance evaluation of 
each Regional PRO. The Regional PROs participated in the 
performance evaluations of the district and service center 
PROs, with the exception of two centers. These were both due to 
unique circumstances for which steps have been taken to ensure 
that this does not recur.



C. Quality Initiatives

    During the past year, action was completed to consolidate 
quality review (QR) activity for PRP in two locations, San 
Francisco for all district offices and the Brookhaven Service 
Center for all service centers. The primary purpose of the 
consolidation was to achieve more consistency in the review of 
PRP casework and application of the PRP quality standards. In 
addition, I commissioned a national task force, made up of 
field PROs and members of my headquarters staff, to review 
concerns expressed by the field regarding the QR process. I 
approved thirteen recommendations made by the task force, 
designed to refocus quality from the customer's perspective 
which should result in both a better understanding of customer 
needs and improved quality results across the board. These 
changes were implemented during October 1996.

D. Communications

    Since I assumed the position of Taxpayer Ombudsman in 1993, 
I have been extremely active in promoting the role of the 
Taxpayer Ombudsman (now Advocate) and Problem Resolution both 
internally and with external stakeholder groups. There was, at 
the time and still is, a need to ensure better understanding of 
the role we play within the organization. As a result of the 
changes created by the passage of TBOR2 that need is even 
greater.
    For the Advocate to be effective, he or she must be allowed 
to operate as an independent voice for the taxpayer within the 
Service and to be able to make appropriate recommendations for 
improving IRS systems and processes that do not work properly 
or have unintended negative consequences for taxpayers. This 
requires both an acceptance and understanding of the role by 
top-level management within the organization as well as support 
from the Commissioner and Deputy Commissioner. The support 
required has been there since the time I first assumed this 
position. The additional authorities granted by TBOR2 such as 
the Advocate's Report to the Congress and the requirement that 
functional management must respond promptly to recommendations 
made by the Advocate will ensure that greater attention is paid 
to this aspect of our program. The balance of the understanding 
required will be gained from continued education of executives, 
managers and employees.
    Since the passage of TBOR2 and even prior to that time, I 
have made a number of speeches to various practitioner groups 
and at IRS sponsored symposiums for tax preparers to discuss 
the changes and enhancements to PRP and my position as a result 
of the legislation. I have also indicated a desire to solicit 
direct feedback from these groups as part of the process to 
identify the most significant problems affecting taxpayers in 
their dealings with the IRS. Response has been very favorable 
and there have been numerous inquires regarding specific 
timeframes for implementation of various aspects of the bill. 
Surprisingly, I also learned that there are still a number of 
tax preparers that were relatively uninformed regarding how PRP 
works and that it is available to them as a resource in dealing 
with problem areas with the IRS.
    The last area relating to communications deals with direct 
feedback from taxpayers. PRP had conducted a series of focus 
groups in late 1993 on service offered by PRP. The information 
obtained was extremely useful in modifying our program 
practices and quality review program focus, but did not offer 
any significant insight to problems taxpayers were experiencing 
with the IRS as a whole. In 1997, I have initiated a series of 
focus groups, in conjunction with our Strategic Planning 
Division, to gather data from both individual and small 
business taxpayers on the types of problems they encounter in 
their dealing with the IRS. This information will be included 
in my next report to the Congress and will also assist in 
developing the list of the most significant problems as well as 
appropriate recommendations for systems improvements. 
Obviously, communications and outreach will continue as a high 
priority for PRP in 1997.

E. Reorganization of PRP

    For the past two years the IRS has been undergoing a 
reorganization of its regional and district offices. During 
that time the Service has consolidated field operations from 
seven to four regions and from 63 to 33 districts. At an early 
point in the discussions regarding district operations, 
Commissioner Richardson made the decision to retain PRO 
positions in all 63 former district offices. This ensured that 
each former district location would maintain a local PRP 
contact, now designated as an Associate PRO, for liaison with 
taxpayers, local congressional offices and the practitioner 
community.
    While PRP staffing has remained fairly stable for the past 
few years, there have been some shift of resources to 
accommodate needed transfers of workload. My office has 
developed a staffing model based on workload needs to ensure 
each district has been allocated an appropriate level of 
resources commensurate with local workload demands.

                         III. Taxpayer Advocacy

A. Initiatives of the Taxpayer Advocate

    Since the inception of PRP, the Taxpayer Advocate's staff 
and field PROs have been involved in identifying the underlying 
causes of taxpayer problems and in recommending solutions to 
improve taxpayer service and IRS responsiveness. Because those 
recommendations were made in a variety of ways and came in 
through different levels of the organization, they were handled 
inconsistently at times and often did not receive the support 
necessary to ensure implementation.
    One of the early actions that I took upon assuming this 
position was to establish a more formal approach towards 
handling improvement recommendations received from the field 
and then in tracking completion of approved actions. Since that 
time, we have also developed a more comprehensive management 
information system and have used data derived from that system 
to pinpoint critical areas of concern. As a result, by the time 
TBOR 2 was enacted much of the structure and internal systems 
to track and report on improvement initiatives sponsored by the 
Advocate's office were already in place. We have established a 
formal system of Advocacy Memoranda, which requires a response 
to the Taxpayer Advocate within 90 days. We also have a 
tracking system in place to ensure approved actions are being 
addressed by the appropriate officials until they are resolved 
or discontinued.
    During the last two months of FY 1996, we issued two 
Advocacy Memoranda, to the appropriate responsible official, 
which contained recommendations relating to two advocacy 
projects undertaken by the Advocate's staff: the first 
contained recommendations related to the Revenue Protection 
Strategy (RPS) that resulted from an FY 1996 cross-functional 
effort to improve processes for the 1997 individual income tax 
filing season. The second memorandum followed up on the 
implementation of recommendations that had resulted from a 1994 
cross-functional effort, the Last Known Address (LKA) Study, 
which I chaired, to improve the way the Service determines and 
maintains taxpayers' current addresses.
    In addition to the aforementioned advocacy projects, my 
staff was involved in two other initiatives worthy of mention 
in this report and we are also supporting a project originally 
initiated by the San Francisco PRP staff and co-sponsored by 
the Western Region. The first two projects deal with the 
establishment of a servicewide customer feedback system and a 
study on issues affecting divorced or separated spouses, now 
more commonly referred to as the joint return study and the 
Western Region study focuses on audit reconsideration issues, 
which represents the number one source of PRP casework (see 
Chart A.).
    A brief synopsis of each of the five projects follows.

1. Revenue Protection Strategy

    The Service's Revenue Protection Strategy (RPS) is an 
approach, begun during FY 1995, to take a more aggressive 
stance to identify and prevent fraud and abuse of the Earned 
Income Tax Credit. Although the strategy has evolved and been 
refined since its initial implementation, RPS' basic feature 
involved the delay in issuance of certain EIC-related refunds 
and the review and screening of questionable EIC claims to 
determine whether to disallow the claim through the statutory 
notice of deficiency process or to initiate a criminal 
investigation. During the 1995 filing season, field PRP offices 
received 25,257 Applications for Taxpayer Assistance Order 
(ATAO) and 895 regular PRP cases related to RPS refund freezes. 
During FY 1995, the Office of the Taxpayer Advocate worked with 
field PRP offices and members of Headquarters operational 
staffs to monitor the RPS processes and case inventories and to 
identify opportunities for improving processes and refining 
screening methods. During the 1996 filing season, only 835 RPS 
related ATAOs were received, a significant decrease in taxpayer 
hardship claims resulting from improved screening and selection 
techniques which required far fewer delays in the issuance of 
refunds. In 1996, although regular RPS PRP case receipts 
increased to 4579, most of those cases were holdover problems 
from the prior year, i.e., 1995, refund freeze was not yet 
resolved because of processing problems.
    During the past fiscal year, the Taxpayer Advocate's staff 
partnered with staff members representing the Assistant 
Commissioner (Examination), the Office of Refund Fraud, and the 
Chief Taxpayer Service to review RPS processes in selected 
districts and service centers. Following that review, 
recommendations were made in an Advocacy Memorandum to the 
Chief Taxpayer Service. We acknowledged in our Advocacy 
Memorandum that legislation pending at the time it was issued 
to give the IRS authority to adjust EIC amounts and other 
return items without requiring issuance of a statutory notice 
of deficiency might impact the recommendations being made.
    During the 1997 filing period my staff will work closely 
with the staff of the Service Center Executive Officer and 
other functional areas to monitor the RPS process. This is 
critical in light of new legislation providing the IRS with 
math error authority on RPS cases and new procedures for 
handling taxpayer identification numbers for those individuals 
unable to obtain Social Security numbers.
    The following is a brief summary of our RPS 
recommendations. The recommendations have been numbered in this 
report to assist the reader:
    1. Revise the wording on the acknowledgment and interim 
letters generated through Examination function management 
information system.
    2. Revise certain RPS taxpayer notices.
    3. Establish indicators on RPS accounts to show when 
correspondence or telephone inquiries are received from 
taxpayers.
    4. Establish an indicator to show when additional 
information is needed from the taxpayer.
    5. Establish separate account indicators to show when an 
RPS case is closed because the taxpayer agreed to the proposed 
adjustment or when the Service accepted the return as filed.
    6. Require the consistent use of indicators among all IRS 
offices.
    7. Indicate the date acknowledgment and interim letters 
were sent on RPS cases.
    8. Issue clarifying instructions for the handling of cases 
where multiple taxpayers live in the same household.
    9. Provide separate indicators for closed cases where no 
response was received and for closed cases where a response was 
received but the information provided was not enough to 
substantiate the taxpayer's eligibility.
    10. Provide separate indicators for open cases where no 
response was received and for open closed cases where a 
response was received but the information provided was not 
enough to substantiate the taxpayer's eligibility.
    11. Revise time frames for initiating internal referrals 
and PRP cases following taxpayer contacts to coincide more 
closely with processing times related to the acknowledgment and 
interim letters.
    12. Revise account research and indicator input procedures 
for taxpayer calls routed outside a center's normal servicing 
area.
    13. Revise indicator input procedures when internal 
referrals or PRP cases are initiated at telephone sites.
    A more detailed explanation of our recommendations, 
responses by the Chief Taxpayer Service and the Taxpayer 
Advocate are included in Appendix A.

2. Last Known Address (LKA) Study

    During FY 1994, the Taxpayer Advocate sponsored a cross-
functional analysis of the IRS's efforts to improve the way it 
updates and maintains taxpayer address records. Twenty-three 
recommendations (ten short-term and thirteen long-term ones) 
were made as a result of that study and were approved by the 
Deputy Commissioner in August 1994.
    In a December 1994 report, entitled TAX ADMINISTRATION, 
Changes Needed to Reduce Volume and Improve Processing of 
Undeliverable Mail, the General Accounting Office (GAO) reached 
the following conclusion:
    Although it is unlikely that the problem of undeliverable 
mail can be totally eliminated, IRS needs to give undeliverable 
mail more attention because it adversely affects operations and 
can cause undue burden on taxpayers. Although previous efforts 
to deal with this mail were primarily limited to IRS' service 
center Collection functions, new efforts are expected to have 
Service-wide consequences because IRS agreed in August 1994 to 
implement recommendations of the Taxpayer Advocate's study. The 
implementation of those recommendations should have significant 
impact on reducing IRS' undeliverable mail.
    Since the December 1994 GAO report, twelve of the twenty-
three approved recommendations were implemented or were closed 
(without being implemented). Actions implemented by the Service 
involved simplification and standardization of address 
instructions to taxpayers, the implementation of new guidelines 
for accepting oral statements during compliance contacts, 
clarification of procedures dealing with divorced and separated 
taxpayers, and expanded training for employees on change of 
address input procedures.
    Overall we believe progress has been made in this problem 
area. At this time we believe most of the remaining issues can 
be closed with the exception of a few recommendations which are 
still in progress.
    One of those projects involves a test funded by the 
Taxpayer Advocate's Office and conducted by the Indiana 
District Problem Resolution Office. The test provides for the 
direct distribution of the IRS change of address form within 
the U.S. Postal Service's Change of Address confirmation letter 
and Welcome Kit. On December 12, 1996, I issued an Advocacy 
Memorandum to the Chief Taxpayer Service recommending that he 
consider implementation of this proposal nationwide. My office 
is tracking that recommendation separately in the 
Commissioner's Reporting System, and I will report on our 
progress in my FY 1997 report to Congress.
    The second issue provides for the development of a 
legislative proposal to define last known address. After review 
by Chief Counsel, they agreed to establish a project to define 
last known address by regulation in lieu of the legislative 
recommendation. At this time we cannot move further until a 
business case is completed for the time frames set forth for 
processing returns and notifications (i.e., the numbers of days 
necessary to process address information from returns and 
notification). This item will remain open pending this 
response.
    A complete listing of the LKA Study recommendations and 
discussion points is contained in Appendix C.

3. Customer Feedback System

    Following passage of Taxpayer Bill of Rights 2, which 
requires that the IRS report on all complaints received related 
to employee misconduct, the Taxpayer Advocate and Chief 
Management and Administration were assigned responsibility for 
the implementation of a Customer Feedback System. The following 
recommendations were made to the Commissioner, Deputy 
Commissioner, and IRS Executive Committee:
    1. The Deputy Commissioner should have the primary 
responsibility for ensuring that appropriate actions are taken 
to implement the system and to initiate actions based on 
information and data provided by the system.
    2. The Taxpayer Advocate should be the individual with 
primary responsibility for administering the system and for 
providing data and appropriate recommendations to the members 
of the IRS Executive Committee.
    3. The Regional Commissioners and Chief Officers should be 
responsible for taking appropriate corrective actions, based on 
the data and recommendations received.
    4. Data on customer feedback should be maintained on the 
Problem Resolution Office Management Information System 
(PROMIS) which will require some modifications to handle data 
input and storage requirements.
    All recommendations have been agreed to and the system is 
now operational. Initially, data on both complaints and 
compliments from taxpayers is being gathered manually and will 
be retained by each office. Following the required 
modifications to PROMIS, which are expected to be completed in 
January 1997, all data will be input and the first report made 
available to the Executive Committee. In addition, coordinators 
have been established within each office to ensure data is 
properly input and maintained. The first report to the Congress 
on customer feedback is due June 30, 1997.

4. Joint Return Study

    During a TBOR2 hearing in April 1994, the Taxpayer 
Ombudsman indicated that a study was being undertaken to review 
the problems being experienced by divorced and separated 
taxpayers. This was in response to comments made by the 
Chairman of the IRS Oversight Subcommittee, in reference to the 
increasing numbers of complaints being received by her office 
on this issue.
    The task force, which was co-sponsored by the Taxpayer 
Ombudsman and the Southwest (now Midstates) Region, completed 
their efforts in late 1995 and provided the results of their 
study to a new task force formed as a result of pending TBOR2 
legislation requiring both the IRS and the GAO to conduct a 
study on the issue of joint and several liability. The Taxpayer 
Advocate and Chief Taxpayer Services are serving as cosponsors 
of the new study. The IRS study group report, which is due to 
be issued January 30, 1997, will also include a review of 
innocent spouse provisions.

5. Audit Reconsideration Project

    In conjunction with our efforts to initiate improvements to 
systems which are creating problems for taxpayers, the Western 
Region recently completed an advocacy project on audit 
reconsiderations which, according to data on FY 1996 casework, 
is the single largest source of cases received by PRP.
    The project, which is being reviewed by my staff and the 
Assistant Commissioner (Examination) has great potential for 
reducing both the timeframes for handling audit 
reconsiderations as well as the number of cases that need to be 
referred and subsequently handled in PRP. A number of 
recommendations have been forwarded to the Chief Compliance 
Officer for review. Results of this initiative will be reported 
on in the FY 1997 Taxpayer Advocate's report.

B. Legislative Recommendations

    While I have no specific independent legislation 
recommendations to make in this year's report due to time 
constraints, there are several legislative proposals being 
circulated within the IRS at the time of this report's 
publication which I endorse for further study and 
consideration.

1. Simplify the Computation and Assessment of the Estimated Tax 
Penalty

    The current rules regarding penalty for underpayment of 
estimated tax under IRC 6654 are extraordinarily complex for 
taxpayers and very difficult for the IRS to administer. For 
example, in FY 1995 5,619,851 estimated tax penalties were 
imposed on individuals. The exceptions to this penalty, for 
which many taxpayers qualify, are difficult to compute and are 
the source of additional frustration for taxpayers. Especially 
complex is the ``annualized method'' of determining if an 
exception to the penalty applies. Taxpayers are required to 
complete Form 2210 in order to show that they qualify for one 
of the exceptions that can lower or eliminate the penalty. Form 
2210 is among the most complex and difficult of the tax forms.
    The fundamental problem, however, is not with the form. The 
problem lies in the complexity of the law. The current list of 
suggested legislative proposals being circulated by Legislative 
Affairs Division contains two separate proposals in this area. 
I support further study of either concept since this is a 
difficult area for taxpayers to understand and is a continuing 
source of problems in PRP. Another possibility worthy of 
consideration is that the penalty be retained for only those 
taxpayers who continually underpay estimated tax, giving first-
time ``offenders'' an automatic waiver.

2. Allow an Exception to the Statute of Limitations on Refunds 
So That Untimely Requested Overpayments Can Be Credited to 
Other Years, in the Discretion of the IRS in Extenuating 
Circumstances

    The IRS is often put in the difficult position of 
explaining to a taxpayer that, while the IRS is seeking tax due 
owed from four or more years ago, it cannot refund amounts that 
would otherwise legitimately be due from those years. Taxpayers 
who file delinquent returns for multiple years often have a 
combination of balance due and overpayment returns. Many 
Service employees can relate instances of actions taken against 
taxpayers who owed taxes for (say) 1990 and 1992 but would have 
had a refund (sometimes larger that the combined balance due) 
for 1991.
    Taxpayers feel it is unfair that IRS will actively pursue a 
balance due while, in their view, ignoring the tax that would 
have been refunded from 1991. One proposal has been suggested 
to allow an exception to the statute of limitations on refunds 
when these types of extenuating circumstances exist. This 
proposal would allow the offset of overpayments to other tax 
liabilities, but not allow the refund of money for years beyond 
the current statute of limitations. Obviously, this is an area 
that needs to be reviewed carefully since we do not want to be 
in a position of rewarding non-filers.

3. Eliminate Failure to Pay Penalty and Increase Interest Rate 
on Underpayment to Market Rate

    The current failure to pay penalty and the related 
application of interest on underpayment is extremely complex 
and appears to do little to encourage taxpayers to pay timely. 
Charging taxpayers both a failure to pay penalty and interest 
on the underpayment is, by itself, unnecessarily complex. 
Adding to this complexity are the rules governing the graduated 
penalty rates and the application of interest only after the 
deficiency assessment is made. I could support a study of a 
change in law that would eliminate the failure to pay penalty 
and increase the interest rate on underpayment to a level that 
would reflect the true time value of funds.

C. The Most Serious Problems Facing Taxpayers

    The Taxpayer Bill of Rights 2 legislation has provided the 
Taxpayer Advocate's office with an important tool, through the 
Advocate's report to Congress, to deal more effectively in the 
identification and resolution of continuing problems that 
taxpayers are facing with the IRS. In our role as an advocate 
for taxpayers, we must not only identify the primary sources of 
problems, we must engage the organization in appropriate 
corrective actions. In developing this list of the twenty most 
serious problems facing taxpayers in their dealings with the 
IRS, that thought was foremost n our minds.
    An initial source for our listing was the day-to-day 
dialogue we have with taxpayers and tax preparers on their most 
serious problems with our systems. Although much of this 
information is derived from informal discussion, many of the 
issues are supported by data from the PRP management 
information system (PROMIS). For example, taxpayers and tax 
preparers, alike, report a significant number of problems with 
IRS penalty administration. As indicated on Chart A (page 7) 
Other Penalties and FTD Penalties rank sixth and seventh, 
respectively, in the top ten listing for the source of PRP 
casework nationally. On the other hand, problems associated 
with taxpayer access to IRS toll-free service are reported as a 
source of continuing frustration for both taxpayers and 
preparers but would not normally be identified as a source for 
PRP casework.
    Following development of the list, my office requested 
feedback from the Regional Commissioners and their staffs as 
follows:
     what progress had been made in their regions in 
addressing the issues outlined;
     the extent of the problem and its relative order 
of importance; and
     whether any other issues had emerged that 
warranted inclusion on the list.
    As a result of this interaction, my staff developed the 
final listing of problems that appears in this report. As 
mentioned in the foreword of this report, plans for 1997 
include more direct interaction with taxpayers and other key 
stakeholders, through focus groups and liaison activities. This 
will ensure a more comprehensive analysis of the issues and 
will be integrated with the data derived from the PROMIS system 
to serve as the primary source for continuing efforts to 
improve the performance of IRS systems affecting taxpayers.
    The listing of the twenty most serious problems facing 
taxpayers in their dealings with the IRS as well as the 
Services' progress to date in addressing these issues and our 
assessment of what remains to be accomplished is as follows:

1. Complexity of the Tax Law

    Responsible IRS Official: Various
    Complexity of the tax law is the single most burdensome 
aspect of compliance for most taxpayers and is an underlying 
cause of many, if not all, of the most serious problems 
encountered by taxpayers. While a number of IRS officials have 
varying degrees of responsibility for reducing the burden faced 
by taxpayers, and are taking appropriate steps , much of the 
impetus for complexity is driven by external forces and 
continuing changes to the tax law.
    While complexity of the tax laws has been identified as the 
single most burdensome aspect of compliance for taxpayers, it 
also serves, to a great degree, as a contributing factor for 
many of the other issues addressed in this report. Obviously, 
complexity in and of itself, is not intentional but rather, is 
the cumulative effect of numerous tax law changes, each of 
which is enacted for a presumably desirable public policy 
purpose. The Service is deeply concerned with taxpayer burden 
and is strongly committed to reducing the burden associated 
with complying with the tax laws, whether it is dealing with 
clarification or simplification of notices, publications and 
instructions or of the tax laws themselves.
    My office has focused on several issues during the past two 
years in an efforts to deal with reducing complexity and burden 
associated with the tax laws. For example, our efforts on a 
Joint Return study, co-sponsored by the Mid-States Region, were 
provided to the national IRS task force looking at the same 
issue. We intend to engage the field more fully in these 
efforts during 1997.
    One proposal that I previously made in testimony before the 
Sub-Committee for IRS Oversight at a hearing on taxpayer burden 
dealt with a methodology to ``score'' all proposed tax 
legislation for taxpayer burden, much the same as is now done 
for revenue. While an acceptable methodology would have to be 
developed to be used in scoring and this would not necessarily 
assure decreases in burden, this would ensure that burden is 
considered as an integral part of the process.

2. Inability to Readily Access IRS by Telephone

    Responsible IRS Official: Chief Taxpayer Service
    Taxpayers consistently identify the inability to reach IRS 
at its toll-free telephone number as a major problem. The IRS 
achieved a level of access during FY 1996 of 46 percent, which 
reflects a decline from the 50 percent level achieved during FY 
1994.
    In FY 1994, the IRS was funded to answer 34.6 million calls 
while actual demand was 66.8 million. In FY 1995, 33.6 million 
calls were funded, while actual demand rose to 101 million 
calls. This resulted in a 33 percent level of access for 
callers. (Demand in FY 1995 was unusually high due to actions 
taken as part of the IRS Revenue Protection Strategy initiated 
that year, which resulted in many refunds being delayed.) For 
FY 1996, 38.3 million calls were funded and actual demand 
dropped to 97.5 million, resulting in a 46 percent level of 
access. Despite the increased number of calls answered, the 
high level of demand each year still exceeds the resources 
available to answer these calls.
    To maximize use of available resources and improve the 
level of access to taxpayers, the IRS established an oversight 
board in November 1995 to review, administer, and implement 
best practices for toll-free sites. The board completed a top-
to-bottom review of toll-free equipment and implemented best 
practices nationwide.
    The IRS is also improving the clarity of its notices to 
reduce the need for taxpayers to contact us. In addition, tax 
forms and publications are available on the Internet 24 hours a 
day and on CD-ROM and in many public libraries. The IRS 
Internet Home Page also provides answers to frequently asked 
questions and other tax information 24 hours a day. This past 
year, many new services including Tax Topics, scannable 
Publications, and Tax Tables were put on-line.
    I strongly endorse the efforts being taken to improve 
access. In light of current and future budget realities, we see 
efforts to reduce demand while improving overall access as 
critical initiatives and are working with the Customer Service 
organization in the Midstates Region to explore further ways to 
reduce avoidable demand. The Service is also committing 
additional resources to toll-free service this year.
3. Lack of Clarity and Inappropriate Tone of IRS Communications 
with Taxpayers

    Responsible IRS Official: Chief Taxpayer Service
    IRS notices and correspondence are not always clear and 
sometimes contain jargon that is not understood by the average 
taxpayer. Frequently, notices do not provide an adequate 
explanation of the reason for the communication. In addition, 
IRS communications to taxpayers take the same tone and approach 
toward taxpayers with spotless compliance histories as toward 
those with long histories of intentional noncompliance.
    In response to concerns such as these, the IRS has begun a 
complete overhaul of its notice system. Efforts are focused in 
two primary areas: redesigning current notices and 
reengineering the entire notice process.
     The Notice Redesign project will improve the 
quality, content and format of IRS notices so that taxpayers 
can understand and know how to respond to a notice without 
having to call the IRS for an explanation.
     The Notice Reengineering project is part of a 
broader Tax Settlement Reengineering effort aimed at 
eliminating duplicate or unnecessary correspondence with 
taxpayers, targeting the notice mailouts to the desired 
audiences, improving the timing of the notice issuances, and 
exploring alternative methods of conveying information to 
taxpayers.
    My staff is actively involved in notice review and redesign 
and will continue to monitor progress inthis area. We see this 
as a major step in reducing burden for taxpayers. It also 
provides the potential to reduce telephone demand if IRS, 
through analysis of incoming notice calls, can improve notices 
so taxpayers do not need to call IRS after they receive them.

4. Erroneous IRS Notices

    Responsible IRS Official: Chief Taxpayer Service
    Information reported to the IRS by external sources on 
wages, interest, and other income is not always accurate and 
often results in IRS communications with taxpayers which are 
unnecessary, inaccurate, and misunderstood.
    The majority of payer reporting problems that impact the 
notices in the Underreporter Program (URP) most often occur in 
business mergers, when both merging entities report the income. 
Duplicate reporting also occurs for some businesses when both 
the payer and its transmitter file the same data. Other 
problems include late filing and/or the non-filing of 
correction documents.
    National procedures for identifying and reporting incorrect 
payer information are used to create a file, which is a 
compilation of payer information that has been verified as 
``erroneously filed or processed.'' The information is updated 
weekly so that erroneous information returns can be identified 
and corrected without having to contact taxpayers. For example, 
during the processing of tax year 1992 cases (worked primarily 
in calendar year 1994, and the last year for which complete 
data is available) 20,589 cases were closed without having to 
contact taxpayers.
    The IRS is revising the regulations that tell payers how to 
report business mergers, to clarify which company is 
responsible. The IRS office responsible for processing magnetic 
media documents conducts annual workshops which teach payers 
how to prevent problems and how to properly report each of the 
various types of income that is reportable on information 
returns. Through these workshops, the IRS has reduced the 
number of large volume filers who have problems. However, as 
the number of small filers has increased, the number of small 
filers who have errors in reporting payer information returns 
has grown. The IRS has begun targeting these small businesses 
with its workshops in an attempt to reduce errors from this 
community.
    In addition to the workshops, a telephone Hotline is 
operated for payers to get information on how to file. Also, 
the IRS publishes the filing requirements each tax year for 
payers to follow and conducts public forums for payers to 
discuss any potential changes to the reporting forms (e.g., W-
2, 1099).
    We strongly endorse the actions being taken and will 
continue to monitor progress in this area. This is also an area 
in which we will attempt to get more direct input on the 
specific nature of the problems being experienced from payors 
and taxpayers in order to more specifically target corrective 
actions.

5. Difficulty in Understanding Federal Tax Deposit Requirements

    Responsible IRS Official: Chief Counsel (primary)
    Chief Compliance Officer (secondary)
    Federal Tax Deposit rules and related penalties are 
extremely complex, resulting in frustration for taxpayers who 
attempt to comply with the requirements, and expenditure of 
significant resources by IRS in maintaining, correcting, and 
adjusting employment tax accounts.
    During fiscal year 1993 the IRS issued new Federal tax 
deposit regulations intended to simplify the system previously 
in place. These regulations were effective with respect to 
deposits of Federal employment taxes (including railroad 
retirement taxes) attributable to payments made after December 
31, 1992, and affect approximately six million employers who 
pay employment taxes. The new regulations were designed to 
simplify the employment tax deposit system. They are easier to 
understand and provide employers with up-front certainty in 
determining their deposit obligations. The new system was 
designed to reduce burden and compliance cost for employers, 
particularly small businesses. In addition, we are currently 
moving toward further simplification by phasing in an 
electronic funds transfer (EFT) deposit system, and giving 
consideration to raising the quarterly threshold requiring 
deposits.
    The IRS is conducting a comprehensive analysis of the 
Business Master File for employers, who had a Form 941 filing 
requirement for 1995, to determine the effectiveness of the 
change in the regulations, noted above, in reducing their 
compliance burden. A second objective of the study is to 
identify and address continuing difficulties employers 
experience in complying with the deposit requirements. 
Participants from several IRS offices will conduct the study, 
as well as the Northeast Region PRP office. The Commissioner's 
Advisory Group is the external participant in this study. The 
results of the study will be available in the spring of 1997.
    To specifically address penalty concerns, the study group, 
in conjunction with the IRS St. Louis office, conducted a 
review of closed PRP cases that addressed federal tax deposit 
penalties. The IRS will continue to emphasize the one-stop-
service procedure which is part of CEP and which is designed to 
limit the number of problems with tax deposits.
    The IRS has also taken steps to help taxpayers cope with 
the complexity of federal tax deposit rules. One example was 
the combination of employment tax information from three 
separate publications (Pub 493, Alternative Tax Withholding 
Methods and Tables, Pub 937, Employment Taxes, and Pub 952, 
Sick Pay Reporting) into one publication, Pub 15-A, Employer's 
Supplemental Tax Guide. In addition, the threshold requirement 
for making federal deposits through electronic filing was 
revised. An Electronic Federal Tax Payment System (EFTPS) help-
line was set up to assist taxpayers in meeting their filing 
requirements.
    Problems experienced by specific groups of taxpayers were 
also addressed. For example, unemployment compensation 
recipients were unable to withhold federal income taxes. As a 
result, changes in the law were recommended to allow 
unemployment recipients to elect to have their state withhold 
federal income tax at a 15 percent rate. Also, the common-law 
rules pertaining to employee versus independent contractor were 
difficult to apply. The IRS substantially revised the common-
law rules pertaining to employee versus independent contractor. 
This was to make the rules simpler and make the criteria for 
determining whether a worker is an employee or independent 
contractor more concise.
    We fully endorse the actions being taken by the Service in 
this area. Although taxpayers may find the Federal Tax Deposit 
rules somewhat complex, a number of changes have been made to 
simplify the process. In addition, the FTD system represents 
the major source of government funds, therefore expeditious 
receipt of FTD payments by the government is vital. Another 
improvement more specifically targeting small business and 
supported by my office was an agreement to notify taxpayers in 
advance when the frequency of tax deposits change.

6. Compliance Burden on Small Businesses

    Responsible IRS Official: Chief Compliance Officer 
(primary)
    Small Business Liaison (secondary)
    Small businesses are heavily burdened in dealing with tax 
related issues, including tax withholding and reporting 
requirements, and differing filing and definitional 
requirements for various types of tax (e.g., FICA, FUTA, and 
income taxes).
    Education is part of the answer to alleviating the burden 
tax law imposes on small business taxpayers and the Service has 
many programs geared to providing this education. Because, it 
has always been difficult to reach all stakeholders, further 
efforts need to be explored to identify ways to ensure 
taxpayers have the knowledge they need in order to comply with 
the tax regulations.
    Small Business Tax Education Program (STEP) is a 
cooperative effort with local organizations to provide tax 
education to small business owners. The overriding theme is 
``making taxes less taxing.'' This up-front tax education 
reduced the burden of the small business owners' tax 
obligations. Approximately 2,200 educational institutions 
(mostly colleges and universities) participated in STEP.
    Small business owners and self-employed persons can attend 
Small Business Workshops (SBW) to learn about their Federal tax 
rights and responsibilities. These workshops provide an 
overview of the role of the Internal Revenue Service and the 
kinds of tax information available to businesses.
    The IRS has many recommendations and initiatives in process 
to reduce the burden of small businesses in complying with the 
law:
     recommending the elimination or modification of 
the Look-Back Provision in IRC 460. This is a burden on 
taxpayers and IRS, produces nominal income or refunds, and is 
costly to administer.
     1995-96 Commissioner's Advisory Group recommended 
(with the support of the Service) that the FIFO rules for 
applying deposits against liabilities be changed for monthly 
depositors and that the de minimus threshold for requiring 
deposits be increased from $500 to $1000;
     considering a Deposit Education Program (DEP) 
initiative to provide the one-time retroactive removal of FTD 
penalties for certain small businesses who participate in a 
training program;
     to comply with the mandate of TBOR 2 (Act section 
304), the FTD timely and correctly deposit penalties will be 
waived for new employers; issuance of a notice to these 
taxpayers explaining what they need to do to comply in the 
future is under consideration;
     IRS will incorporate information in the Electronic 
Federal Tax Payment System (EFTPS) information package on the 
option of businesses making federal tax deposits more 
frequently than that provided by the regulations;
     developed a new publication, Publication 583, 
Starting a Business and Keeping Records, in an effort to assist 
small business people who are starting a business by providing 
basic federal tax information for small businesses;
     developed a video and written materials to assist 
employers and employees in meeting their tip income reporting 
requirements; the written material was produced in English and 
Spanish, and a Chinese version is under development.
    The Service recognizes that small business owners cannot be 
expected to comply fully with the tax laws unless they first 
understand their tax obligations and then have the tools they 
need to satisfy their obligations quickly and cost-effectively. 
For that reason, approximately two and a half years ago, the 
Commissioner made a commitment that the Service would do what 
it could to assist small businesses.
     Regulatory Reform--The IRS started by going 
directly to small business owners to listen to them. To 
participate in this regulatory forum, the IRS established a new 
IRS Small Business Affairs Office (SBAO) in March 1994. SBAO 
serves as the national contact for small business taxpayers or 
their representatives to express concerns regarding issues of 
tax administration.
     Small Business Town Meetings and White House 
Conference on Small Business Meetings--The IRS continued to 
seek opportunities for listening to the small business 
community. The Commissioner held seven small business town 
meetings throughout the nation during the spring and summer of 
1995. The IRS also actively participated in the White House 
Conference on Small Business's (WHCSB) state, regional and 
national meetings in 1994 and 1995.
     Tax Information and Assistance--During the summer 
of 1995, the IRS joined with the Department of Commerce and 
fourteen other government agencies to establish the U.S. 
Business Advisor--a one-stop Internet shop that directs small 
business owners to government information available on-line, 
including the electronic IRS Homepage. For small business 
owners seeking specialized tax assistance, the IRS partnered in 
the development of the first U.S. General Store for Small 
Business opened in Houston, Texas in July 1995. This store, 
which fourteen other federal agencies support, provides one-
stop government service to businesses, ranging from assistance 
in complying with regulations, to solving tax problems, and 
obtaining loans. The IRS continues to work with other federal 
agencies.
    The recommendation alluded to in the complexity section 
seems particularly relevant for small businesses, i.e., if 
burden were calculated at the time of enactment of tax 
legislation, small business concerns would be specifically 
considered at that time. We believe that business requirements 
are frequently enacted with a focus on the capabilities of 
medium and large businesses when in fact most businesses 
affected are very small, and are therefore faced with 
additional costs and complexity in complying. My office will 
continue to work with both operations and the Office of Small 
Business Liaison, as well as with the various Commissioners 
liaison groups to stay on top of and deal promptly with the 
concerns of small businesses.
7. Problems in the Administration of Penalties

    Responsible IRS Official: Chief Compliance Officer
    A large number of penalties are imposed and then abated 
each year, causing an unnecessary burden on both taxpayers and 
IRS.
    The Chief Compliance Officer has indicated that it may be 
premature to conclude that, because a large number of penalties 
are abated each year, an unnecessary burden is being placed on 
taxpayers and the IRS. Generally, civil penalty statutes 
require that penalties be imposed (for certain infractions of 
the law) unless the taxpayer establishes ``reasonable cause.'' 
In all such instances taxpayers must be contacted, in some 
manner, to be provided an opportunity to establish reasonable 
cause.
    The vast majority of civil penalties are computer assessed. 
Computer generated penalties, such as the failure to file and 
failure to deposit penalties, are assessed when returns are 
processed and notices are generated affording the taxpayer the 
opportunity to request abatement for reasonable cause. In the 
absence of a reasonable cause determination, the penalty 
stands. In the case of information reporting penalties, a 
``proposed'' assessment notice is sent, affording taxpayers an 
opportunity to establish reasonable cause prior to the penalty 
assessment. In either instance, the Service would be remiss if 
it did not afford the taxpayer the opportunity to respond to 
the penalty assessment. If this opportunity results in the 
taxpayers establishing reasonable cause and having the penalty 
removed, the Service has reduced at least a portion of 
taxpayers' burden attributable to cost.
    It is acknowledged that the Service can improve its 
processing of penalties to minimize the frequency of erroneous 
assessments (resulting in additional abatements) due to such 
things as misapplied payments and other systemic errors. Steps 
are being taken to improve our penalty management information 
system and to better determine the reason penalties are 
removed. In 1993 IRS established ``penalty reason codes'' which 
break down the reasons, to categories, such as reasonable 
cause, taxpayer error, Service error, or Appeals settlement. 
These codes were operational in service center processing in 
1993 and in examination processing in 1994. In 1996, these 
penalty reason codes were refined to provide more meaningful 
data.
    In 1993 the Service also introduced a cross-functional 
Penalty Internal Revenue Manual (PIRM) to be used by all 
Service employees who handle penalties. The objective of this 
manual was to improve the consistency with which penalties are 
addressed. This PIRM is currently available on the Penalty 
Bulletin Board and on the CARTS system.
    My office believes the data derived from the PROMIS system, 
which indicates penalties are a continuing source of taxpayer 
and PRP problems, clearly establishes the need for more action 
in this area. We have sponsored an advocacy project in the 
Northeast Region which will be looking at Federal Tax Deposit 
penalties to avoid or minimize instances of non-productive 
imposition. We are also working with the Office of Small 
Business Liaison to initiate a more comprehensive review of 
penalty policies and procedures and hope to report more in this 
area in our next report.

8. Lack of Understanding of Taxpayers' Concerns

    Responsible IRS Official: Chief Management and 
Administration
    IRS does not fully understand the concerns taxpayers have 
with tax administration and therefore cannot adequately address 
them.
    The IRS recognizes the importance of identifying taxpayer 
concerns and creating strategies to improve our services. To 
date, our efforts to explore taxpayer concerns have been 
focused on opinion research; since 1989, we have devoted 
considerable resources to taxpayer opinion data collection. 
Although exploring taxpayer opinions has led to improved 
services, we recognize a need to examine concerns through means 
other than opinions. We are in the process of expanding our 
efforts to include the systematic capturing of taxpayer 
complaints. The Taxpayer Advocate's Office is currently 
developing a system to track complaints and actions taken to 
respond to them. We believe that the analysis of this data will 
lead to a better understanding of taxpayer concerns and will 
allow us to better meet the needs of our customer.
    Even before Executive Order 12862, requiring federal 
agencies to survey customers about satisfaction levels with 
services, was enacted in September 1993 the IRS was taking 
steps to systematically survey taxpayer opinions. Since 1992, 
the Service has conducted five customer satisfaction surveys 
with individual taxpayers and three with small business 
taxpayers. We have also trained employees to moderate 
structured focus groups and have sponsored or conducted more 
than forty public opinion and customer satisfaction surveys. 
The Value Tracking Core Business System was created the to 
centralize the collection of qualitative data on taxpayer 
satisfaction. Recently, the section tasked with this 
responsibility was renamed the Opinion Research Group, and this 
group currently resides in the Strategic Planning Division.
    One initiative that resulted from opinion research is the 
creation of a small business assistance center, established as 
a three-year research test in the fall of 1993 in Buffalo, New 
York. Since it opened, the Center has provided assistance to 
more than 11,000 small business taxpayers and received the 
Hammer Award in April 1996 because of their new and innovative 
taxpayer services. Currently, an evaluation is being conducted 
to measure the Center's impact on compliance. Once the 
evaluation is completed, decisions will be made on the 
continuation of the Center in Buffalo and on the creation of 
centers in other locations.
    To follow-up on the results of the 1993 customer 
satisfaction surveys, the Opinion Research Group conducted 
focus group projects to gather in-depth information on two 
issues: the burden of recordkeeping and taxpayers' perceptions 
of the fairness and integrity of the IRS.
    The Opinion Research Group actively involves IRS executives 
in identifying and prioritizing key issues of concern to 
taxpayers. The Opinion Research Group also designs surveys for 
specific purposes at the request of individual executives. As a 
part of a National Performance Review effort during fiscal year 
1995, the Opinion Research Group helped develop and conduct the 
``Out of Washington'' events to obtain direct feedback from the 
public. The Opinion Research Group is currently partnering with 
IRS field offices on several data gathering efforts. They also 
have conducted focus groups with individual and small business 
taxpayers to gather opinion data concerning four processes 
identified by the Tax Settlement Reengineering Project. 
Following is a list and description of the four processes:
     Enable Taxpayers to Fulfill Their Tax Obligations 
(the process of proactively educating the general public about 
the tax process and motivating taxpayers to fulfill their tax 
obligations);
     Provide Assistance (the processes used by 
taxpayers to voluntarily fulfill their tax obligations); and
     Perform IRS Quality Control (the processing and 
perfecting of the taxpayers' returns and pipeline documents).
    Analysis on the data collected through these focus groups 
will assist the reengineering project employees to achieve 
their objective of designing, prototyping, and implementing a 
tax settlement process that reduces cost, and improves quality 
and cycle time.
    My office strongly endorse the actions being taken and in 
FY 1997 will sponsor focus groups in conjunction with Stretegic 
Planning Division on the problems taxpayers experience with 
IRS. Information from these groups will be used in developing 
our FY 1997 report.

9. Delays by IRS in Compliance Contacts

    Responsible IRS Official: Chief Taxpayer Service
    Compliance contacts by the IRS, such as notices concerning 
discrepancies between income reported on a tax return and that 
reported by payers, are routinely initiated from one to two 
years after the income was received and/or reported. This 
burdens taxpayers with the possible lack of recall and records, 
as well as with potential additional penalty and interest 
charges.
    Over the past few years, the IRS has taken steps to shorten 
the time between when income is reported by taxpayers on their 
tax returns and when the IRS contacts taxpayers if the 
information reported by payers differs. The goal is to reach 
taxpayers before they file their next return so that they can 
avoid repeating the problem that gave rise to the initial IRS 
contact. For example, in calendar year 1995, the elapsed time 
was reduced to three months; for tax year 1995 returns, initial 
taxpayer contacts began in November 1996. This is accomplished 
by extracting tax and information return data in two separate 
phases rather than waiting until all returns have been 
processed. The IRS is pursuing additional processing and 
procedural changes to further reduce the time between the 
document matching process and the date underreporter notices 
are issued.
    My office endorses the actions being taken and has noted 
reductions in the elapsed time between the reporting of income 
and follow-up actions by the Service

10. Problems in Determining and Maintaining Taxpayers' Current 
Addresses

    Responsible IRS Official: Chief Taxpayer Service
    A December 1994 GAO report, entitled TAX ADMINISTRATION, 
Changes Needed to Reduce Volume and Improve Processing of 
Undeliverable Mail, recommended that IRS more aggressively 
communicate to taxpayers the need to notify IRS when they 
change their address and to make the notification process 
easier for taxpayers. In addition, IRS sometimes fails to 
update its files to reflect the most current taxpayer's address 
known to any IRS component, and does not always take adequate 
steps to assure that its communications reach both parties to a 
joint return when there has been a divorce or separation.
    As described in the GAO Report, the IRS estimated that it 
had about 15 million pieces of undelivered mail in fiscal year 
1992. The three principal causes of this problem were 
identified as:
    1. Taxpayers move without leaving a forwarding address with 
the United States Postal Service (USPS);
    2. The USPS may not deliver or forward mail, which is then 
returned to the IRS as undeliverable; and,
    3. The IRS may incorrectly record taxpayers' addresses in 
its files.
    The IRS has pursued a number of initiatives to improve the 
accuracy of taxpayer address information on file and to reduce 
the amount of undelivered mail that is returned to service 
centers. For example:
    1. Internal Revenue Manual (IRM) procedures have been 
revised to require the update of a spouse's address of record 
when a taxpayer separates from his or her spouse.
    2. IRMs also provide instructions to enter the ``In care 
of'' data, if present, when updating taxpayer addresses to IRS 
computer files.
    3. Oral statements are now accepted to facilitate the 
processing of address changes.
    4. From July 1995 through September 1996, the IRS 
participated in a joint effort with the United States Postal 
Service (USPS) to test the Federal Address Change System 
(FACS).
    The following is a list of ongoing or planned actions that 
should reduce the amount of undelivered mail generated by the 
IRS and improve the accuracy of taxpayer address information 
contained in the Master File.
    1. The USPS has required that, by July 1997, all mail 
pieces claimed at automation (i.e., discount) postal rates must 
have had their addresses validated against the NCOA database 
within 6 months of the mailing.
    2. The IRS is testing the use of address software to 
improve delivery. The software helps ensures the consistency of 
city, state, and ZIP code information within an address, and 
corrects data transcription errors.
    3. Due to the efforts of the Notice Reengineering Team in 
FY 1996, the IRS has taken steps to eliminate several high 
volume notices that will prevent approximately 18 million 
mailings. The elimination of these notices will also reduce 
undeliverable mail that would normally result from these 
mailings.
    This area continues as a concern of my office . Other 
related actions are discussed in the section entitled Taxpayer 
Advocate Initiatives: Last Known Address (LKA) Study. We plan 
to continue discussion with Taxpayer Service to look for means 
of improving procedures for this program.

11. Cost to Taxpayers of Electronic Filing

    Responsible IRS Official: Chief Taxpayer Service
    The cost of electronic filing is a burden to low income 
taxpayers who use electronic filing to get quick refunds.
    The Service needs to continue to offer low or no-cost 
methods of filing electronically to encourage taxpayers to use 
this option and has initiated several programs that help 
provide relief from this burden. Three of these programs are:
    1. TeleFile, which allows taxpayers to file their returns 
by telephone using a toll-free number. There is no cost to 
taxpayers who use this program. Nationwide expansion of this 
program in 1996 resulted in an increase in the number to 2.84 
million from over 680,000 in 1995.
    2. Tax Counseling for the Elderly (TCE) and Volunteer 
Income Tax Assistance (VITA), which provide electronic filing 
services. ELF returns filed by VITA sites increased from about 
124,400 in 1995 to 226,300 in 1996.
    3. Automated Walk-in Assistance and Electronic 
Transmission, which provides electronic filing for taxpayers 
requesting assistance with return preparation. Taxpayers must 
meet certain criteria to use this service. In 1996, about 
50,000 electronic returns were processed by IRS walk-in 
offices.
    My office strongly endorses the comment that IRS needs to 
offer low or no-cost methods to encourage the use of electronic 
filing so as not to place a burden on taxpayers who use this 
service out of proportion to the benefits IRS derives. Employer 
or community-sponsored programs provide another option for low 
income taxpayers should also be explored. The increased 
promotion of Telefile should also result in substantial 
increase in receipts over 1996.
12. Problems in the Administration of the Earned Income Tax 
Credit

    Responsible IRS Official: Chief Compliance Officer
    The growing population of taxpayers entitled to the Earned 
Income Tax Credit frequently has less than average knowledge of 
tax laws and requirements, and need additional assistance in 
understanding the complexities of this provision.
    The IRS has provided comprehensive support for enabling 
qualified taxpayers to obtain the Earned Income Tax Credit 
(EITC) and, if they wish, the Advance Earned Income Tax Credit 
(AEITC). To accomplish this, the IRS established partnerships 
with state and local government agencies and national and local 
community service, social welfare, religious, professional, 
business, labor and ethnic organizations.
    The Service has made significant inroads to educate the 
public on the eligibility rules for EITC/AEITC, has made EITC 
and AEITC key elements of the VITA and TCE Programs, and 
developed special training for more than 80,000 volunteer 
assistors to help eligible taxpayers take the credit and apply 
for the advance credit. The training has included special video 
programs and focused sections in print materials.
    During FY 1993 Post-Secondary Understanding Taxes Program 
was piloted in 27 educational institutions by 38 instructors 
with 768 students. In FY 1994, materials were available 
nationwide. Through a tele-marketing project, more than 2,500 
sponsors requested the materials during the first year. 
Approximately 5,500 educators currently use the resource 
package. The program includes significant information dedicated 
to EITC and AEITC.
    IRS actions taken during FY 1996 and proposed for 1997:
     Secured organizational sponsors for special VITA/
EITC assistance sites and coordinated informational efforts 
with government and private sector organizations and print and 
electronic media.
     Entered into partnership with USDA Cooperative 
Extension Service to inform potentially qualified individuals 
about EITC and AEITC.
     Coordinated outreach actions with the Center for 
Budget and Policy Priorities that led to grassroots EITC and 
AEITC information campaigns by state and local social advocacy 
groups throughout the nation.
     Secured the cooperation of more than 80 major 
organizations to assist with the promotion of EITC/AEITC.
     Arranged for distribution of print promotional/
information materials in English and Spanish.
     Arranged with state and local governments to 
include stuffers in various public assistance mailings, and to 
place posters and other promotional materials in public 
buildings.
     Arranged with major private sector employers and 
employer associations to distribute promotional materials. In 
July 1996 a task order was awarded under the terms of the 
Taxpayer Information and Education Multi-Year Contract (TIR-93-
0059), providing for a rewrite of the current edition of the 
Post-Secondary Education Program.
     Worked with local school systems, educational 
associations, and other organizations to promote awareness 
among students' families and other eligibles.
    Availability of sufficient funding to produce updated 
Volunteer Assistance and Compliance Education materials is 
critical. Without these products the instructors who use the 
Post-Secondary Understanding package will not receive the most 
current tax law; and the volunteers for the VITA and TCE 
programs will not receive the necessary training. Every year 
the number of individuals who rely on the services of the VITA 
and TCE volunteers increases, along with the number of adults 
required to file income tax returns for the first time.
    My office endorses the stated actions and we are heavily 
involved to assure that necessary EIC compliance programs do 
not inordinately burden taxpayers and to provide expeditious 
release of refunds in case of significant hardship. Issues 
relating to EIC are also discussed in the section entitled 
Revenue Protection Strategy.

13. Abatement of Interest Due Because of IRS Delays

    Responsible IRS Official: Chief Compliance Officer
    There is a lack of equity caused by the inability of IRS to 
waive or abate interest charges that result because of delays 
caused by IRS.
    The IRS has been statutorily unable to abate interest in 
most cases. The Tax Reform Act of 1986 (Taxpayer Bill of 
Rights) introduced IRC Section 6404(e)(1) to allow for an 
abatement of interest on deficiencies or payments when the IRS 
makes an error of delay in the performance of a ministerial 
act. This affects all taxpayers who owe taxes and perceive that 
additional interest has accrued due to delays caused by IRS 
employees or procedures. Section 301 of TBOR2, passed in July 
1996, expanded the scope of IRC Section 6404(e)(1) to provide 
that the IRS can abate interest with respect to any 
unreasonable error or delay resulting from managerial acts as 
well as ministerial acts. In addition, denial of claims for 
abatement are now entitled to Tax Court Review.
    As a result of TBOR2, IRS has developed a National 
Examining Officer's Activity Record (Form 9984) which requires 
documentation in the case file of all activities on the case. 
In addition, in order to ensure Tax Court deadlines are met, 
Formal Interest Abatement Claim Disallowance procedures are 
also being developed.
    My office will be monitoring the additional authority given 
IRS by the recently enacted TBOR2 legislation to assure that 
implementation procedures are developed which are consistent 
with Congressional intent.

14. Problems in Mailing Forms, ES Vouchers, Etc.

    Responsible IRS Official: Chief Taxpayer Service
    IRS seems to be experiencing increasing problems in mail 
items reaching the intended taxpayers.
    This problem may be diminishing in severity since the most 
recent IRS Customer Satisfaction Survey (Publication 1866A) 
indicated that taxpayers gave IRS its highest rating in the 
entire value tracking section when responding to the statement: 
``The IRS provides people with the forms and information they 
need to complete their tax returns.''
    IRS presently mails approximately 160-170 million pieces of 
bulk mail each year to addresses that are generally 6 to 9 
months old at the time of the mailing and have not been 
perfected with current ``state of the art'' address correction 
systems. In addition, all the IRS's bulk forms or return 
mailings are mailed by third class, which is less expensive 
than first class, but does not provide automatic forwarding or 
return-to-sender service and may experience potential delays in 
delivery.
    The IRS has taken numerous steps over the years to improve 
its bulk mailing techniques and procedures, has improved the 
address software for large volume booklet mailings to move the 
products to the closest point of delivery for the first sorting 
and handling of the mail, and began using bar codes on all bulk 
mailings. In addition, the IRS is pursuing the use of the NCOA 
system for all bulk mailouts, is beginning to use software that 
performs address standardization routines for mailings to 
individual and business addresses, and has developed contract 
language stressing technical requirements for bulk mailouts and 
vendor responsibilities in meeting contract dates.
    Plans for the future include the following initiatives to 
refine the IRS contract compliance and mail monitoring 
procedures:
    1. New mail tracking and monitoring systems put in place by 
the USPS and industry will electronically track mail as it 
enters and moves through the postal system;
    2. The IRS is exploring multi year contracting methods to 
ensure a more stable base of experienced, well-qualified 
contractors;
    3. The IRS is exploring the use of ``on demand'' or ``point 
of delivery'' concepts rather than large volume single source 
contracts.
    4. While bulk forms mailings continue to generally be the 
most cost effective method to deliver most forms and 
instructions to the widest possible audience, the IRS continues 
to explore and expand the use of alternatives.
    My office fully endorses the actions being taken.

15. Separate Mailing of Math Error Notices and Effected Refund 
Checks

    Responsible IRS Official: Chief Taxpayer Service
    Several million taxpayers who receive refunds each year 
also make mathematical errors in computing the tax on their 
returns affecting their refund amounts. Currently, the 
explanation of the error and the refund checks are mailed 
separately, causing confusion to taxpayers.
    Currently, the IRS forwards an indicator, via the refund 
magnetic tapes from service centers, to the Financial 
Management Service's (FMS) Regional Financial Centers, that a 
math error was identified in the original return and that the 
refund amount has been corrected. FMS inserts a stuffer with 
the affected refund checks advising taxpayers that their 
refunds may be for amounts other than what they expected, and 
that an explanation for the difference will be sent separately. 
The proposal to include a math error notice indicator along 
with the refund check tape was scheduled to be addressed as 
part of the IRS plan to upgrade its computer systems. However, 
due to funding uncertainties, both in the IRS and FMS, this 
issue is not being pursued at this time.
    My office will continue to work towards a better solution 
to this problem which involves two agencies in Treasury. 
Taxpayers who believe their refund checks comes from IRS call 
the the Service unnecessarily. We believe a comprehensive cost 
benefit analysis would be useful to determine the potential to 
reduce both taxpayer burden and the cost to the IRS in handling 
unnecessary calls.

16. Delays by IRS in Processing Offers in Compromise

    Responsible IRS Official: Chief Compliance Officer
    The number of offers-in-compromise has increased greatly 
because of changes in IRS policy toward their consideration and 
acceptance. However, IRS's ability to respond timely to those 
submissions has not kept pace.
    As a result of the substantial increase in offers in 
compromise inventory since the Service implemented the changes 
to the offer program in 1992, the IRS has established a new 
disposition goal of six months. The IRS recognized that many 
offers prior to 1992 were not resolved for long periods of 
time. The cumulative disposition rate within 6 months has 
ranged from 54 percent in 1993 to 58 percent in July 1996.
    A core business group was formed in April 1996 to evaluate 
the entire offer process. The group has not completed its task 
to date but has made numerous recommendations which should help 
to reduce the inventory and allow for a more timely resolution. 
Additionally, offers continue to age while they are in the 
hands of District Counsel. TBOR2, however, provides that 
Counsel now only has to review offers with liabilities which 
exceed $50,000. The great majority of offers in the inventory 
are for liabilities below $50,000. It is expected that this 
change will also decrease the amount of processing time.
    My office feels the steps being taken should have a 
positive impact on improving the timeliness of offer 
processing. We also plan to review the acceptance rate for 
offers as well as consistency of processing actions.

17. Burden Caused by Cash Management Practices

    Responsible IRS Official: Chief Taxpayer Service
    The IRS does not seem to have adequately addressed burdens 
that the use of lockbox vendors (i.e., a bank to receive and 
quickly process tax payments) cause for taxpayers, such as 
separate envelopes for returns and remittances, additional 
postal charges, confusion caused taxpayers by changes to 
lockbox addresses, and problems associated with lockbox 
employee embezzlement.
    Since the advent of lockbox processing, procedures have 
been in place to safeguard taxpayer payments and to prevent 
theft or fraud. Although some instances were reported and 
addressed early-on, the IRS is not aware of recent problems 
associated with lockbox employee embezzlement. The burden issue 
with regard to lockbox occurs when the IRS requires taxpayers 
to separately send payments to a lockbox address and tax 
returns to an IRS service center. To deal with this issue, tax 
year 1996 Form 1040 tax packages will contain a single envelope 
with instructions that direct taxpayers to mail returns with 
payments to the same address. Two labels will be provided, one 
with the lockbox address for returns with payments and the 
other with the appropriate IRS service center address for non-
remittance returns.
    My office endorses the stated actions being taken. In 
addition, we believe when such changes are proposed by the 
Treasury Department to save the Department either costs or 
interest expense, consideration should be given to the 
increased burden on those affected. For example, in this case a 
small part of the savings from the expedited cash flow could 
have been set aside to offset the possible increased postage 
costs for taxpayers.

18. Lack of Acknowledgment of Taxpayers' Submissions and 
Payments

    Responsible IRS Official: Chief Taxpayer Service
    Taxpayers often receive no acknowledgment of receipt when 
they submit claims, payments, and responses to IRS 
communications, nor information on the eventual disposition of 
the matter.
    Prior to June 1991, taxpayers were sent an acknowledgment 
letter when their correspondence, claim, payment, etc., was 
received. However, there was no measurement to ensure that the 
IRS response specifically acknowledged everything received or 
addressed all issues when closing the case. Since 1991, the IRS 
increased its emphasis on improving responsiveness to taxpayer 
correspondence, emphasizing closing taxpayer correspondence 
within 30 days rather than sending acknowledgment (interim) 
letters. During implementation of this practice, a performance 
analysis system was installed to monitor the accuracy and 
timeliness of responses.
    Current criteria do not call for acknowledging incoming 
mail (such as ``Enclosed, please find my tax payment . . . '') 
that does not require further contact with the taxpayer by the 
IRS. However, such acknowledgments will be done if there are 
other issues which require action by the IRS when an interim or 
final letter is prepared. Recently, some computer-generated 
pattern letters were revised to include a paragraph 
acknowledging a payment received with the taxpayer's 
correspondence.
    The IRS continues to explore ways to improve its 
responsiveness to taxpayer correspondence. For example, the 
acknowledgment paragraph for the taxpayer's correspondence and 
payment will be put in all letters as a selective paragraph 
instead of leaving it to the IRS employee to manually type. 
Correspondex letters are continually revised to make them more 
understandable and meaningful to taxpayers.
    My office endorses the efforts taken. The additional cost 
of further acknowledgment needs to be weighed, in our view, 
against the additional costs of non-acknowledgment such as 
unnecessary telephone calls. This should be explored as part of 
efforts addressed at reducing unnecessary telephone demand.

19. Lack of One-Stop Service

    Responsible IRS Official: Chief Taxpayer Service
    Despite efforts to address this problem, taxpayers continue 
to be frustrated when they must make repeated contacts and deal 
with several different IRS employees to resolve separate but 
closely related tax issues.
    GAO and IRS Internal Audit findings indicate that taxpayers 
expect to make one call and talk to one person who will resolve 
all of the issues they raise. Customer Service/Taxpayer Service 
assistors receive extensive training in most areas of account 
resolution, but it is still not possible to expect every 
assistor to have the necessary skills to handle all issues all 
the time. Sometimes it is necessary for them to transfer the 
call to another area for issues not within their realm of 
knowledge/authority.
    Prior to 1995, one-stop service was measured only for 
account calls in the IRS toll-free districts. The rate for 
Business Year 1994 was 96.65 percent, compared to 91.32 percent 
for 1993. In 1995, the traditional definition and measurement 
of one-stop service was replaced with a new measure, Initial 
Contact Resolution (ICR), which measures the satisfactory 
resolution of all issues resulting from a taxpayer's first 
inquiry to the IRS.
    ICR became effective March 1995 and now measures all types 
of inquiries to the IRS (i.e., telephone, walk-in or 
correspondence inquiries). Five different categories make up 
this measurement. ICR is being tracked in the first three 
categories as follows:
    1. The satisfactory conclusion of all issues during a 
taxpayer's first inquiry while on-line with the first IRS 
representative.
    2. The satisfactory conclusion of all issues during a 
taxpayer's first inquiry while on-line with more than one IRS 
representative. (Due to many types of complex account problems, 
it is not feasible to expect that all assistors will have the 
answers to each and every issue.)
    3. The satisfactory conclusion, off-line (written 
referrals, correspondence, messaging) of all issues as a result 
of the taxpayer's first inquiry.
    Two additional categories are used to measure service but 
are not considered as meeting ICR:
    4. The satisfactory conclusion of all issues as a result of 
or during the taxpayer's subsequent inquiry on the same 
issue(s).
    5. The inability to provide satisfactory conclusion to the 
taxpayer's issues on-line.
    The national ICR rate for the 12-month period ending in 
August 1996 was 81.3 percent, up from 79 percent in December 
1995 (the December figure reflects only an 8-month average). 
Specific ``reason codes'' were developed to assist tracking, 
determination and identification of the top conditions causing 
taxpayers to re-contact the IRS. Trend analysis has been 
performed on the data to target the top reasons. This 
information allows the IRS to make changes within its control 
(i.e., IRM procedures, acceptance of oral testimony). However, 
situations such as system limitations (i.e., computer system is 
down) also prevent the IRS from achieving 100 percent ICR and 
cannot readily be changed at the present.
    My office endorses the actions taken as well as those 
planned for the future.

20. Inconvenient Times and Locations for Doing Business With 
IRS

    Responsible IRS Official: Chief Taxpayer Service
    Working taxpayers often find it difficult to do business 
with IRS during IRS' normal weekday, 8:00 a.m. to 5:00 p.m. 
business hours because they are at work themselves during walk-
in hours of operation.
    District Directors nationwide were encouraged to evaluate 
the effectiveness of walk-in offices and their locations and to 
decide how best to provide services based on demographics and 
available resources. The Service has also aggressively 
publicized alternatives to direct face-to-face IRS assistance, 
including the availability of volunteer assistance at 
approximately 20,000 VITA and TCE sites nationwide.
    Tax forms and publications are available electronically on 
the Internet 24 hours a day. In addition, the IRS makes them 
available by CD-ROM and in many public libraries. The IRS 
Internet Home Page also provides answers to frequently asked 
questions and other tax information 24 hours a day. This past 
year, many new services including Tax Topics, scannable 
Publications, and Tax Tables were also put on-line. Also, the 
IRS continues to make its district office toll-free telephone 
assistance services available 10 hours each weekday. Answers to 
account-related inquiries are available 13 hours per day on the 
IRS 1-800-TAX-8815 assistance number.
    My office endorses the actions taken and will continue to 
advocate that times for access be expanded, within available 
resources, to allow taxpayers the option to do business with us 
at times more convenient for them.

                             IV. Appendices

                Appendix A: Revenue Protection Strategy

    The following is an overview of each of the Taxpayer 
Advocate's recommendations regarding the Service's Revenue 
Protection Strategy, a program to strengthen the IRS' ability 
to detect and prevent fraud. A number of these recommendations 
are either being implemented or are planned for implementation 
at some time in the future. Some will require additional 
discussion prior to a determination of appropriate action.
    Assistant Commissioner (Customer Service) Comments: 
Legislation has been enacted giving math error authority to the 
Internal Revenue Service for missing/invalid Social Security 
Numbers for dependent exemptions and Earned Income Tax Credit 
for qualifying children. Self employment tax work and dependent 
care credit are also impacted. Due to this legislation, there 
will be radical changes in the predominant type of work Service 
Center Examination does, the volume of work that can be 
accomplished, the methods of obtaining that work, and the 
procedures that will be implemented for Examination's role in 
the RPS for processing year 1997. We will continue to consider 
any negative impact to the taxpayer as we go about the primary 
objective of Correspondence Examination which is determining 
the correct liability using deficiency procedures. 
Additionally, we will solicit input from the Advocate's staff 
when the 1997 Revenue Protection Strategy Guidelines package 
for Service Center Examination is coordinated with the other 
National Office functional areas. Comments on the specific 
recommendations made are as follows:

1. Revise the Wording on the Acknowledgment and Interim 
Letters.

    We agree with this recommendation and we are revising the 
generated acknowledgment and interim letters used by Service 
Center Examination (not just in the Revenue Protection 
Strategy). The revisions were made based on input from the 
service centers and your staff. At this time, we do not know if 
Information Systems (IS) will be able to program the changes 
for the start of the 1997 processing year.

2. Revise the CP 19 and CP 20 Notices Initiated by Selection of 
a Case Based Upon RPS Criteria.

    Revisions to the CP 19 and CP 20 notices have been 
requested for 1997 based on input from the service centers and 
the Advocate's staff under the assumption that math error 
legislation would not be implemented in 1997. If the math error 
legislation is implemented in 1997, the CP 19 and CP 20 notices 
systemically generated for EITC, dependent exemptions, Self-
Employment Tax and Child Care Credit will cease to exist. Any 
Examination letters developed for the programs that will be 
worked by Correspondence Examination, under the RPS procedures, 
will be developed by the Office of Service Center Examination.

3. Establish an IDRS Control When Correspondence and Refund 
Inquiries Are Received in the Unit.

    We cannot implement this recommendation. All Service Center 
Examination Branches do not have adequate resources (IDRS 
terminals and staffing) needed to devote to this 
recommendation. Again, if the math error legislation is 
implemented in processing year 1997, the Service Center 
Examination Branches will be working their RPS cases manually. 
Therefore, they should have a better management of their 
correspondence since they will control how much work they take 
in weekly by what they are able to accomplish. The Office of 
Service Center Examination will be more vigilant in assuring 
that:
     Examination does not receive correspondence/refund 
inquiries that does not meet the criteria for routing to 
Examination (that was observed at all 10 service centers last 
year).
     Examination works their correspondence/refund 
inquiries timely by insuring more detailed instruction, 
monitoring status updates, performing evaluative visits and 
monitoring the weekly PRP reports provided by the Advocate's 
staff.

4. Establish a Separate Status Code When Additional Information 
Is Needed to Determine the Taxpayer's Eligibility.

    This problem was observed on our visitations to the service 
centers and was cited in our reports; however, we concluded 
that a larger problem was that service centers were not 
following instructions to put cases in Status 23 because this 
would have entailed taking work out of the automated system. If 
the math error legislation is implemented in 1997 and a manual 
AIMS control process is in effect for our RPS work, we will 
consider mandating a second status code in addition to Status 
23 for the scenario described in the recommendation. In our RPS 
Request for Information Services (RIS) for processing year 
1998, we will request a programming change for the automated 
system. No additional programming changes will be requested for 
1997.

5. Establish a Separate Status Code When a Case is Closed as 
Agreed or No Change.

    Disposal codes, not status codes, explain how an 
Examination case was closed. We don not believe any additional 
codes are necessary. There are ``no change'' and ``agreed'' 
disposal codes.

6. Require that All Centers Use the Same Status Codes and 
Organization Codes When Indication Case Actions.

    This problem is not limited to RPS Examination work. We 
agree with the recommendation to use consistent RPS status 
codes Servicewide in light of the fact that account status 
information, through universal access, is no longer confined to 
a service center and its jurisdictional district office. We 
will ensure that 1997 RPS guidelines address this issue. 
Organization code information, however, primarily serves as a 
tool for Examination to locate work within Examination that is 
not limited to service center RPS case processing and has no 
bearing on information provided to the taxpayer.

7. Indicate the Date the Acknowledgment Letter and Interim 
Letter Is Sent on AIMS or IDRS.

    No new AIMS programming requests will be submitted for 
processing year 1997, since it is not clear at this time what 
the benefits of the recommended change would be to taxpayers or 
telephone assistors. Again, the impact of this recommendation 
is not limited to Revenue Protection Strategy work. With more 
information from the Problem Resolution staff, we will evaluate 
a need to request a programming change from AIMS for processing 
year 1998. The issue of IDRS control has previously been 
addressed in the response to the third recommendation.

8. Issue Clarification for the Handling of Cases Where 
Taxpayers Live in the Same Household. Currently, EITC and Head 
of Household Filing Status Are Being Denied Automatically in 
Some Centers, While Others Are Not.

    We will provide more detailed instruction in the Duplicate 
Address section of our 1997 RPS Guidelines to address this 
problem.

9. Provide a Separate Disposal Code (DC) for Default Cases 
(Status 90) DC 10, for Cases With No Response and DC XX, for 
Cases Where a Response Was Reviewed But the Information 
Provided Was Not Enough to Substantiate the Taxpayer's 
Eligibility.

    No new programming changes will be requested for processing 
year 1997 and again, the recommended change would impact more 
than just Service Center Revenue Protection work. We will work 
with the Advocate's staff to further define the nature and 
extent of this problem, and will consider this programming 
recommendation for 1998.

10. Provide a Separate Status or Organization Identifier for 
Cases about to Default or an Indicator to Indicate Cases Where 
There Is No Response Versus Cases Where There Was a Response 
But It Was Not Enough to Validate the Eligibility.

    No new programming changes will be submitted for processing 
year 1997. We will evaluate this programming change for the 
automated system in conjunction wit our Examination plans for 
the 1998 Revenue Protection Strategy which have not yet been 
determined.
    During the Office of SC Examination's 1996 evaluative 
visits, it was our observation that the service centers with 
the least number of status codes had less labor-intensive 
operations than those that defined everything they did with 
some type of terminal update action. Those centers with the 
fewest status codes were able to locate cases better, move 
their inventory faster, use less resources and answer 
correspondence and telephone calls more expeditiously. Any 
future changes we make in the RPS program for Examination will 
consider efficiency along with other factors cited it the 
recommendation.

11. Revise Customer Service Time Frames for Initiation of 
Refund Inquiries and PRP Case To Coincide with Examination Time 
Frames.

    We are in the process of evaluating this recommendation but 
plan to coordinate and make agreed upon recommendations once 
this process has been completed. We will coordinate with 
Service Center Examination and update IRM (21) as appropriate 
to improve initial contact resolution on refund inquiry cases.

12. Revise Procedures To Include Research of Universal IDRS TO 
Answer RPS Calls Routed to Other Call Sites and Input of 
History Items When Forms 4442 or 5543 Are Sent.

    We currently have general procedures on the use of 
universal IDRS in our manual and guidelines but will review the 
procedures and guidelines to see if additional instructions are 
needed.

13. Revise Procedures To Open an IDRS Control to the Center 
When Forms 4442 or 5543 Are Sent.

    This recommendation also requires further coordination and 
analysis with all organizations involvedin the process. We need 
to first ensure monitoring systems will be improved prior to 
making any changes.

Taxpayer Advocate's Comments:

    During the final quarter of FY 1996, operational functions 
that had previously been under the separate jurisdictions of 
the Chief Taxpayer Service and Chief Compliance Officer, i.e., 
all operational functions which provide other than face-to-face 
taxpayer contact, including Service Center Examination were 
combined into one organization, Customer Service, headed by the 
Assistant Commissioner (Customer Service). By the end of FY 
1996, all of the RPS recommendations contained in my Advocacy 
Memorandum addressed to the Chief Compliance Officer and Chief 
Taxpayer Service fell within the purview of the newly created 
Customer Service organization.
    We acknowledge that the Service's newly legislated math 
error authority under IRC 6213(g)(2) to make adjustments for 
failure to include a correct Taxpayer Identification Number 
(TIN) or failure to pay self-employment tax on a return 
claiming the Earned Income Tax Credit, the focus of the Revenue 
Protection Strategy will shift dramatically during the 1997 
filing season. This should greatly reduce the volume of RPS 
cases handled through the Examination process. Our 
recommendations will still apply, however, to those cases and 
other refund freeze cases that will be worked under the 
statutory notice of deficiency process.
    A number of RPS recommendations were made in order to 
provide better information about the status of RPS audits via 
existing systems to IRS employees outside the examining office 
who respond to taxpayer inquiries. Taxpayers' whose refunds are 
frozen because of RPS are far more likely to contact the IRS 
than taxpayers involved in routine audits. RPS taxpayers are 
generally lower income taxpayers who are anxiously awaiting 
issuance of refunds, while taxpayers involved in routine audits 
are generally not expecting any payment from the Service. RPS 
taxpayers, therefore, are likely to try to contact us determine 
what actions are necessary from them to expedite payment from 
the IRS. As a result, the systems routinely used in the past 
primarily to manage audit inventories have been called upon 
under RPS processing to serve an additional purpose of 
providing current status information, and they do not 
adequately meet that requirement. We will continue our 
coordination efforts with all functional areas involved in this 
process to improve controls and processing actions.
    Establishing appropriate IDRS controls for each case 
(recommendation 3) would obviate much of the need for some of 
the other recommendations. Most of the RPS cases which became 
PRP cases during the 1996 filing season occurred because front 
line assistors mistakenly concluded from information available 
on existing systems that no response had been received from the 
taxpayer, when in fact an incomplete response had been 
received. In considering the resource impact of our 
recommendations, the resources devoted by the Service to 
process the FY 1996 RPS PRP cases should be included in the 
calculation. We look forward to continuing to work with the 
Customer Service staff to review our differences and to explore 
various alternatives to enhance the RPS process.

               Appendix B: Last Known Address (LKA) Study

    During FY 1994, the Taxpayer Advocate sponsored a cross-
functional analysis of the IRS's efforts to improve the way it 
updates and maintains taxpayer address records. Twenty-three 
recommendations (ten short-term and thirteen long-term ones) 
were made as a result of that study and were approved by the 
Deputy Commissioner in August 1994.
    In a December 1994 report, entitled TAX ADMINISTRATION, 
Changes Needed to Reduce Volume and Improve Processing of 
Undeliverable Mail, the General Accounting Office (GAO) reached 
the following conclusion:
    Although it is unlikely that the problem of undeliverable 
mail can be totally eliminated, IRS needs to give undeliverable 
mail more attention because it adversely affects operations and 
can cause undue burden on taxpayers. Although previous efforts 
to deal with this mail were primarily limited to IRS' service 
center Collection functions, new efforts are expected to have 
Service-wide consequences because IRS agreed in August 1994 to 
implement recommendations of the Taxpayer Advocate's study. The 
implementation of those recommendations should have significant 
impact on reducing IRS' undeliverable mail.
    Since the December 1994 GAO report, twelve of the twenty-
three approved recommendations were implemented or were closed 
(without being implemented). Actions implemented by the Service 
involved simplification and standardization of address 
instructions to taxpayers, the implementation of new guidelines 
for accepting oral statements during compliance contacts, 
clarification of procedures dealing with divorced and separated 
taxpayers, and expanded training for employees on change of 
address input procedures.
    Overall we believe progress has been made in this problem 
area. At this time we believe this issue can be closed with the 
exception of a few recommendations which are still in progress.
    One of those projects involves a test funded by the 
Taxpayer Advocate's Office and conducted by the Indiana 
District Problem Resolution Office. The test provides for the 
direct distribution of the IRS change of address form within 
the U.S. Postal Service's Change of Address confirmation letter 
and Welcome Kit. On December 12, 1996, I issued an Advocacy 
Memorandum to the Chief Taxpayer Service recommending that he 
consider implementation of this proposal nationwide. My office 
is tracking that recommendation separately in the 
Commissioner's Reporting System, and I will report on the Chief 
Taxpayer Service's response in my FY 1997 report to Congress.
    The second issue provides for the development of a 
legislative proposal to define last known address. After review 
by Chief Counsel, they agreed to establish a project to define 
last known address by regulation in lieu of the legislative 
recommendation. At this time we cannot move further until the 
Chief Taxpayer Service completes a business case for the time 
frames to forth for processing returns and notifications (i.e., 
the numbers of days necessary to process address information 
from returns and notification). This item will remain open 
pending this response.
    To assist the reader, recommendations denoted with an (S) 
are considered short-term while those with an (L) are long-term 
recommendations.

Recommendations Closed During FY 1995

    Between August 1994 and September 1995 seven of the 
approved recommendations were implemented, or were closed 
without being implemented, as summarized below.
    S2. Standardize Address Instruction to Taxpayers
    Responsible IRS Official: Chief Taxpayer Service

Implemented
    S4. Provide Training on Address Formats for Employees
    Responsible IRS Official: Chief Management and 
Administration

Implemented
    S5. Standardize Procedures for Accepting Oral Statements 
During All Compliance Case Contacts
    Responsible IRS Official: Chief Compliance Officer

Implemented
    S7. Standardize Procedures for Address Changes for Divorced 
and Separated Taxpayers
    Responsible IRS Official: Chief Taxpayer Service

Implemented
    L6. Incorporate Up-Front Quality Address Checks in all 
Future Input Systems
    Responsible IRS Officials: Chief Taxpayer Service and Chief 
Information Officer

Closed:
    Recommendation was closed because of Tax Systems 
Modernization ``re-scoping.'' Its eventual implementation will 
be monitored by the responsible officials.
    L7. Implement Standard Address Check Program ``CZALL'' in 
all Current Input Systems
    Responsible IRS Official: Chief Taxpayer Service

Implemented
    L12. Conduct Cost/Benefit Analysis of Processing Addresses 
from Extension Requests
    Responsible IRS Official: Chief Taxpayer Service

Closed:
    The cost/benefit analysis calculated the cost to implement 
at about $1 million and 48 FTE. Analysis further revealed that 
19 percent of extensions contain practitioners', not 
taxpayers', mailing addresses.

Recommendations Closed During FY 1996
    At the beginning of FY 1996, sixteen of the twenty-three 
recommendations approved in August 1994 had not been 
implemented or otherwise closed. A follow-up request was made 
on July 9, 1996 to determine the current status. During FY 
1996, five more recommendations were implemented or closed, as 
summarized below:
    S8. Test Distribution of IRS Forms 8822M, Change of Address 
Request, at U.S. Post Office
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Incomplete

    The initial test distribution for Form 8822M was completed 
by Indiana PRO in September 1995. Results could not be measured 
because the required system was not in place to extract and 
analyze necessary baseline data.

Chief Taxpayer Service's Response: Closed

    This action involved implementing a test to determine the 
effectiveness of including an IRS change of address mailer in 
the U.S. Postal Service's (USPS) Change of Address Kit. The 
test was conducted by the PRO in Indianapolis, but the absence 
of baseline data made results difficult to measure. However, 
the process that was tested would not qualify as a means of 
meeting the new Address Quality requirements established by the 
USPS for pre-sort postal discount rates. Consequently, the 
Service is pursuing other options (See comments under 
Recommendation L2, below.) to improve the accuracy of IRS 
address information.

Taxpayer Advocate's Comments:

    Two different change of address form tests conducted by the 
Indiana PRO. The first, discussed here under recommendation S8, 
involved distribution of IRS change of address forms at 
selected Indianapolis post offices, and a comparison of rates 
of undeliverable IRS refund checks within those ZIP codes 
during the filing season periods preceding and subsequent to 
the test distribution. Although the test distribution was 
completed by the Indiana PRO, as scheduled, the test results 
could not be measured because the needed baseline data was not 
provided.
    The second test distribution of IRS change of address forms 
by the Indiana PRO is discussed below under recommendation S9. 
Since the results of that test seem to have far more potential 
than that in S8, we consider recommendation S8 as incomplete 
but closed.
    S9. Test Distribution of Forms 8822 to U.S. Postal Service 
Change of Address Customers
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Active

    Initially, Compliance agreed to conduct this test proposed 
by the Cincinnati Service Center (CSC), between April and 
August 1995, with an analysis of results completed by February 
1996. In March 1995, the Compliance test at CSC was dropped 
because of complications with the vendor, and Taxpayer Service 
(TPS) Input Processing Division assumed responsibility for this 
item. TPS provided an action plan indicating initial testing to 
begin at the Philadelphia Service Center (PSC) in May 1995 and 
continuing through September, with a report of test results 
targeted for October 1995. We understand that the test is still 
in progress at PSC.
    In addition, a modified version of this test is being 
undertaken by the Indiana PRO, distributing, via a USPS 
``Welcome Kit'' vendor, modified Forms 8822M that were revised 
based on feedback from focus group interviews of postal service 
customers. Other than staff time devoted to processing 
responses and collecting statistical data, and the cost of 
printing the Forms 8822M, the vendor is distributing the 
Service's change of address form at no charge. The comparative 
data from both of these tests will be useful in assessing their 
effectiveness.

Chief Taxpayer Service's Response: Closed

    Because of reluctance by the USPS to provide access to its 
National Change of Address (NCOA) database for use by IRS in 
mailing out Forms 8822 to taxpayers who filed change-of-address 
notifications with USPS, another method of testing this concept 
was explored. Under this alternative, the USPS mailed letters 
on behalf of IRS to individuals who had moved. Taxpayers who 
received these letters were asked to send confirmation of their 
address changes to IRS (Philadelphia Service Center). These 
confirmations included signatures, social security numbers, 
telephone numbers, and dates of birth of the people who moved, 
and provided a basis for IRS to update its Master Files to 
reflect the address changes. The test ran from July 1995 
through September 1996. During this period, confirmation was 
received on only 25% of the letters sent out by the USPS. The 
test was terminated for the following reasons: the USPS was 
reluctant to provide IRS with a list of movers who did not 
respond to the mailing; other agencies were reluctant to 
actively participate in testing and developing the system; 
funding was not available to expand the testing area; and, the 
USPS determined that this process would not qualify as a means 
of meeting the new Address Quality requirements for pre-sort 
postal discount rates.
    The Problem Resolution Office, Indiana District, conducted 
a modified version of this test from May-August 1996, during 
which the Postal Service included a modified version of the 
Form 8822 in the Movers Kit accompanying the confirmation 
letter from USPS. As of August 4, 1996, only about 17-18% of 
the recipients sent the confirmation forms to IRS. Also, as in 
the Philadelphia test described above, this process will not 
qualify as a means of meeting the new Address Quality 
requirements for pre-sort postal discount rates.
    Consequently, the Service is pursuing other options to 
improve the accuracy of IRS address information. (See comments 
under Recommendation L2, below.)

Taxpayer Advocate's Comments:

    For purposes of this study, I concur with the Chief 
Taxpayer Service's response indicating that the original 
initiative of his office is closed. Having said that, I believe 
the results of the second test mail-out coordinated by the 
Indiana PRO with an external vendor proved to be very 
successful and at a lower cost than the test conducted by TPS 
(12 cents per unit versus 50 cents per unit). While 
implementation of this test distribution process may not meet 
the USPS' Address Quality requirements, the TPS distribution 
process also fails to meet postal requirements. This will need 
to be addressed in either case.
    The other options, mentioned above by the Chief Taxpayer 
Service and discussed under recommendation L2, also need to be 
pursued. However, since the eventual implementation of any of 
those options is neither assured nor close at hand, I have 
recommended that the Chief Taxpayer Service adopt the method 
tested by the Indiana PRO.
    On December 12, 1996, I issued an Advocacy Memorandum to 
the Chief Taxpayer Service recommending that he consider the 
vendor's proposal and begin negotiating a contract on behalf of 
the IRS. My office is tracking that recommendation separately 
in the Commissioner's Reporting System, and I will report on 
the Chief Taxpayer Service's response in my FY 1997 report to 
Congress.
    L4. Standardize Processing of ``In Care of'' Name Lines
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Incomplete

    Mail label and notice programs were to have been changed to 
display ``in care of'' name lines. A March 1995 status report 
stated that a position paper was developed and a decision 
document signed, but the content of those documents was not 
provided. A December 1995 status report stated ``Completed. IRM 
procedures have been issued to be effective January 1, 1996.'' 
Since the status report did not specify the IRM section, we 
contacted Taxpayer Service. But, research of the IRM section 
cited (i.e., IRM 3(13)50) shows no reference to processing ``in 
care of'' name lines.
Chief Taxpayer Service's Response: Closed

    The Taxpayer Service organization issued a Production 
Evaluation Report to the field instructing them to ensure that 
IMF address changes that have ``in care of'' data are properly 
input. References on where to enter this data are included in 
section 3(13)24.1 of IRM 3(13)20, BMF Account Numbers and in 
section 3(13)52.15 of IRM 3(13)50, IMF Account Numbers (1997 
version). Procedures have been written and issued to all 
service centers.

Taxpayer Advocate's Comments:

    I consider this recommendation fully implemented.
    L13. Conduct Cost/Benefit Analysis for Processing Addresses 
from Electronic Filing (ELF) Forms
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Active

    In February 1996, Taxpayer Service shared a draft costing 
and decision paper proposing that the Form 8453 Document 
Locator Number (DLN) and last known address not be posted to 
the Master File because of the estimated costs exceed the 
expected benefits, and because of ongoing initiatives to 
eliminate Form 8453 in favor of a paperless system. No final 
decision has been communicated.

Chief Taxpayer Service's Response: Closed

    The cost/benefit analysis for processing addresses from ELF 
forms has been completed, and on July 10, 1996, Chief Counsel 
concurred with our decision not to post address information 
from taxpayers' Forms 8453 to the Master File. (See discussion 
of Recommendation L5, above.)

Taxpayer Advocate's Comments:

    I do not object to the decision reached, and consider 
recommendation L13 closed.

Open Recommendations:

    As of the end of FY 1996, eleven of the original twenty-
three Last Known Address Study recommendations remain open and 
not implemented, as summarized below:
    S1. Develop Legislative Proposal to Define Last Known 
Address
    Responsible IRS Official: Chief Counsel (primary)
    Chief Taxpayer Service (secondary)

Taxpayer Advocate's July 1996 Comments: Inactive

    No business case has yet been developed by Taxpayer 
Service, describing the correct and appropriate time frames for 
processing address changes from notifications and from tax 
returns. Internal procedures, i.e., Rev. Proc. 90-18, currently 
provide for 45 and 90 day processing time frames. The business 
case must be made so that Chief Counsel can draft the 
legislative proposal. The Taxpayer Service action plan 
initially contained a June 1995 target date for completion of 
the business case. That was subsequently rescheduled to October 
1995 because of delays, then to January 1996.
    As an alternative to the legislative proposal, Chief 
Counsel has suggested defining last known address by 
regulation, but the business case for processing address 
changes from notifications and tax returns would still be 
required to open a regulation project. (See recommendation L5 
below.)

Excerpt from Chief Counsel's Response: In Process

    Our action plan on S1 specifically provides that Chief 
Counsel will seek Executive Committee clearance (with 
coordination through Legislative Affairs) of a legislative 
proposal to define last known address after business cases are 
established by Collection and Taxpayer Services.
    On June 29, 1994, the Taxpayer Advocate requested that a 
business case be developed for the time frames set forth for 
processing returns and notifications (i.e., the numbers of days 
necessary to process address information from returns and 
notifications). We have not received this business case.
    If a business case for the time frames set forth for 
processing returns and notifications is made, we will establish 
a regulation project to define last known address by 
regulation, in lieu of the legislative recommendation. However, 
we believe that the use of third party information required 
legislation.
Chief Taxpayer Service's Response: In Process

    We are still in the process of completing a business case 
to determine the correct and appropriate time frames for 
processing address changes from notifications and from tax 
returns. My staff is working with the Advocate's staff to 
revise a preliminary paper they prepared earlier this year on 
this issue.

Taxpayer Advocate's Comments:

    This item will remain open until discussions are completed.
    S3. Standardize Address Format on Internal Input Documents
    Responsible IRS Official: Chief Taxpayer Service
Taxpayer Advocate's July 1996 Comments: Active
    Standardized format required on all revisions after June 
1996; to be completed by December 1996.

Chief Taxpayer Service's Response: In Process

    The National Director, Multimedia Production Division, 
issued Publishing Procedure 164, Standardized Taxpayer Address 
Format on all Internal Use Forms. This procedure is used by all 
printing analysts to ensure the proper address format is used 
when revising internal use forms. This is an ongoing process as 
forms are submitted by originators for revision and printing, 
and has been in effect since May 1995. All forms will be 
reviewed for conformance and revised as needed by December 
1996.

Taxpayer Advocate's Comments:

    I am satisfied with the progress of the implementation of 
this recommendation.
    S6. Test Effectiveness of Address Change ``Check Box'' on 
Form 911, Application for Taxpayer Assistance Order (ATAO)
    Responsible IRS Official: Taxpayer Advocate

Taxpayer Advocate's Comment: In Process

    Data was gathered on a random sample of more than 350 Forms 
911; the results have been tabulated, and analysis of data has 
been completed and is being reviewed within my office. The 
results will be circulated for comment beginning in January 
1997 among appropriate internal stakeholders.
    S10. Develop Change of Address Education Campaign Through 
Taxpayer Education (TPE) Program
    Responsible IRS Official: Chief Compliance Officer

Taxpayer Advocate's Comments:

    Some Taxpayer Education materials have been revised to 
include Change of Address information; others will be revised 
if funding is available. I am satisfied with the progress made 
in implementing this recommendation, but still consider it 
open.
    L1. Develop Servicewide Standard Procedures for Use of 
Locator Services
    Responsible IRS Official: Chief Compliance Officer

Taxpayer Advocate's July 1996 Comments: Incomplete

    Initial action plans called for development of Servicewide 
locator procedures by June 1995 and implementation of locator 
services units at all service centers by September 1995. 
Funding was identified as a critical issue for implementation 
of this recommendation. As of November 1995 status report, 
Servicewide procedures were to be developed by May 1996; 
locator units had been established only in CSC and PSC.

Chief Compliance Officer's Response: In Process

    Each year following the development of this recommendation 
by the Last Known Address Study Group, funding for multi-
functional locator research was either cut or eliminated. The 
Inventory Delivery System (IS), which will operate in each 
service center, incorporates several modules such as address 
research, telephone number research, and asset research that 
will perform functions similar to the locator work envisioned 
by the multi-functional locator units under recommendation L1 
of the Last Known Address Study. The IS prototype began in July 
1996, at the Philadelphia Service Center, and will continue 
during FY 1997. We expect the Investment Review Board (IRB) to 
make a decision in May 1997, concerning IS roll-outs to the 
other centers. If the IRB approves the roll-out, implementation 
would occur in FY 1998 (subject to budget limitations).
Taxpayer Advocate's Comments:

    I will continue to pursue adoption of this recommendation 
because of the potential to reduce taxpayer burden and overall 
costs.
    L2. Develop Servicewide Procedures for Processing 
Undelivered Mail
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Inactive

    Initial action plans called for a multi-functional effort 
to design, develop, test, and implement standard procedures for 
Undeliverable Mail System (UMS) to be completed by June 1995. A 
March 1995 status report showed all target dates delayed 6 
months while a multi-functional group (to meet in June 1995) 
reviewed results of different tests underway (e.g., FACS, NCOA) 
to reduce undelivered mail volume. No revised action items or 
target dates were provided.

Chief Taxpayer Service's Response: In Process

    Prior to convening a multi-functional task force to develop 
standardized procedures for processing undelivered mail, the 
Submission Processing organization decided to participate in 
several studies to determine how to reduce the amount of 
undelivered mail the Service receives.
    As stated in S8 and S9, above, IRS participated in a joint 
effort with the U.S. Postal Service (USPS) in 1995 and 1996 to 
test the Federal Address Change System (FACS). Under this 
system, which was slated to be an inter-agency process and was 
to reduce IRS undelivered mail by 30% to 50%, the USPS sent 
letters asking for address confirmation to people who had moved 
in a given area. About 25% of the population filing change-of-
address forms with the USPS responded to the initial mailing.
    The USPS has given an extension to July 1997 for 
implementation of its new requirement that all mail pieces 
claimed at automation (i.e., discount) rates must have had 
their addresses validated against the NCOA within six months of 
the mailing. Funds to process the Master File through NCOA are 
included in the FY 1997 budget. IRS is also attempting to 
acquire the NCOA database and legal authority to update 
taxpayers' addresses to help reduce the amount of undelivered 
mail we receive.
    Additionally, IRS is testing the use of ``address hygiene'' 
software to purify addresses to improve delivery. The 
purification process insures the consistency of city, state, 
and Zip code information within an address and, in effect, 
corrects any data transcription errors.

Taxpayer Advocate's Comments:

    Although Taxpayer Service has asked Chief Counsel to revise 
Revenue Procedure 90-18 to allow updating taxpayer addresses 
from third party sources, no significant actions have yet been 
taken. Taxpayer Service has indicated a need to review the 
results of tests to reduce the amount of undeliverable mail 
before developing uniform procedures for processing it. We 
still view this as an area of concern that needs continued 
attention and will continue efforts with TPS to review test 
results and to determine appropriate actions.
    L3. Develop and Test Change of Address Turnaround Notices
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Incomplete

    Initial action plan called for the redesign, refinement, 
testing, and assessment of effectiveness of turnaround notices 
to be completed by September 1995. A March 1995 status report 
modified some action items and target dates. A December 1995 
status report advised that prototype testing of redesigned 
balance due Notices 501, 502, 503, and 504 was to begin January 
1996. ``In conjunction with this effort, the ability to include 
change of address information on these notices, or whatever 
method is feasible, will be determined at the time of 
implementation.''

Chief Taxpayer Service's Response: Closed

    Testing of the redesigned Notices 501, 502, 503, and 504 
has been completed. During the test, the change-of-address 
information was added. When the final product was extracted, 
the change of address information interfered with the bar code, 
which contains coded data about either the taxpayer's address 
or enclosed tax data. Because of insufficient space on the 
notices, we cannot effectively include change-of-address 
information on them.
Taxpayer Advocate's Comments:

    The redesigned notices 501, 502, 503, and 504 intentionally 
contain far less text and far more white space than the 
previous designs, in order to simplify the forms and make them 
more easily understood by taxpayers. Despite that worthwhile 
goal, I believe that the change-of-address information could be 
accommodated on a redesigned form. I will ask that the Chief 
Taxpayer Service reconsider that decision and include a member 
of my staff in those deliberations. For this reason, I consider 
the status of recommendation L3 to remain ``IN PROCESS.''
    L5: Revise Revenue Procedure 90-18
    Responsible IRS Officials: Chief Counsel (primary)
    Chief Taxpayer Service (secondary)

Taxpayer Advocate's July 1996 Comments: Inactive

    Chief Counsel is waiting for completion of LKA 
recommendations S1 and L13. Other closed LKA recommendations 
impact revision of Rev. Proc. 90-18: S5 and L12. Counsel has 
developed a draft revision that incorporates S5 actions, and 
will incorporate others when completed by Chief Taxpayer 
Service.

Chief Counsel's Response: In Process

    L5 specifically provides that, after recommendations S1 
(Legislative Proposal to define last known address), S5 
(Standardize procedures Servicewide for accepting oral 
testimony during case contacts), L12 (Process addresses from 
applications for extension of time to file), and L13 (Process 
addresses from Form 8453, U.S. Individual income Tax 
Declaration for Electronic Filing) are implemented, Chief 
Counsel will revise Rev. proc. 09-18 C.B. 491, to reflect 
changes in law and administrative procedures.
    As of this date, only S5 (regarding oral statements during 
case contacts) has been implemented. CC:DOM:IT&A opened a 
publication project to update Rev. Proc. 90-18 to reflect this 
change in the Service's administrative practice which permits 
taxpayers to provide oral notification of change to the 
taxpayer's address of record for active accounts and address 
perfection.
    The revision of Rev. Proc. 90-18 to reflect S1 and L13 will 
be treated as a separate publication project(s), when and if, 
S1 is adopted and/or L13 is implemented. L12 will not be 
implemented. Thus, address changes will not be made from 
applications for extension of time to file.
    We drafted a proposed revenue procedure which permits 
taxpayers to provide oral notification of a change to the 
taxpayer's address of record. The proposed revenue procedure 
provides that oral notice of change of address I accepted only 
for active accounts (e.g., a current examination, an account or 
adjustment inquiry, an undelivered refund, or current 
correspondence from the Service) and address perfection (i.e., 
the correction of misspellings and the addition of house and 
apartment numbers).
    On July 14, 1995, our office briefed the Associate Chief 
Counsel (Domestic) on the proposed revenue procedures. She had 
asked that we determine if the Service wants this revenue 
procedure published since it is limited only to active accounts 
and address perfection. We informed the Commissioner's staff of 
the Associate's request. In order to include this publication 
project in IT&A's 1997 Business Plan, the Service must 
determine whether there is a critical need for this project and 
whether oral notification from cold calls (i.e., calls where 
the only action requested is a change of address) should be 
accepted.

Chief Taxpayer Service's Response: In Process

    Chief Counsel was tasked with revising Revenue Procedure 
90-18 but was waiting for the Submission Processing 
organization to complete recommendations S1 (Complete a 
business case to determine the correct and appropriate time 
frames for processing address changes from notifications and 
from tax returns) and L13 (Conduct Cost/Benefit Analysis of 
Processing Addresses from ELF Forms). As stated above, the 
business case for Recommendation S1 has not yet been completed; 
this will be completed on an expedite basis. However, the cost/
benefit analysis for Recommendation L13 has been completed, and 
on July 10, 1996, Chief Counsel concurred with our decision not 
to post address information from taxpayers' Forms 8453 to the 
Master File. Additionally, the National Director, Multimedia 
Production Division, asked Chief Counsel to revise Revenue 
Procedure 90-18 to allow IRS to update taxpayer addresses using 
third party sources.
Taxpayer Advocate's Comments:

    See my comments under recommendations S1 and L13 above.

Expand Standard Address Check Program CZALL to Validate Foreign 
Addresses

    Responsible IRS Officials: Chief Taxpayer Service (primary)
    Chief Compliance Officer (secondary)

Taxpayer Advocate's July 1996 Comments: Inactive

    An initial action plan called for development of RIS by 
August 1995 and implementation by July 1996. A November 1995 
status report stated Taxpayer Service is waiting for ``a 
detailed list of the specific items required and wanted by 
International and upon receipt a RIS will be prepared to write 
the suggested International CZALL program.''

Chief Taxpayer Service's and Chief Compliance Officer's 
Response: In Process

    Customer Service will coordinate with the Assistant 
Commissioner (International) to develop a detailed list of 
requirements for validating foreign addresses. Due to current 
budget considerations and reduced funding for TSM, the 
feasibility to expand the current address field to properly 
validate foreign addresses must be coordinated with the 
Information Systems staff. Customer Service will provide your 
office with a report containing the decision on this proposal 
shortly.

Text of Customer Service's Report:

    CZALL currently has in place a format routine that allows 
for the proper formatting for a foreign address. This format 
routine is also used for domestic addresses. When entering a 
foreign address into the system, the street address, foreign 
city, province or country must be in the proper fields before 
we make an update to the master file. If this data is not in 
the proper fields, the system immediately rejects the input 
data, and the system informs the operator of an incorrect 
format error.
    Due to current budget limitations and reduced funding for 
Tax Systems Modernization, it is not in the best interest of 
the Service to continue this initiative to create foreign 
country codes. Foreign country codes are ``nice to have'' 
features for our systems; however, it will not increase the 
ability to get the mail to the correct street address 
(Domestically or Internationally).

Taxpayer Advocate's Comments:

    While the current address check program, CZALL, will allow 
the input of a foreign address, it does not validate foreign 
addresses. Instead, proper formatting of foreign addresses, 
including the input of the required period (.) in the state 
field, suppresses the CZALL routine that would otherwise reject 
the foreign address as if it were an invalid domestic address.
    The intent of recommendation L8 is to expand the use of 
CZALL to validate foreign addresses, through the use of tables 
of valid names or abbreviations of foreign countries, 
provinces, cities, and postal codes, much like the tables of 
valid state abbreviations, city names, and their related ZIP 
codes currently used with the program. Implementation of this 
recommendation would go far toward addressing the problem of 
foreign mail that is undelivered because of misspelled or 
improperly formatted city, province, and country names and 
abbreviations, and incorrect postal codes.
    While budget limitations may be a valid reason for not 
implementing this recommendation, no information was provided 
in the EOCSO's report about the estimated costs of developing 
and maintaining such tables, nor was a comparison provided of 
those costs versus the costs in lost revenue to the government 
and in additional processing for Service because of 
undeliverable foreign mail. I still consider the status of this 
recommendations to remain ``IN PROCESS.''
    L9. Improve and Expand the Use of Job Aid, Document 7475, 
State Abbreviations, Major City Codes, and Address 
Abbreviations
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Inactive

    Taxpayer Service status report stated Doc. 7475 was revised 
but our review shows that foreign country names and address 
field lengths were not included as recommended.
Chief Taxpayer Service's Response: Closed

    Document 7475 was revised in June 1995 and again in 
September 1996. Additional domestic ZIP code and major city 
code data was included. We expanded the use of this job aid by 
providing for its distribution through the three Centralized 
Inventory Distribution (CID) sites. The document is also 
available at the ten service centers. Page 31 of Document 7475 
(Rev. 9/96) contains an acceptable address format for foreign 
addresses that our current ADP system can handle.

Taxpayer Advocate's Comments:

    The text appearing on page 31 of the September 1996 
revision of Document 7475 referenced by the Chief Taxpayer 
Service above is as follows:
    Foreign Addresses
    The street address in foreign addresses on IMF accounts is 
input on Name Line 2. On BMF accounts, the street address in 
foreign addresses is input in the field designated for foreign 
addresses.
    Input the foreign city, province or country and foreign 
postal code in the street address field.
    Input foreign country in the city field. This must not be 
abbreviated.
    Input a period (.) in the state code field.
    Taxpayer Service considers this recommendation closed, 
although foreign country names and address field lengths were 
not included in the revised job aid as recommended. While there 
may be valid reasons for not implementing this part of the 
recommendation, we need to follow up with Taxpayer Service to 
review those issues. I still consider the status of 
recommendation L9 to remain ``IN PROCESS.''
    L10. Create One Uniform Entity Address Document/Handbook
    Responsible IRS Official: Chief Taxpayer Service

Taxpayer Advocate's July 1996 Comments: Incomplete

    The LKA study group considered alternatives for revising 
existing IRMs to make them consistent or for creating a multi-
functional entity address handbook. Based on internal 
stakeholder input, the latter approach was agreed upon and 
approved. Initial action plans called for completion of the 
handbook by January 1996. A December 1995 status report from 
Taxpayer Service states: ``After stakeholder meetings, it was 
decided that a uniform document/handbook was not necessary nor 
preferred by customers. Action Plan Completed.''

Chief Taxpayer Service's Response: In Process

    The EOSCO will shortly provide your office with a report 
containing his decision and rationale regarding the 
implementation of this proposal.

Text of the Executive Officer for Customer Service Operations' 
Report:

    We conducted a feasibility analysis and our analysis 
indicates that the implementation of this recommendation would 
not be beneficial to all areas of the Internal Revenue Service. 
Our analysis indicated a consolidated Entity document/handbook 
will not meet the needs of internal customers because entity 
information is necessary in many Internal Revenue Manuals 
(IRMs). However, we have consolidated entity address 
information into one handbook for the Customer Service 
Operations.
    Customer Service Operations Division recently completed the 
creation of several new Chapters of IRM (21)00. Two of the new 
common chapters of this handbook for the Customer Service 
Operations are entitled ``Entity Changes'' and ``Business 
Master File Tax Issues.'' This IRM consolidates entity 
information.
    We conclude that Recommendation L-10 is not beneficial for 
all areas of the IRS and should only be implemented as stated 
for Customer Service Operations.

Taxpayer Advocate's Comments:

    While the new Customer Service Operations IRM chapters 
cited above contain some of the information recommended for 
inclusion in the multi-functional handbook (e.g., guidelines 
for accepting oral statements of changes of address, 
instructions for updating addresses on joint accounts of 
divorced and separated taxpayers, etc.), they do not contain 
all of the recommended information.
    The purpose of the recommendation was to ensure that 
consistent and uniform address format instructions are provided 
to all IRS personnel, not just those in the Customer Service 
organization. Customer Service's rationale for concluding that 
creation of a multi-functional entity address handbook ``is not 
beneficial for all areas of the IRS'' is not made clear in his 
report, and details of the ``feasibility analysis'' conducted 
by his office have not been reviewed by my office. I still 
consider the status of recommendation L10 to remain ``IN 
PROCESS.''

L11. Ensure Implementation of Last Known Address Study 
Recommendations

    Responsible IRS Official: Taxpayer Advocate

Taxpayer Advocate's July 1996 Comments: In Process

    After August 1994 approval by the Deputy Commissioner, 
progress of implementation was tracked by the Taxpayer Advocate 
via the Commissioner's Tracking System (administrative 
predecessor to the TBOR2-mandated Commissioner's Reporting 
System) and monitored by a series of status requests from 
responsible executives and status reports to the Executive 
Committee. In July 1996, in anticipation of the enactment of 
TBOR2, the Taxpayer Advocate orally requested status reports on 
each recommendation, and began tracking them in the 
Commissioner's Tracking System, to be reported on until closure 
or implementation in the Taxpayer Advocate's annual report to 
Congress.

Taxpayer Advocate's Response:

    All open LKA recommendations have been entered into the 
``Commissioner's Reporting System'' and will be monitored and 
reported on until closed in the Taxpayer Advocate's Annual 
Reports to Congress.
      

                                

Questions on the Taxpayer Advocate's 1996 Report on the Twenty Most 
Serious Problems Facing Taxpayers From Representative Coyne to Lee 
Monks

                     1. Complexity of the tax law.

    The Report lists tax law complexity as the single most 
burdensome aspect of compliance for most taxpayers. It does not 
specify what specific tax provisions are particularly complex, 
nor which specific tax provision should be simplified.

What specific tax provisions should the Congress simplify to 
make taxpayers' compliance with the tax laws easier?

Examples of provisions that Congress could simplify are:
      Employee independent contractor-the IRS needs the 
ability to apply clear and uniform standards.
     Taxability of Social Security Benefits--requires a 
complex computation to determine the taxability, again is 
targeted to a segment of the populations that may require 
assistance in computing.
     Depreciation--Laws on depreciation are complex and 
continually changing so that taxpayers find it difficult to 
determine the correct computation.
     Alternative Minimum Tax--Complex only applies to a 
limited number of taxpayers

In your Report, you suggest that all new tax legislation should 
be ``scored for taxpayer burden'' similar to that done for 
revenue. What would this accomplish within the IRS and 
Treasury?

     This would assure that complexity is focused on 
whenever legislation is considered.
     Scoring legislation for taxpayer burden in itself 
may not do anything unless it causes Congress to pass laws with 
low scores.

            2. Inability to readily access irs by telephone.

    The Report states that, in fiscal year 1996, less than half 
of the taxpayers calling the IRS's toll-free number got through 
(i.e.,100 million calls made; 40 million answered).

As the Taxpayer Advocate, what percentage of calls do you think 
the IRS should answer?

     While the Service should strive for nothing less 
than 100%, the Taxpayer Advocate believes that the IRS could 
develop reasonable customer service standards that are 
comparable to those used in private industry (airlines, credit 
card companies, etc.).
What percentage of taxpayers' calls are currently being 
answered?

     According to Customer Service's snapshot report, 
the IRS level of access for Fiscal Year (FY) 1997 was 67%.

In recent years, the IRS has only been funded to answer 30-40 
million calls. Should this amount be doubled for fiscal year 
1998?

     The IRS' Strategic Plan through FY 2002 states 
that we will provide an 80% level of access for taxpayers 
telephoning the IRS. Funding for toll-free could be increased. 
However, a long-term solution to this problem lies in reducing 
the demand for toll-free service by reducing the causes of 
taxpayer calls. Many taxpayer contacts are due to such factors 
as the significant number of incorrect or incomplete notices 
and misapplied payments. While there may be no ``quick and easy 
fix'' for these problems, the Taxpayer Advocate would rather 
increase funding aimed at correcting those problems rather than 
simply placing more employees on the phones. This is not to say 
that additional phone and walk-in access is not needed. A 
significant portion of any new funding should be devoted to 
training so that those employees who are put on the front lines 
have the knowledge and the tools to properly assist the public.

 3. Lack of clarity and inappropriate tone of irs communications with 
                               taxpayers.

    The Report only generally discusses the need for clearer/ 
friendlier notices.

What specific notices do you consider particularly confusing 
and/or unnecessarily nasty?

     Generally erroneous computer generated notices are 
a problem.

Why is it that the IRS can't seem to develop and use clear 
notices?

Outside stakeholders have stated the following concerning IRS 
notices:
     Verbal and written communications contain jargon 
not easily understood by the average taxpayer.
     Frequently, notices do not provide an adequate 
explanation of the reason for the communication.
     IRS communications take the same tone and approach 
toward complying taxpayers as those toward taxpayers with a 
background or history of noncompliance.
     The subject matter is complex because of the 
complex law.

A recent Association of Certified Public Accountant (AICPA) 
survey found that IRS notices do not adequately explain the 
``basis for tax adjustments, penalties and interest.'' Do you 
agree?

     While there may be some notices that do not 
adequately explain the basis for tax adjustments, penalties and 
interest, many IRS notices do clearly and adequately explain 
these. In fact some of these notices, such as the CP 2000 are 
often criticized due to their length because of the effort to 
fully explain all aspects of the notice.

Could your office undertake to fix the content of taxpayer 
notices?

     Notices are constantly reviewed and revised. We 
believe it should be the responsibility of the initiator (the 
office with program responsibility) to produce an acceptable 
product. We can provide input to the process but our 
involvement should not go beyond that point. Additionally, to 
``fix'' a notice one must have a complete understanding of the 
programs and their problems. It is also important to note that 
depending on who is consulted (an individual taxpayer a 
corporate taxpayer, a practitioner, Certified Public Accountant 
(CPA), attorney) the perception of a notice varies. A ``fix'' 
for one group could result in a problem for another. The IRS 
must balance this when revising notices. Also the current 
ability to fix notices is partially limited by current computer 
systems.

                       4. Erroneous irs notices.

    The Report states that the IRS's communications with 
taxpayers are often inaccurate and unnecessary.

Which IRS notices are the most problematic?

     Math Error notices are often problematic because 
frequently the description of the error does not give the 
taxpayer sufficient information to identify the error. This, in 
turn may generate a telephone call requesting an explanation.

What kind of errors does the IRS make in its notices?

     The IRS sometimes sends Erroneous Notices to 
taxpayers because of programming errors. For instance earlier 
this year, the IRS sent notices to Schedule H filers who no 
longer were required to file forms 940 nor 942. Another example 
is apparently conflicting information such as the current CP 
523. This notice tells the taxpayer that they defaulted their 
installment agreement and they must pay the outstanding payment 
to reinstate the agreement. It also lists Appeal rights and the 
complete balance owed on a tear-off section of the notice. 
Taxpayers do not understand the desired action: pay the entire 
balance or the installment payment. Also, recently a computer 
programming problem sent unnecessary yearly reminder notices to 
a certain class of taxpayers whose accounts were in 'Currently 
Uncollectible Status'. Other erroneous notices may be generated 
because of the lag in computer time for a transaction or 
adjustment to post to the Masterfile. Some erroneous notices 
are generated as the result of incorrect actions taken by IRS 
employees.

About how many erroneous notices does the IRS mail out each 
year?

     There are no available figures for the numbers of 
erroneous notices sent to taxpayers each year. However, many of 
our Problem Resolution Program (PRP) cases and contacts from 
both tax practitioners and Congressional offices are based, at 
least in part, on an incorrect or misleading notice received by 
a taxpayer.

    5. Difficulty in understanding Federal tax deposit requirements.

In what ways are the Federal tax deposit rules difficult for 
taxpayers?

     The complexity of determining what category their 
payroll falls into (Look Back Rule) and the deposit 
requirements sometimes discourage small business taxpayers from 
hiring employees.

Are the deposit time rules too difficult, and/or the forms 
required to accompany the deposits too complex?

     The deposit rules seem difficult and confusing. 
Also the dollar amounts for the monthly and semi weekly deposit 
requirements may be too low. We are in the process of reviewing 
whether an increase in amounts for both periods will simplify 
the process for some taxpayers. However, we should note that 
deposit rule changes in recent years have materially reduced 
the number of PRP cases in this area.
     Electronic Federal Tax Payment System (EFTPS) 
should eliminate many of the problems that the taxpayers had 
with the FTD forms; The FTD forms tended to be susceptible to 
taxpayer error because of the format (e.g., placement of the 
type of form and tax period etc.)

               6. Compliance burden of small businesses.

What percentage of your cases involve small business versus 
individual taxpayer problems?

     The Taxpayer Advocate's management information 
system does not capture the size of the business when 
identifying the type of case according to problem description. 
However, about one quarter of our cases are businesses and we 
believe that most of these are small businesses.

What is your office's priority in assisting small businesses?

     The Taxpayers Advocates office has been working 
with the Small Business Affairs Office within IRS to ensure 
that cases that are identified by the 10 Small Business 
Fairness Boards as meeting PRP criteria will be handled within 
the Problem Resolution Program.
     As the result of recent focus group interviews, 
sponsored by the Taxpayer Advocate, with small business 
taxpayers we have identified some education needs of these 
taxpayers and will be providing feedback to the IRS Taxpayer 
Education program.

            7. Problems in the administration of penalties.

    About six years ago, the oversight Subcommittee developed, 
and the Congress enacted into law, legislation which simplified 
and rationalized the various tax penalties applicable to 
individuals. The Report makes two legislative recommendations 
in the penalty area: (1) to simplify the computation and 
assessment of the ``estimated tax penalties,'' and (2) to 
eliminate the ``failure to pay penalty.''
Which tax penalties cause taxpayers the most trouble?

     The FTD penalty (failure to deposit/late deposit) 
and the estimated tax penalty (for failure to pay sufficient 
tax) are in our estimation the two penalties that cause the 
greatest problems for taxpayers. There are 6.4 million 
quarterly Form 941 filers, with over 25 million returns a year 
(and chances for error). Due to notices that are generic in 
nature and errors by both the Service and taxpayers in the 
application of payment, it is often difficult for taxpayers 
(and the Service) to determine which payments are causing a 
problem. The burden caused by the estimated tax penalty is due, 
in large measure, to the complexity in computing several of the 
exceptions to this penalty.

Is the problem that the penalties are unfair?

     The problem with most penalties is not that the 
penalties are ``unfair,'' but that they are very complex and 
that the abatement of those penalties is complicated and 
inconsistent. One area in which a penalty could be administered 
more consistently is the tolerances for application of the 
estimated tax penalty. While IRS applies a tolerance (i.e., the 
amount below which a penalty would not be asserted) in 
assessing a penalty, no tolerance amount is published for 
taxpayers who ``self-assess'' penalties (estimated tax 
penalties for individuals) and computes their penalty on Form 
2210, as they are asked to do. This leads to the inequitable 
treatment of the taxpayers who comply, while giving a benefit 
to many taxpayers who do not. Also, previous compliance history 
is rarely taken into account in the application of many 
penalties on individual taxpayers. While ``first time 
offenders'' are often given consideration in the abatement of 
certain penalties (primarily in the employment tax area), very 
few individual taxpayers receive this consideration because 
Congress has not provided a reasonable cause exception.

Is the problem that penalty notices are confusing and not 
adequately explained by IRS?

     Penalties are sometimes poorly explained by IRS 
notices or not explained at all. Often, if a taxpayer contacts 
the Service seeking information about a penalty, they will be 
provided a very good explanation. An example of this is the 
PINEX (Penalty and Interest Notice Explanation) notices, sent 
to taxpayers who request a clarification of their federal tax 
deposit application and/or penalties. I believe that taxpayers 
should not be required to ask for an explanation of a penalty. 
Clear explanations should be provided to taxpayers when a 
penalty or tax change is proposed.

How should the ``estimated tax penalties'' be simplified?

     The problem is not so much the estimated tax 
penalty, but the system for figuring an exception to the 
penalty. One possible solution would be to eliminate the 
penalty entirely and charge market rate interest on all 
underpayments. However, this is a two-edged sword, since some 
of the complexity is of benefit to some taxpayers. Another 
simplifying option is to apply a flat percentage of the 
underpayment rather than computing the penalty quarter by 
quarter. I will propose to the Commissioner that taxpayers who 
``self-assess'' should be given the same tolerance amount as is 
applied to penalties assessed by the Service. No Form 2210 
should be required, and no penalty assessed, for underpayments 
below a certain amount.

Why do you recommend that the ``failure to pay penalty'' be 
eliminated?

     Rather than completely eliminate the penalty, the 
penalty should be reduced if that taxpayer agrees to an 
installment agreement and remains current for a specified 
period or until the balance due, with interest, is paid in 
full. Additionally, the complexity of assessing (and sometimes 
abating) this penalty could be eliminated by simply charging a 
flat rate of interest, which, in theory, require a taxpayer to 
pay the same amount.

            8. Lack of understanding of taxpayers' concerns.

    The Report states that the IRS does not fully understand 
taxpayers' concerns with regard to tax administration. Since 
1992, the IRS has conducted five customer satisfaction surveys 
regarding individual taxpayers.

What were the results of the IRS's five customer satisfaction 
surveys?

     Summarize the findings of these surveys:
    --These respondents expect to be treated professionally, 
fairly, and reasonably. There is a prevailing mistrust among 
respondents that a government bureaucracy is able to provide 
this.
    --They recognize that the time required to resolve problems 
varies. They expect a realistic estimate and to be notified of 
unforseen delays.
    --They also recognize that the frequency of periodic 
updates varies with the complexity and seriousness of the 
problem. They expect individual need to be considered.
    --Because of their distrust of bureaucracy, they expect all 
communications and actions to be backed up in writing.
    --They expect that once resolution is reached, it will be 
effected Servicewide.
    --They expect that penalties and interest will stop 
accruing, and that communication from other IRS functions will 
cease while the problem is being resolved in PRP.
    --They expect to deal with a single contact person who is 
competent and will thoroughly analyze the problem. In order to 
do this, (they believe) the person must have access to all 
files, records, and information that have been previously 
generated regarding the problem.''

What is it that IRS employees fail to understand about 
taxpayers' concerns?

     The Restructuring Commission's Report states: 
``Both internal and external forces foster an environment in 
which employees value rules over outcomes and do little to 
encourage the use of judgement in handling taxpayer problems.''
     The IRS response to the Commission field hearing 
findings re: customer service stated: ``Even when the taxpayer 
responds timely . . . there is no certainty the IRS is aware of 
the contact . . . there is no one caseworker assigned to most 
IRS notices. When names and numbers of IRS personnel are given, 
the person may not be reached. This further frustrates and 
angers taxpayers.''
     Previously IRS did not do a good job of conveying 
taxpayer's concerns to all employees. We are a segmented 
organization in some areas and employees working in some of our 
functions are not as sensitive to taxpayer concerns as other 
employees.

                9. Delays by IRS in compliance contacts.

    The Report discusses how the IRS does not contact taxpayers 
about problems on their returns (e.g., unreported income or 
overstated deductions) for one to two years after their returns 
have been filed.

Why is it important that the IRS contact a taxpayer about an 
error or discrepancy on their tax return the same year the 
return is filed.

     Taxpayers will tend to remember the background of 
the information that is not claimed on a return and are usually 
able to document a legitimate deduction or credit on the most 
recent return the same year as the return is filed. A year or 
two later the this information may not be clear or available.
     Taxpayers may not be reachable after a period of 
time because of relocation, death or business failure.
     Any additional tax owed as the result of these 
compliance programs will accumulate penalties and interest on 
the underpayment until it is paid.

What interest rate do taxpayers have to pay in each year the 
IRS delays in contacting them about problems on their tax 
returns?

     Internal Revenue Code (IRC) Section 6621 states 
the rate of interest on underpayments of tax shall be the sum 
of:
    --The Federal short-term rate determined for the first 
month of a quarter plus 3 percentage points.
    This rate is subject to change on a quarterly basis; 
therefore in the case of individual income tax interest will be 
assessed and accrue on an underpayment from the due date of the 
return to the date paid. The interest will be computed at the 
quarterly rate for each quarter that a balance is owed. 
Interest will also be compounded daily pursuant to IRC 6622.

    10. Problems in determining and maintaining taxpayers' current 
                               addresses.

    The Report discusses how taxpayers often never get IRS 
audit or tax delinquency notices, and only later find out that 
a lien has been filed on their property or that a levy has been 
filed on their wages by the IRS.

If taxpayers notify the IRS that they have moved, can they be 
assured that all future IRS contacts will come to their new 
addresses?

     If a taxpayer formally (i.e. use the designated 
form) notifies IRS that they have moved, they should receive 
all future IRS contacts and mailings at their new address.

Why it that some IRS divisions and offices will have a 
taxpayer's correct address and other will not?

     Functions within IRS that deal with only one 
aspect of an account may not have the information in their 
files updated when the masterfile computer system is updated. 
If the employee working the case is not aware of the address 
change, information may be sent to the taxpayer's old address. 
This can also work in reverse. When the taxpayer informs the 
IRS employee working the case of an address change (and the 
employee uses the new address only for the case-related 
correspondence and does not enter the change into the 
computer), future notices and mailing may go to the incorrect 
address. Again this is partly the result of IRS's antiquated 
computer systems.

If an IRS letter is returned to the IRS by the post office as 
``undeliverable,'' what happens?

     Undeliverable mail is treated differently 
depending on the type of mailing. Letters are usually returned 
to the function that is attempting to contact the taxpayer 
where further address research is performed. Certain notices 
that are sent certified, such as a Statutory Notice of 
Deficiency, are attached to the taxpayer's original return if 
the Service is unable to ascertain a new address after further 
research. The the IRS searches for a new address for account 
related notices. However, informational notices will simply be 
destroyed.

Will the post office forward IRS mail to a taxpayer's new 
address?

     Generally, account-related correspondence, which 
is mailed first class, will be forwarded if the taxpayer has 
left a forwarding address with the Post Office. Tax Return 
Packages are not forwarded because they are mailed using 
``bulk'' rates and ``forwarding'' service (at extra cost) has 
been found to be costly.

              11. Cost of taxpayers of electronic filing.

    In 1993, the Taxpayer Advocate reported that ``low-income 
taxpayers incur disproportionally higher costs in using 
electronic filing to get quick refunds.'' In raising the issue 
with the Commissioner as an ``ethical concern,'' the Taxpayer 
Advocate advised the Oversight Subcommittee that the IRS would 
offer free access to electronic filing for low-income 
taxpayers, as resources permitted.
    The 1996 Report states again that the cost of electronic 
filing is an unfair burden to low-income taxpayers. Further, it 
states that the IRS processed about 50,000 electronically-filed 
returns, free-of-charge, in IRS walk-in offices.

In which IRS offices can taxpayers currently get free 
electronic-filing of their returns?

     It is our understanding that free electronic 
filing is available in some IRS local offices, but that due to 
budget constraints, many other offices do not offer this 
service. Also, the Service is offering free electronic filing 
through the Volunteer Income Tax Assistance (VITA) program. The 
Taxpayer Advocate's office does not currently have a list of 
the specific local offices or VITA sites in which free 
electronic filing will be available for the coming filing 
season.

Overall, what percentage (or number) of electronically-filed 
returns involve the earned income tax credit (EITC)?

     Of the approximately 19 million electronically 
filed returns, about 4 million (or about 21 percent) claim the 
EITC.

Is $25-$35 the typical charge for filing a return 
electronically, including an EITC return?

     The price range for filing returns electronically 
varies greatly. Some Electronic Return Originators (EROs) 
provide electronic filing for free to individuals who have 
their returns prepared by the ERO. Others charge nominal fees 
for the same service. On-line providers offer free fill-in 
software and charge $4.95 for electronic filing. Other 
practitioners will file a self-prepared return electronically 
for additional costs.

To what extent have you been successful in utilizing private 
sector efforts to provide free electronic filing of returns 
(e.g., H&R Block has advertised free electronic filing in 
various markets)?

     H&R Block is not the only tax preparation firm to 
offer free electronic filing. In addition to office 
preparation, several firms are offering free on-line filing for 
the 1998 filing season. Also, some software preparation 
companies have partnered with transmission service providers to 
offer a product which allows a taxpayer to file an electronic 
return at the same cost as a paper one.

Specifically, how should the IRS follow up on your 
recommendation that the IRS ``offer low or no-cost methods to 
encourage the use of electronic filing'' (e.g., a tax credit 
for electronic filing or more free electronic-filing sites at 
IRS offices)?

     My office supports a number of the Service 
initiatives to encourage electronic filing. The Service is 
increasing access to free electronic filing at a greater number 
of walk-in and VITA sites. The Electronic Tax Administration 
(ETA) Request for Proposal (RFP) contains a number of 
alternatives that would enhance the use of electronic filing. 
The TeleFile program allows taxpayers to file simple returns 
using a touch-tone telephone. TeleFile holds the promise of 
simplifying filing for a large number of taxpayers and should 
be aggressively pursued by IRS. However, my office has 
expressed serious reservations about the lack of tax forms, the 
tax tables, the Earned Income Tax Credit (EITC) tables, or 
complete instructions in the TeleFile package that is mailed to 
taxpayers. Currently, TeleFile simplifies filing for those 
taxpayers who are willing and able to use it, while adding 
complexity for the majority of those sent these packages who 
end-up filing on paper.

With the ``refund anticipation loan'' (RAL) program, a bank 
files a taxpayer's return electronically and gives the taxpayer 
the refund amount `` on the spot'' as a loan. The loan is paid 
off several day/weeks later upon direct deposit of the refund 
check to the bank by IRS electronic fund transfer. What percent 
the RAL participants are low-income taxpayers, about 95%? What 
is a typical charge for a RAL, about $75? What effective annual 
interest rate are RAL participants paying in their loans, 
between 100%-300%? (e.g.,$75 charge for a $500 refund)

     My office has no specific figures on the 
percentage of Refund Anticipation Loan (RAL) participants that 
are low income filers or the typical fees or effective interest 
rates. However, many low income taxpayers are paying what 
appear to be excessive charges. Even if the number of taxpayers 
paying these large fees were to be small, my office is 
concerned about the potential inequity. It appears to many 
taxpayers that the Service, which is not a party to the loan, 
is sanctioning this financial transaction. Unfortunately, these 
taxpayers look to IRS for relief if there is a problem. If 
nothing else, the Service could require stricter ``truth in 
lending'' rules to help taxpayers avoid the most expensive 
RALs. The Service has put forth certain rules mandating that 
these be referred to as ``loans,'' instead of accelerated 
refunds, which could eliminate some of the confusion in the 
minds of taxpayers.

  12. Problems in the administration of the earned income tax credit.

    In 1993 and 1996, the Taxpayer Advocate reported that (1) 
low-income taxpayers need additional assistance in claiming and 
understanding the complexities of the earned income tax credit 
(EITC), and (2) the IRS has an obligation to ensure that 
taxpayers eligible for the credit are made aware of it and 
receive it. While the IRS's educational outreach efforts and 
the volunteer income tax assistance (VITA) program serve the 
low-income community to some degree, the Advocate is concerned 
that the IRS is not doing enough. Also, the IRS's annual ``most 
common error'' study continues to show ``EITC errors due to 
complexity'' as the most common mistake made by both taxpayers 
and tax preparers.

Do you believe that the IRS should be available to directly 
assist low-income taxpayers in preparing their tax returns, as 
was done in the 1970's in IRS district offices throughout the 
country?

     Yes, the Taxpayer Advocate believes that the IRS 
should directly assist low-income taxpayers.

Is the IRS spending enough from the ``volunteer income tax 
assistant'' VITA program to assist low-income taxpayers? How 
much of the $3.9 million in VITA program funds is used to help 
low-income taxpayers? Is this an appropriate level in 
comparison to the separate $4.3 million spent on the volunteer 
Tax Council for the Elderly (TCE) program, targeted to provide 
``tax counseling for the elderly''?

     The IRS does a good job paying for programs like 
VITA and TCE, but we believe that as long as there are 
taxpayers who have questions or are unduly burdened in 
complying, we are not doing enough.

While about 18 million taxpayers claimed the earned income tax 
credit (EITC) during the 1995 filing season, how many 
additional families and individuals do you estimate were 
eligible for the EITC but failed to claim it?

     Approximately 2 million taxpayers may have been 
eligible for the EITC for the 1995 filing season. The IRS 
issued about 2 million notices to taxpayers who did not claim 
EITC but who may have been eligible. These taxpayers were then 
required to respond to the IRS notice to receive the credit.

What percentage (or number) of EITC returns are prepared each 
year by professional return preparers, about 60%?

      The IRS does not capture this data for EITC 
filers. However, according to the Submission Processing Branch 
35.04% of total returns expecting a refund are prepared by 
preparers.

Generally, how much does a paid preparer charge for preparation 
of an EITC return, about $50?

     The Taxpayer Advocate's office does not have any 
reliable figures on this.

Generally, how much does it cost a taxpayer to have an EITC 
return electronically filed, about $25?

     While our office does not have any reliable 
figures on this, it is our understanding that the average 
charge for filing a return electronically has decreased in 
recent years, although it varies a great deal. The typical tax 
return preparer may provide this service for $25 or under.

Does the IRS provide the EITC to eligible families and 
individuals even if they do not claim the EITC on their return? 
If so, how does this process work?

     The IRS sends taxpayers a CP 09 (for taxpayers 
with qualifying dependents) or a CP 27 (for taxpayers without 
qualifying dependents) to inform taxpayers that they may be 
eligible for EITC. The taxpayer must then respond with certain 
information to be granted the credit.

Does the IRS provide the EITC to eligible families and 
individuals in cases where an employer sends the IRS wage 
income information (on Form W-2) showing EITC-eligible amounts, 
but the family or individual has not filed a tax return?

     Because the the IRS does not have all of the 
necessary information (i.e. qualifying child information) to 
make the determination as to whether the taxayer is entitled to 
the EITC, the taxpayer must file a return claiming the EITC. 
(Even if the return is selected for inclusion in the Automated 
Substitute for Return (ASFR) program.)

Have you reviewed the EITC form and instructions? If so, how 
could they be simplified and made easier to understand?

     Yes we have looked at the forms and instructions. 
The Taxpayer Advocate will pursue several recommendations with 
the Tax Forms and Publications Division for the Tax Year 1998 
forms and publications. Recommendations include combining 
dependent and EITC information on the tax return and 
simplifying the Publication 596.

Have you reviewed the substance of the EITC tax provisions? If 
so, how could it be simplified--both made easier to administer 
for the IRS, and made easier to apply for taxpayers?

     Many excess EITC claims do not result from fraud 
or intentional or willful disregard of regulation but from 
incomprehension. The law is too complex. The dependency and 
income tests could be based on amounts already shown on the tax 
return. Also, recently passed legislation adds another level of 
complexity. We may include recommendations for simplification 
in the Taxpayer Advocate's December report to Congress.

          13. Abatement of interest due because of IRS delays.

    The Report discusses how Taxpayer Bill of Rights 2 provides 
for abatement of interest when an unreasonable error or delay 
is caused by an IRS employee. This provision was a result of 
the Taxpayer Advocate's 1993 recommendation for such 
legislation.

What are some examples of when a taxpayer should be able to 
have interest charges abated?

     Interest attributable to an unreasonable error or 
delay by an IRS employee in performing a ministerial or 
managerial act:
     Interest charges may be abated under ``Managerial 
Act'' when an IRS manager makes a personnel decision during the 
processing of a taxpayers case which delays the processing of 
that case. For example: a Revenue Agent is sent to extended 
training or has extended sick leave and the agent's supervisor 
decides not to reassign the agent's cases.
     Interest charges may be abated under ``Managerial 
Act'' when a delay in the processing of a case is caused by the 
loss of records. For example: a delay in issuing a Notice of 
Deficiency, after the issues are discussed with the taxpayer, 
caused by a clerical employee misplacing the taxpayer's case 
file.
     Interest charges may be abated under ``Ministerial 
Act'' when a procedural or a mechanical act causes a delay in 
processing the taxpayer's case. for example, a delay in 
transferring a taxpayer's examination from one jurisdiction to 
another after both the taxpayer and the IRS agreed to the 
transfer.

How will your office insure that interest is abated for a 
taxpayer when the problem was due to ``unreasonable IRS error 
or delay,'' rather than the taxpayer's fault?

     Our PRP caseworkers receive training in tax law 
changes at the same time as the front line telephone and walk-
in employees. Since we work closely with the taxpayer, on a one 
on one basis, PRP caseworkers can identify and alert taxpayers 
to an interest abatement situations. Also, cases are referred 
to the PRP program where the sole issue is interest abatement 
either under ministerial or managerial act.
     My staff has been involved with Counsel and the 
functions to ensure that the Temporary Regulations are clear as 
to the scope of the Taxpayer Bill of Rights 2(TBOR2) provisions 
of IRC 6404(e)(1). We reviewed the functional manual 
instructions to ensure that proper guidance was given to field 
employees regarding the procedures to follow when interest 
abatement is requested and that any relevant notices and 
publications were revised accordingly.

In order to have interest abated due to ``IRS error or delay,'' 
does a taxpayer have to apply for such relief, or will IRS 
employees be empowered to offer abatement relief to taxpayers?
     There is a Revenue Procedure that gives guidance 
on how to apply for relief under the abatement of interest 
provisions. However, there is nothing in the Temporary 
Regulations, Revenue Procedure or the Internal Revenue Manuals 
that prohibits us from abating interest under these provisions 
absent a request from the taxpayer. The Customer Service Manual 
states ``All IRS employees are responsible for identifying 
delays due to ministerial acts on work in progress.''
    Also, the Advocate recommends in his Report that 
legislation be enacted to provide relief to taxpayers in 
claiming refunds--even after the 3-year statute of limitations 
for refund claims has expired--in extenuating situations.

What are problems are created for taxpayers by having refund 
claims expire after 3 years, and allowing IRS to assess taxes 
for up to 10 years?

     Payments made prior to the due date of a return 
are only available for refund or credit to another liability if 
a return or claim is filed within three years of the due date 
of the return or two years from when the tax is paid. 
Therefore, a taxpayer may have a substantial amount of money 
that is not available to be refunded or offset to another 
liability yet we are actively pursuing collection for another 
tax period.

Should the 3-year statute of limitations for refund claims be 
extended for all taxpayers?

     We are in the process of researching this issue 
for a possible Legislative Proposal for our FY 1997 report. 
While we feel it is only fair to allow prepaid credits for 
taxpayers who do not file within the 3 year statute of 
limitations to offset to other liabilities which we have ten 
years from the assessment date to collect, we are concerned 
that refunding money to delinquent filers may encourage further 
delays in filing. At a minimum, IRS needs to do a better job of 
advising taxpayers of this 3 year statute. Most taxpayers may 
not be aware of this law.

What types of ``extenuating situations'' do taxpayers have 
which merit refund claim relief?

     Illness of the Taxpayer, illness and/or death of a 
member of the taxpayers family, a traumatic experience such as 
a fire or a natural disaster, divorce, and theft of records are 
some examples of ``extenuating circumstances'' that taxpayers 
may use to request refund claim relief.

      14. Problems in mailing forms, estimated tax vouchers, etc.

    The Report states that the IRS sends about 160 million 
pieces of bulk mail each year to taxpayers, usually by bulk 
rate (third class) mail. This process does not provide for the 
automatic forwarding of mail to a new address or any return-to-
sender service.

Are the addresses the IRS uses for routine mailings (e.g., 
estimated tax return vouchers, tax forms) the most updated 
addresses available anywhere in the IRS system, or do bulk-rate 
mailing addresses come out of a separate, outdated data base?

     Most tax forms mailing is accomplished using the 
``Masterfile'' address, which may or may not be the most 
current address available to the Service. While there is no 
separate database for these mailings, the Masterfile address 
can only be updated in certain ways (clearly the Service needs 
to be sensitive to making incorrect address changes) and may 
not reflect a new address that at taxpayer includes with 
correspondence or gives to a collection or examination division 
employee working a current case. Mailing bulk-rate does not 
provide for forwarding of the tax packages without an added 
``forwarding requested'' expense.

Which types of IRS mailings, tax forms, or payment vouchers are 
most likely not to reach the intended taxpayers?

     The ``bulk-mailings'' (tax form packages, etc.) 
are probably the least likely to reach taxpayers--especially 
those who have moved. However, these are not necessarily the 
mailings that cause the greatest problems for taxpayers. A 
significant number of cases in the Problem Resolution Program 
are there, in large measure, due to problems taxpayers 
experienced receiving account related notices and 
correspondence.
     With the extremely large number of forms, notices, 
and correspondence that the Service mails to taxpayers every 
year, some problems are inevitable. While progress has been 
made in this area in recent years, the Taxpayer Advocate 
maintains that more improvement is needed.

 15. Separate mailing of math error notices and effected refund checks.

    The Report implies that IRS continues to send refund 
checks, which have been reduced by the IRS due to mathematical 
error, separately from the IRS's explanation of why the refund 
amount was reduced. Taxpayers become quite upset when they 
receive smaller refund checks than they expected, and don't get 
explanations at the same time.

About how many complaints does your office get each year from 
taxpayers concerning refund checks which have been reduced 
without explanations?
     We don't have any record of numbers of complaints 
but the problem is widely acknowledged.

Isn't there a plan for the Treasury Financial Management 
Service to insert, in a reduced refund check, a stuffer 
notifying the taxpayer that an explanation for the reduced 
refund amount is forthcoming?

     Yes, but this still does not tell the taxpayer why 
the change happened when they receive the check.

         16. Delays by IRS in processing offers in compromise.

    The Report discusses taxpayers' efforts to negotiate 
reduced tax payments through the offer-in-compromise program of 
the IRS's Office of Chief Counsel. One complaint about the 
program is that the IRS's Office of Chief Counsel does not 
resolve the cases (i.e., accept or reject their offers) for 
significantly long periods of time.

How long should it take for an average offer-in-compromise to 
be accepted or rejected by the IRS?

     The average offer should be accepted or rejected 
within six months of the date the waiver of the statute of 
limitation contained in the offer agreement (Form 656) is 
signed by the Service. This six month period includes review by 
the Office of Chief Counsel for the required cases. However, 
with the increase in the statutory review criteria, a very 
small percentage of offers in compromise now require al legal 
opinion. According to the Offer in Compromise statistical 
information for FY 97 cases, 64% of all offers were completed 
within the 6 months period. Additionally, the Office of Chief 
Counsel does not accept or reject offers in compromise, but 
provides an opinion regarding the legal sufficiency of those 
offers involving liabilities of $50,000 or more.
     It is in the best interest of the taxpayer and the 
Service for the Revenue Officer to investigate these cases 
thoroughly to ensure that taxpayers do not have sufficient 
assets to pay the complete balance owed and the taxpayer can 
remain compliant for 5 years after the offer is accepted. 
Revenue Officers must pursue these investigations while 
remaining current with their other cases. Any shortening of the 
processing time for these cases will probably require 
additional resources which are not planned at this time.

            17. Burden caused by cash management practices.

    The Report describes how the IRS, in order to provide for 
the most prompt deposit of tax payments, has various systems 
for having tax payments deposited directly into financial 
institution ``lock boxes,'' rather than having the payments 
sent to the various IRS service centers. Sometimes taxpayers 
are confused about having their tax forms sent to one IRS 
address and their tax payments to another.

For individual taxpayers, what is the major confusion they face 
in dealing with IRS ``lock boxes''?

     Adding a new payment form (Form 1040V), which has 
its own set of instructions, increases the burden on taxpayers 
who must pay with their return. It also adds one more item to 
the tax package for all taxpayers, even those who may be 
receiving a refund. This adds one more area of complexity for 
all taxpayers. While it may be argued that this constitutes a 
small added burden, it is the dozens of small items that have 
been added in recent years that together are significantly 
increasing the burden of filing a tax return. Also, the Service 
did not have well-established processes in place to work with 
third party vendors to resolve lockbox and electronic payment 
problems.

Will taxpayers be punished by the IRS if they erroneously send 
tax payments to an IRS service center or district office, 
rather than to the correct IRS ``lock boxes'' financial 
institution?

     At the present time, it is our understanding that 
there are no penalties or ``punishment'' for individual 
taxpayers who erroneously send a tax payment to a service 
center or district office rather than to the designated lockbox 
financial institution.

   18. Lack of acknowledgment of taxpayers' submissions and payments.

    The Report discusses why taxpayers become frustrated when 
they send money or answer questions as a result of IRS notices, 
and the IRS never acknowledges or confirms the taxpayers' 
responses. For example, if the IRS sends a taxpayer a notice 
making adjustments to his or her tax return (thus, demanding an 
explanation of the discrepancy or payment of additional tax), 
the IRS never lets the taxpayer know whether the explanation is 
acceptable and/or the tax payment has been received, or most 
importantly, that the case is closed.

What types of responses do taxpayers deserve from the IRS after 
they have sent the IRS tax payments the IRS has demanded, or 
after they have supplied the IRS with the information 
requested?

     Taxpayers deserve a response or acknowledgment 
that tells them that they do, or do not, need to take further 
action to resolve an open issue with IRS. Currently, taxpayers 
are often left waiting and wondering if their problem is 
resolved or if IRS will contact them seeking further 
information or payment.

What specific recommendations does your office have to deal 
with this fundamental customer service problem?

     The Service should acknowledge all payments, 
including those sent with returns and acknowledging the closing 
of a case or completion of any action. Taxpayers who are being 
audited generally receive a ``no-change'' letter if there case 
is closed without additional tax due. Taxpayers who have other 
dealings with IRS, such as service center account inquires and 
math-error notices, have the right to the same courtesy. 
Providing this type of notification to taxpayers would have the 
added benefit of reducing the telephone calls and written 
correspondence that the Service receives from taxpayers asking 
about the status of their case or payment. This should be done 
even if it goes against the effort to reduce IRS notices.

                     19. Lack of non-stop service.

    The Report outlines how taxpayers often need to talk to 
three or four different IRS employees to get a relatively 
simple tax problem resolved.

Are there any IRS offices where a taxpayer can get a 
satisfactory conclusion of a tax problem during the taxpayer's 
first contact/inquiry of the IRS?

     Often the Service can resolve a taxpayer's problem 
during the first contact. Many issues are within the power and 
ability of the toll-free (or walk-in) assistors to resolve. 
Unfortunately, many issues involve greater research capability 
or more recent data than can be quickly accessed by most 
Service employees. Many local IRS offices have undertaken 
initiatives to improve their customer service. For example the 
Northern California District Compliance functions initiated a 
system in which local Examination and Collection groups work 
together to expedite processing cross-functional issues. The 
Rocky Mountain District Customer Service Site hired additional 
assistors and initiated several training efforts to ensure that 
all employees have a comprehensive knowledge of Integrated Data 
Retrieval System (IDRS).

What specific recommendation does your office have for handling 
taxpayer inquiries, similar to those available to customers 
making inquiries of their credit card company, insurance 
company, or bank?

     Solutions to the lack of one-stop service lie in 
systems redesign and modernization. Comparisons with credit 
card and insurance companies are difficult because tax accounts 
are often far more complex than anything those private company 
customer service functions are required to deal with. However, 
the Taxpayer Advocate recognizes two necessities to enhance the 
Service's ability to provide one-stop service:
     The Service needs to provide updated account 
information as close to ``real-time'' as possible to employees. 
The Taxpayer Advocate is aware that this involves significant 
funding and modernization issues, and
     The employees provided this enhanced service 
capability need to receive significantly more training in all 
phases of Service operation. While making every employee an 
``expert'' in all areas of tax law and account activity, is not 
possible, every assistor should have the knowledge to address 
most issues.

    20. Inconvenient times and locations for doing business with IRS

    The Report states that working taxpayers often find it 
difficult to do business with the IRS during the hours IRS 
offices are open (i.e., generally 8:00 a.m. to 5:00 p.m.). It 
is a particular problem for those needing to go to IRS offices 
during the regular workday. The Taxpayer Advocate recommends 
that IRS office and telephone hours be expanded.

Should IRS offices be open earlier in the morning or later in 
the evening?

     Yes, IRS offices be open outside normal business 
hours.

What hours and days are a particular problem for taxpayers?

     It may not be convenient for our customers to 
visit IRS offices, access the toll-free systems, or take off 
from work for Examination appointments. This is a regular 
complaint from taxpayers and practitioners. Greater flexibility 
in setting tours of duty would help avoid overtime costs. The 
IRS would need to address union concerns, and issues relating 
to additional costs for security, heating, ventilation, air 
conditioning, and staffing.

Should the IRS staff its offices more like the U.S. Customs 
Service (i.e., Customs officials work when flights and 
shipments arrive, both early in the morning and late at night)?

     IRS offices should be open so that most Americans 
can access the assistance they need. Wal-Mart and Sears are 
open convenient hours because they want your business. IRS is 
not faced with either the competition or the desire to 
``please'' customers. However, the Taxpayer Advocate maintains 
that the Service has a duty to serve the public. This would 
entail, at the very least, being open some evenings and 
Saturdays. During filing season, hours should be extend to 
include Sundays. Also during filing season, toll-free service 
should be provided 24-hours a day.
     According to the Report on the IRS: Reinvention, 
Recourse, Rights, Reform:

1. Provide Better Telephone Service
    --Increase Hours: To make service more convenient, the IRS 
will, by January 1, 1998, expand telephone service to 6 days a 
week, 16 hours a day. By January 1, 1999, the IRS will expand 
telephone service to 7 days a week 24-hours a day. Currently, a 
caller can get their questions answered by an IRS telephone 
representative only 5 days a week, 12 hours a day. Expanding 
phone service will be achieved by putting more of the current 
work force on the phones during peak calling periods, using a 
new national call-routing system to route calls to the next 
available customer service representative, and forwarding calls 
to employees in other time zones during late night hours.

2. Expand Customized Services
    --In 1999, the IRS will begin using new call-routing 
technology to provide service that is geared to specific 
customer needs, such as: the sale of a house, retirement, or 
job change, and multi-lingual service. The IRS will also 
provide a nationwide hotline for tax preparers.

3. Make It Easier To Get Answers
    --Expand Office Hours: Beginning in 1998, the IRS will open 
district offices on Saturdays during the busiest weekends of 
the filing season.
    --Open More Convenient Locations: Beginning in 1999, the 
IRS will open additional temporary community-based locations 
during peak season for publications and forms, such as banks, 
libraries or shopping malls. The IRS will expand the telephone 
information system so that people can find out when and where 
they can get help.

                                

    Chairman Johnson. Thank you, Mr. Monks. I appreciated your 
testimony and your updating us on what you are doing and some 
of the systems reforms that you have adopted to develop better 
data.
    One of the things that has always interested me is that it 
should take a change in the law to get the data that, frankly, 
you would think a department would need anyway, but I know with 
the many responsibilities of the IRS it does sometimes take a 
law to focus that and I am impressed with the progress that you 
have made in the area of data collection.
    However, the goal of the legislation, the Taxpayer Bill of 
Rights legislation, was to have you come forward with the 20 
problems and recommendations for their solution, and while I am 
pleased to see the variety of things that you have done that 
are certainly an improvement in the system and your clear focus 
on taxpayer problems, I would like you to be more specific on 
problems and solutions, and if you could go through that, I 
think the idea of a score burden is a good one, but many of the 
items that are on this list were on the list in 1993 so they 
are not unfamiliar to you.
    Mr. Monks. Right.
    Chairman Johnson. I would like you also to go through some 
of your recommendations to address the problems of complexity 
and administrative issues that you bring up in your list of 20. 
So if you could be a little more specific, I would appreciate 
it, if you could go through the list.
    Mr. Monks. Yes. Do you want me to respond to each of the 
areas or do you want to address specific questions to each of 
the areas or how would you prefer?
    Chairman Johnson. I would like to go through each of the 
areas to some extent. My vision of this hearing was basically 
that, and one of the problems for this Subcommittee has been 
that we do not get specific information about specific problems 
and we do not have the opportunity to determine whether there 
is an administrative solution or whether we would need to 
legislate.
    So we do need the more specific information as well as the 
very valuable general information that you gave us in your 
opening statement, so if you would just proceed down the list 
and give us some idea of your thoughts as to solutions.
    Mr. Monks. Yes, if I could, I would like to differentiate 
somewhat between the two sections in the report. One section 
deals with the 20 most serious problems that are facing 
taxpayers. This information was derived primarily from 
anecdotal input received from taxpayers and input from our 
Regional Problem Resolution Offices and also our District 
Problem Resolution Officers. This information was shared with 
the IRS Executive Committee and Regional Commissioners that 
have responsibility for the functional systems and we have 
asked them to provide an update on where they are at in terms 
of dealing with each of these areas.
    One of the problems that I have as a Problem Resolution 
organization within the Service is that we have a relatively 
limited amount of staffing, although I believe our staffing is 
at an appropriate level. Our primary focus in the past year and 
since the time that the TBOR2 legislation was passed has been 
to work with the taxpayers to fix their immediate problems, and 
in some cases, that task has been so overwhelming that that 
eats a lot of our available time that we might spend on 
analysis of the problem areas. So I wanted to just provide that 
focus.
    Chairman Johnson. I do appreciate that, Mr. Monks. I do 
want to add, though, that in 1993, one of your predecessors 
provided the Subcommittee with a list of the 20 most serious 
problems facing the taxpayers----
    Mr. Monks. And I agree.
    Chairman Johnson [continuing]. And that list is very close 
to the list that has come forward. So I do not think that 
developing the list was really the problem, and so I am 
interested in what you are thinking about solutions.
    Mr. Monks. Yes. And I wanted to move to the other element 
now, and the other element is the listing of the top 10 areas 
for PRP casework. That is where our primary focus has been 
because that is more than anecdotal information. That is 
information from our own Management Information System that 
indicates that these are areas that taxpayers are coming to the 
Problem Resolution Program with that are actual systemic 
problems that they are experiencing with the IRS. This is 
information that we derive directly from our Management 
Information System and these are the areas that we have been 
focusing our primary attention to during the past year, up 
until the time the legislation was passed.
    So what we have been trying to focus on since I have been 
the Taxpayer Advocate or Ombudsman and Advocate is to look at 
these areas that we know we can quantify the specific number of 
problems that taxpayers have had in dealing with the IRS, try 
to identify those that are causing the most problems, and to 
create what we call advocacy projects out in the field offices 
where they are more familiar with the specific problems that 
taxpayers are having.
    For example, a task group that we initiated dealing with 
joint and several liability, the joint return issue, was 
conducted in the old Southwest Region, now the Mid-States 
Region, and provided the impetus for the Service's task force, 
the larger Service's task force in that area.
    The issue of audit reconsiderations has been worked as a 
project, because as you can see, that is the number one source 
of PRP casework within PRP and we have made a number of 
recommendations in that area for the Service to give 
consideration to in terms of improving that process and, 
hopefully, eliminating taxpayer cases that are finding their 
way into PRP.
    And again, we have projects that have been initiated as a 
result of the report and my report back to the Executive 
Committee on this top 10 area of sources of taxpayer problems 
coming into PRP that have already been initiated by the 
Service.
    Now, we do not have completed projects in most of these 
areas but we expect to. We are monitoring the activities and 
will be following up with the Regional Commissioners to look 
into each of these areas and, hopefully, will be able to 
provide more of what you are looking for in the next report to 
the Congress. Now, I do not mean that as an excuse or anything, 
but legislation was passed somewhat late in the year, and 
granted, while these other problems have been known to us and 
are continuing problems, most of our focus has been in this 
area as opposed to the other because some of the others are not 
necessarily areas that I have control over to be able to 
influence to the degree that I would like to.
    Chairman Johnson. I do appreciate that, and the strength of 
your opening statement was setting out how the Department is 
trying to operate in a way that refocuses it on taxpayers' 
problems and solutions and this list of 10, I think, will 
provide the fodder for a year from now when you are before us 
with the specific problems and specific recommendations.
    But since your 20 problems, for the most part, were things 
that had been identified since 1993, I would hope that you 
would have some specific solutions for us to recommend. Even in 
the first item, complexity, I appreciate the fact that your 
suggestion of scoring burden, and I think that is a very 
interesting one and I would like to have your input about how 
we would structure that, on what basis, what factors would we 
take into account if we wrote a law in that regard.
    But on the other hand, can you tell us the three laws that 
are the most complex and cause the most problems and how we can 
fix them?
    Mr. Monks. Let me----
    Chairman Johnson. Or what parts of them are complex?
    Mr. Monks. Let me tackle complexity. One of the things that 
we have heard from both individual taxpayers and from small 
business taxpayers as we have done focus groups with taxpayers 
is that we should leave the Code alone. By continually changing 
the Code every year, by striving to provide benefits to one 
group, we sometimes unintentionally penalize other groups.
    So for those taxpayers that would like to be able to use 
their tax return, for example, as a guide in preparing their 
subsequent years' tax returns, they cannot do that because 
there are so many changes to the Code. We go through this 
process every year where the forms are changing and so on. That 
adds complexity for millions and millions of taxpayers, 
obviously.
    Another specific example that we have and that we have 
discussed and are looking at in Problem Resolution are the 
rules for earned income tax credit and dependents. We have 
slightly different rules for taxpayers that want to claim the 
earned income credit and claim the dependency exemptions and 
that causes confusion. Should not those be somewhat more of the 
same or identical for taxpayer? They are different. It causes 
confusion, causes questions, and so on.
    So there are a couple of specific examples that we have 
looked at. We have a number of projects that are looking at 
this right now. We are looking at complexity of forms. We have 
a task group working within the IRS and my staff is working 
with that group. We have made a number of recommendations in 
terms of improving wording on forms that would make it easier 
for taxpayers to understand. That is a continuing project.
    Another thing that we have done as a result of the recent 
legislation on math error and individual taxpayer 
identification numbers is to work with the functional areas to 
ensure that as new processes are developed if taxpayer cases 
arise that are inadvertently caught up in these areas, that 
they are handled expeditiously and we can remove as much burden 
from the process as possible.
    When you look at some of the new legislation that has been 
enacted, and frankly, it is enacted for very good reasons, some 
of the items that I reviewed this year were very complex and 
are going to be difficult for many people to understand. It 
does not mean that it is inappropriate legislation. It is 
certainly appropriate. But the rules for the adoption credit, 
for example, are very complex and we need to look at how we 
might be able to simplify the instructions that will be going 
out to taxpayers so that they can understand who can claim that 
credit and what it takes to claim that credit, but that is an 
area that we----
    Chairman Johnson. Just if I may, hopefully, when this 
process gets going, you would be able to report to us at this 
point what are the complexities of that that are going to be 
very difficult to implement so that we have a chance to 
simplify them before we get too far into that process.
    Number 12 of your 20 problems is the earned income tax 
credit, EITC, and you note that it is so complicated that the 
very people who need to use it have less than average knowledge 
of the tax laws and need additional assistance in understanding 
the complexities of this provision, but you have had 
considerable experience with that now. Are there specific 
provisions of that that you would recommend that we repeal?
    I do not want you to feel inhibited about criticizing the 
job we did in writing the Tax Code. Frankly, you know what a 
sort of sausage-making operation it is. The reason we asked for 
these reports to come from you and not go through the IRS 
Commissioner, not go through the Secretary of the Treasury is 
because we wanted to get the straight and raw, and if you do 
not feel free to say, listen, the way you wrote this is going 
to make it practically impossible for us to administer and this 
is what people out there in the real world are faced with and 
you could dump this section of it or simplify that, then this 
project will fail.
    Mr. Monks. No. I certainly understand----
    Chairman Johnson. So to have the list of 20 and have 
complexity cited but no guidance how to deal with it is really 
just simply missing the point. This Subcommittee is going to be 
focusing on small business simplification, so I hope that at a 
later date you will be able to come back with what you meant by 
complexity beyond the fact that it helps small business if 
there is no change. I understand they feel that way now, but we 
need to move back the other way before we stop making change. 
At least, that is my interest.
    But a number of the things you point out here about the 
explanation of why your numbers were wrong and you are getting 
a smaller tax return and the check being in the same envelope 
rather than a separate envelope so the taxpayer gets it, that 
is a problem. That has been on the list since 1993. I want you 
to be recommending a solution.
    Now, if there are no solutions, if you have no more detail 
on solutions than you recommended in your opening statement, 
you might as well say so rather than go through the 20 items, 
but I would have to tell you that is not what I expected. As 
much as I commend you on your effort to move the Department in 
a new direction, we needed concrete recommendations and I would 
rather have had you say, I could not get to 20, I did not have 
time, but here are 10, than just to outline problems, most of 
which have been known, and not recommend any solutions 
specifically.
    Mr. Monks. No, and I appreciate your comments. Frankly, you 
are right on target in that particular area because most of 
our--again, as I pointed out, most of our efforts with 
certainly our field staff and even our staff in headquarters 
has been caught up in the process of trying to work with 
taxpayers who are having immediate problems and trying to solve 
those immediate problems and we have not been able to devote 
the attention to looking at the variety of issues that are 
negatively impacting on taxpayers, such as the 20 most 
significant items affecting taxpayers and even the top 10 
sources of PRP casework.
    We have, I think, renewed our efforts to enhance our 
advocacy program by enlisting the efforts of our regional 
offices. I have a relatively small staff in Washington and we 
can do, and I hate to use this as an excuse, but we have limits 
with what we can do with the resources that we have. But we do 
have the availability of the resources from the Regional 
Commissioners, the District Directors, and so on to be able to 
ask them to look at the most troublesome areas in their 
specific region, to be able to look at some actual casework and 
develop the underlying causes or the root causes of these 
problems and come in and help us with the development of 
specific recommendations that can be more helpful to this 
Subcommittee.
    I view this first report to the Congress as a tip of the 
iceberg type thing. It is the first report out of the box and 
we had a lot to do in a relatively short time to try to pull 
the report together and to demonstrate what we had done up to 
this point.
    Mr. Collins. Madam Chairman.
    Mr. Monks. I agree with you. We have not made the progress 
that I would like to have seen us made, but I would expect that 
subsequent reports, as a result of the activity that we have 
already initiated and have underway at this point in time, will 
be much more fruitful in the near future.
    Chairman Johnson. I thank you, and I am going to give my 
other colleagues a chance, but I would want to put on the 
record that I hope the lack of specific recommendations is not 
the result of concern with what the agency will think.
    Mr. Monks. No, it is not.
    Chairman Johnson. We specifically had you report directly 
to us. What you report may not be doable and they may say, 
well, this will interact with that and we cannot do it, and we 
may say, it is complex and we like it that way and we will not 
do it. But if we do not get it out there, no one is 
accountable. We are not accountable for some of the bad 
legislating we do and you are not accountable for telling us, 
and in the end, we get a bad product out there that is almost 
impossible to administer.
    So I do consider this the first time around and the tip of 
the iceberg, but I would have to say, while it sets out 20 
problems, it does not set out any solutions and any material to 
which we can say, this is administrative and they ought to do 
this and this is legislative and we had better get ourselves 
together and do that. It does give us some general guidance and 
we will use that.
    With that, I will yield to my Ranking Member, Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman, and thank you for 
your testimony, Mr. Monks.
    Mr. Kleczka, did you have a question?
    Mr. Kleczka. Thank you, Madam Chairman.
    Mr. Monks, you indicated twice the size of your staff. 
Could you relate to the Subcommittee how large or how small 
your Washington staff is?
    Mr. Monks. I have 21 people in Washington, DC, Tom and 
myself in the front office with a couple of secretaries that 
handle incoming calls from taxpayers and----
    Mr. Kleczka. I just wanted to know the total number. 
Thanks.
    Mr. Coyne. Mr. Monks, one of the complaints that many of us 
receive is the inconvenient times and locations for doing 
business with the IRS and my question is, is it your judgment 
that the IRS offices ought to be open earlier and later for the 
convenience of people who work, say, from 8 in the morning 
until 5 at night and who therefore cannot visit the IRS during 
those hours?
    Mr. Monks. I think, certainly, that would be helpful for 
taxpayers. I think one of the issues that we are dealing with 
there, of course, is one of resources and when do we get our 
primary traffic. Obviously, one of the things that is looked at 
in both our walk-in offices and our toll-free services is when 
the highest volume occurs and trying to staff the offices 
accordingly. Toll-free service is available from 8 until 5 and 
for the notice-type calls, it is available until 9 in the 
evening. Obviously, the automated systems are open 24 hours a 
day.
    We are trying to look at ways that we can enhance that 
availability of service to taxpayers, particularly those that 
work during the day and just cannot break free to contact the 
IRS. So that is a concern.
    Mr. Coyne. So the fact that that has not happened yet is a 
direct result of the lack of resources to do it?
    Mr. Monks. Certainly, part of that is a resource issue. 
Certainly, one of the focuses this year, because of the 
problems with toll-free access, has been to put more resources 
into toll free and I think that effort has proved to be 
successful. Obviously, when you have a number of priorities, 
you have to make decisions as to where you spend your resources 
and our primary effort this year, at least in customer service, 
has been to enhance the level of access on the telephones.
    Mr. Coyne. What would be a good response percentage for 
you? What do you think you ought to be able to respond to? What 
percentage of calls do you think the IRS ought to be able to 
respond to?
    Mr. Monks. Well, ideally, we would respond to 100 percent, 
but that would be certainly a significant resource problem. I 
would say that we ought to be striving in the areas of 80- to 
85-percent level of access for taxpayers. That is a goal we 
used to hit several years back on a fairly consistent level and 
I think that that ought to be our target effort, somewhere in 
that arena, because I think at that if you go beyond that 
point, you are beginning to perhaps spend resources 
inefficiently that could be used for other programs.
    Mr. Coyne. What is the current percentage? What are you 
responding to now?
    Mr. Monks. This filing period, we are achieving a 68-
percent level of access and that compares to a 48.6-percent 
level of access last year. So we are up substantially. It is 
still not where it needs to be, obviously, but it is up 
substantially. It has been a concern and one that we put a lot 
of resources into and we have paid a lot of attention to it.
    We are also looking--in fact, we have a task force in 
Problem Resolution that is cosponsored by our Mid-States Region 
looking at how we might be able to improve access by trying to 
reduce demand, unnecessary demand that is coming in as a result 
of perhaps taxpayers not getting their information from other 
sources, such as the tax package and so on. We are looking at a 
number of areas to try to enhance that service.
    Mr. Coyne. You touched on your work with the EITC problem 
that exists, and that in 1995, there were 18 million taxpayers 
who filed for the EITC. How many additional families and 
individuals do you estimate are eligible for EITC but failed to 
file for it?
    Mr. Monks. That is a difficult question to respond to 
because if they did not include it on their form, it is 
difficult for us to determine whether or not they are entitled 
or would be entitled to it if they did not claim it. We do try 
to identify in the Service those returns that come in where it 
appears that the taxpayer may be entitled to a credit. We send 
them a notice advising them of that and ask them to provide 
some additional information that would validate whether or not 
they are entitled to the credit, but I could not give you a 
number.
    Mr. Coyne. So you have no figure on that?
    Mr. Monks. No, I do not.
    Mr. Coyne. Does the IRS provide the EITC to eligible 
families and individuals in cases where an employer sends the 
IRS wage information, a W-2 form, showing EITC eligible amounts 
but the family or individual does not file? Do you give that 
taxpayer the credit for it?
    Mr. Monks. No, we do not. They have to file a tax return in 
order to get the credit. It could very well be that if some 
information identified that a taxpayer was eligible, we might 
send them a notice saying it appears that they are eligible for 
the credit, but we would not automatically give them the credit 
without their filing for it.
    Mr. Coyne. If you do get the W-2, though, do you notify 
them that they are eligible?
    Mr. Monks. No, I do not believe so. I believe it would take 
the filing of a return. The W-2 in and of itself would not 
necessarily indicate that they were eligible for the credit. 
There might be some extenuating circumstances that would make 
them ineligible for the credit. The return would have to be 
filed and then that, in turn, would generate a notice if the 
taxpayer appeared to be eligible for the credit.
    Mr. Coyne. In your report, have you done anything to 
recommend changes in the EITC form to make it easier for people 
eligible for the EITC to file for it?
    Mr. Monks. That is another area that we have asked a 
specific task group to look at. The Western Region is currently 
looking at the earned income tax credit process. They, of 
course, have had significant experience with that as a result 
of some of the revenue protection issues which surfaced out in 
the Western region initially. They have probably the highest 
experience with that particular problem in terms of cases that 
have come into Problem Resolution. So they are working a 
project and we expect that project to be completed in the very 
near future and to be able to have some specific information in 
that area.
    Mr. Coyne. Thank you.
    Chairman Johnson. Mr. Portman.
    Mr. Portman. Madam Chair, Mr. Ramstad has to go participate 
in a debate on the floor of the House, so I am going to yield 
to him and I think he is yielding back to me.
    Mr. Ramstad. Thank you, Madam Chair, and I thank my friend 
from Ohio for yielding.
    Mr. Monks, you mentioned in your testimony, and I am 
quoting now, ``We should leave the Code alone,'' and you drew 
that conclusion, you said, based on a focus group meeting. Was 
this focus group one held here in Washington, people from the 
District, or inside the beltway?
    Mr. Monks. We did a series of focus groups in 1993 that 
went out across the country. I cannot remember all the sites, 
but I believe San Francisco, Atlanta, and a couple of other 
locations, where we talked to individual taxpayers. One of the 
things that we wanted to find out in that series of focus 
groups was about the service that they received from problem 
resolution and we also touched on a number of other issues. 
That is one of the issues that they raised, that they felt that 
the complexity was enhanced to a great degree by the continuing 
numbers of changes to the Code.
    Mr. Ramstad. Certainly, with all respect, I would welcome 
you to come to Minnesota because I have yet to find a 
constituent who believes that the current Code is either simple 
enough or fair. Ten thousand pages of rules and regulations 
last year, and according to the report I read, it took the 
taxpayers of our country 5.1 billion hours to comply at the 
cost to our gross domestic product of $300 billion. I certainly 
would welcome you, because in 7 years of representing the good 
people of Minnesota's Third District, I have not found one who 
believes the Code should be left alone, that it should not be 
made less complex and more simple.
    Mr. Monks. Mr. Ramstad, I did misspeak on that. What they 
were talking about was not necessarily the Code and I did 
misspeak. It is the return itself that I was alluding to and I 
misspoke on that. The basic tax return changes as a result of 
changes to the Code, and----
    Mr. Ramstad. Oh, I see. OK.
    Mr. Monks. That was the issue I was alluding to.
    Mr. Ramstad. I am relieved to hear that because I was 
incredulous at your remark, which I wrote down verbatim, ``We 
should leave the Code alone.'' I do not think too many people 
in this Congress reflective of their constituencies would agree 
with that----
    Mr. Monks. And I would agree, also.
    Mr. Ramstad [continuing]. Because the thrust of tax reform 
is obviously to make the Code less complex, more simple, and 
easier to comply on the part of the taxpayers.
    Let me just ask you another question, if I may, based on 
the large number of people in my district back in Minnesota who 
are upset with the failure, really, of the IRS to implement 
interest netting on overpayments and underpayments. I am sure 
you are familiar with the issue. It has never made any sense to 
me nor to the people I work for back home why a taxpayer should 
be forced to pay a higher rate of interest when he or she has 
an underpayment situation than the IRS pays in overpayment 
situations. It seems to me a blatant and unfair double standard 
to have those two different rates.
    In spite of congressional instructions to implement 
interest netting, the IRS has, to my knowledge, failed to do 
this. Have you looked into this, and if so, could you tell us 
why?
    Mr. Monks. We are looking into this issue, and, in fact, we 
have recently put together a simplification group within the 
IRS and we are looking at issues of this very nature. This 
could very well be one of the recommendations that comes out of 
the group, to make the rates the same. I think, currently, the 
rate that taxpayers would pay the IRS on a deficiency is 9 
percent, whereas the rate that they would receive from the IRS 
on a refund, if it was appropriate, is 8 percent. This is an 
area that is being looked at and we think that a recommendation 
will come out of this effort to make that more equitable.
    Mr. Ramstad. I appreciate your emphasis there and I truly 
hope it is one of those recommendations. Actually, I think the 
disparity is even greater, but nonetheless, I am pleased to 
hear you say it is a priority and I look forward to discussing 
it with you further and to making that change, because it is 
not fair that the taxpayers have to pay a higher rate of 
interest than the IRS pays them in an overpayment situation.
    I will yield back, and again, I thank the gentleman for 
yielding.
    Chairman Johnson. Thank you.
    I am going to recognize Mr. Kleczka next.
    Mr. Kleczka. Thank you, Madam Chair.
    Mr. Monk, I think you responded to Mr. Coyne relative to 
the office hours. Is there any pilot project started around the 
country where either during tax season we open the office on 
Saturday until noon, or 1 night a week the office would be 
open, say, until 9 to convenience tax filers who happen to work 
so they can pay their taxes?
    Mr. Monks. I believe that there are. I do not have specific 
information on which offices may be providing that type of 
service, but it did come to my attention that there were some 
specific offices that were experimenting with extended hours on 
either Friday or providing some Saturday service.
    Mr. Kleczka. OK. How widespread is the lockbox approach? Is 
that in all the various areas of the country? I am not 
associated with it in Milwaukee yet.
    Mr. Monks. A lockbox is a process where taxpayers forward 
their returns and the payment on the returns directly to a 
banking institution that, in effect, makes the deposit 
immediately so that the Treasury of the United States----
    Mr. Kleczka. How widespread is the practice?
    Mr. Monks. It is all across the country. This is a standard 
process.
    Mr. Kleczka. OK. And the last question I have is, in regard 
to the refund anticipation loan program, as you looked into 
that, have you found some widespread abuses where either the 
bank or the filing company charges a relatively high percentage 
of the refund in order to give the immediate refund to the tax 
filer?
    Mr. Monks. This has been an area of concern, I think, for 
some time, particularly for low-income taxpayers that seemingly 
have a need to have their refund relatively quickly and that go 
to various institutions that charge a high rate for the service 
to----
    Mr. Kleczka. Do you have any examples of how high the rate 
can be?
    Mr. Monks. Not specifically, but I think that depends upon 
the particular market area, but there are some companies that 
provide, in effect, the whole package without differentiating 
between the rate for the filing of the return and the rate for 
electronic filing. I have read some stories that indicate some 
rates charged in various locations are fairly significant in 
terms of what you would view as an interest charge, of that 
nature, but I do not have any specific examples.
    Mr. Kleczka. So we have no example of what the interest 
rate could be?
    Mr. Monks. No.
    Mr. Kleczka. Ten percent? Twenty percent? You have no idea 
whatsoever?
    Mr. Monks. If you were to compute that on an annual basis, 
I think it could work out to substantially higher than that.
    Mr. Kleczka. Like?
    Mr. Monks. I would say in the neighborhood of perhaps 30 
percent.
    Mr. Kleczka. Do you think legislation is needed in this 
area to curtail some of those practices?
    Mr. Monks. I think legislation might be appropriate.
    Mr. Kleczka. To do what, limit the interest rate charge or 
limit the practice altogether?
    Mr. Monks. Well, it is not necessarily an interest rate, of 
course.
    Mr. Kleczka. Well, how do we determine that?
    Mr. Monks. It is a fee-for-services, and to some degree, 
the fee depends upon what the market will bear. Frankly, it 
surprises me that taxpayers sometimes will pay the charges that 
are charged for this particular service, but they do. I do not 
know if that is an area that should be regulated or not, but I 
think that we should work within the IRS to provide additional 
options for taxpayers, perhaps for free electronic filing, free 
service so that the taxpayers can get their refunds 
expeditiously, and make that available to them and known to 
them.
    I think we should work with Volunteer Income Tax 
Assistance, VITA, sites to provide the capability for those 
VITA sites to file returns electronically so that taxpayers can 
have an option. That way, if they choose to, they can go to the 
VITA site and get the service there. If they choose to, they 
can go to a company and get a refund anticipation loan, RAL.
    I think it is one of our responsibilities, certainly as an 
Advocate, to at least advocate for providing some options to 
taxpayers that might give them some other choices.
    Mr. Kleczka. Thank you very much.
    Chairman Johnson. I have to say, Mr. Monks, you have been 
in this job for 3 years. Many of the things on your list are 
identical to things on a list 3 years ago and my colleague just 
asked you about locations of business, opening hours. Number 20 
on your list is, of the problems faced, it says inconvenient 
times and locations of doing business with the IRS. Working 
taxpayers often find it difficult to do business with the IRS 
during the IRS normal work day, from 8 to 5.
    Now, this is an old recommendation. Why are you not here 
today giving us some guidance on we need a law that allows flex 
time, or what do you need? We all understand the constraints, 
but this Subcommittee was a very tough ally of the IRS in the 
last Congress to get more money into your budget. But you 
specific this as one of the problem. It is a pretty simple 
problem. It has been around a long time. It was on preceding 
lists when you were there and yet you have no recommendation.
    The same with cash management practices, number 17. Burden 
caused by cash management practices. The IRS practice of using 
lockbox vendors and separate envelopes for returns and 
remittances causes confusion among taxpayers. Now, it does seem 
to me that you might have come with some recommendation about 
that. That does not seem so difficult or you would have said, 
it is a problem and it cannot be solved for the following 
reasons.
    You know, we were looking to this hearing to develop the 
substance for another taxpayer bill that would help you and 
help us and there are two simple things my colleague just asked 
about on your list, could have been addressed and were not, and 
that disappoints me.
    Mr. Monks. If I could respond to a couple of those items, 
certainly on the inconvenient times, some of these problems 
have been longstanding and are being dealt with and I tried to 
in the Advocate's Report to the Congress to provide some 
examples of where service was being improved. Hours have been 
extended, certainly for toll-free services, and we have 
experimented with longer office hours in specific locations.
    Obviously, resources is a continuing problem. The IRS 
budget has gone down each year, or at least remained constant, 
but did take a decrease for a couple of years and is 
substantially lower now than it has been in the past, certainly 
in terms of 1997 dollars.
    We have made an effort to improve access to taxpayers on 
toll free and are also trying to retain our walk-in program at 
at least the same level that we have in past years. This is a 
challenge for us. Obviously, I do not have all of the answers 
but I think we have made some strides in this particular area. 
Our office hours are improved.
    Chairman Johnson. I just make the point that we, really, we 
are looking for more specific recommendations and I hope in the 
future they will be more concrete and specific. Do you need 
authority for people to work different hours depending on the 
demand in certain areas, that kind of thing.
    Anyway, let me yield to my colleague, Mr. Portman.
    Mr. Portman. Thank you, Madam Chair.
    I have so many questions, I do not know where to begin. 
First of all, I thank your office for working with this 
National Commission to restructure the IRS. As you know, we 
have about 5 months left before issuing our final report. Mr. 
Coyne is also on that Commission with me and at our hearing 
about 2 months ago, your Problem Resolution Officers 
participated and gave us some very helpful input.
    Not to pile on here, but I think what you are hearing is 
``where is the beef?'' This report is fine in terms of 
identifying problems. That is what we are experts at. It is the 
people who are politicians, public officials like ourselves who 
love to talk about the problems at the IRS and we are very good 
at it. What we need you to do is to tell us how to solve some 
of these problems, and I think you are in a unique position.
    Number one, you have the knowledge. You are working on 
these problems every day. Your PROs, I see, I think, five of 
them here in the front row, can tell you what is going on out 
in the field. You know, you, frankly, are not buffeted by the 
political winds that we are, so you have the ability, I think, 
to play a unique role here and to really help taxpayers.
    If you do not have the time to do it, you do not have the 
budget to do it--incidentally, the IRS budget has not decreased 
over the last decade. It consistently went up. Last year, yes, 
there was some reduction, particularly in the area of 
modernization after $4 billion was spent on the computerization 
project which apparently is not working well. That is 
understandable, and this Subcommittee did stand up for you and 
did try to give you the resources you needed, but you have to 
reallocate those resources to help taxpayers in a way that I 
think you uniquely can do, which is to give us constructive 
solutions, not just list the problems for us. Again, that is 
what we are very good at.
    Let me just focus on a couple, if I could. First of all, I 
am sorry you reversed your position on responding to my friend, 
Mr. Ramstad's question on change. If change is a major problem, 
tell us that. Do not back away and say, ``That is not what I 
meant. I think you guys can go ahead and change the Code all 
you want.''
    One of the problems is complexity. Another problem is we 
keep changing the Code so much. You should be an advocate for 
us not changing the Code so much. Surely, we need to simplify 
the Code, but once we do that, we have to stop changing it so 
often. I think that is what I would say if I were in your 
position, because, certainly, that is what I have heard over 
the last 7 months continually and I hear that even from my 
constituents, as do the other Members around this panel today.
    So I guess my suggestion, respectfully, is that you be more 
aggressive, that you really take on the role of an advocate. I 
believe you testified earlier that you ran this report by the 
regional heads, and so on. I do not know if that was the intent 
of the legislation. I did not draft it with Mrs. Johnson 
particularly, but I think folks on this panel would like you to 
report directly to us, and not necessarily to vet it through 
the management structure. I think you need to give it to us 
straight as to what the real problems are and what the 
constructive solutions are.
    With regard to your burden scoring, I am very interested in 
that. Give us some suggestions. We are working on two or three 
ways with the Commission, in which you could essentially put 
the same National Taxpayers Union type scoring on legislation 
as it works its way through on the complexity side. What are 
the burdens to the taxpayer and to the IRS? Therefore, what are 
the costs to the system of legislation being proposed? We need 
your help on that.
    Second, you should be recommending that the IRS be involved 
in drafting legislation. You all should be at the table, not 
necessarily you, Mr. Monks, but maybe some people in the 
program areas that are affected by new legislation. That is 
partly our role to try to make that happen more, but also, you 
need to be an advocate out there to tell us how you can be more 
effective in drafting this legislation so it is not so complex 
for the taxpayers and for the IRS.
    With regard to phones, I have to respectfully disagree with 
you on that. The figures I have from GAO show that for fiscal 
year 1996, 20.56 percent of the calls got through--20.56 
percent of taxpayer calls went through. Now, I know there are 
different formulas being used here to come up with different 
figures. They factor in abandonments. They factor in busy 
signals, which I think is appropriate. Apparently, in your 
numbers, you factor in calls where someone is asked to hold, 
and there may be some discrepancy there. But I do not think the 
figure is 46 percent for last year. I do not know if it is 80 
or 85 percent this year. I think it is more like 20 percent.
    Again, not to focus on a problem so much, but at least we 
have to understand what the problem is in order to come up with 
a constructive solution. I agree, more resources should 
probably be devoted to phones, but let us be sure that it works 
and that it works consistently with the other modernization 
efforts around the system.
    Finally, with regard to the Taxpayer Advocates around the 
country, I think Field Resolution Officers should properly 
report to you, and I have changed my mind on that. I think they 
should report to the District Officers, to the managers out in 
the field. Initially, I thought they should report to you 
because their allegiance should be to you. I do not see heads 
shaking one way or the other here. I am sure we will hear later 
from your representatives.
    But I do feel strongly that if you are going to have 
Taxpayer Advocates that actually have an opportunity to 
represent the taxpayer, their stature needs to be improved. 
Specifically, what do you think of giving them the same stature 
as their peers heading other functional divisions in the 
district offices, in the regional offices, in the service 
centers?
    I was in the Cincinnati Service Center all day yesterday. 
It seems to me that it is very difficult for them to progress 
in their careers right now because the only way they can 
progress is to get into the functional areas. So how are they 
going to be able to go up against the people in the functional 
areas if they cannot have that same status, and I think that is 
a legitimate concern. What do you think about that? What is 
your recommendation?
    Mr. Monks. And I agree that that is a concern. We are 
looking----
    Mr. Portman. Do you agree that it ought to be changed?
    Mr. Monks. We are looking at the grade level issue right 
now. I have had a discussion with the Deputy Commissioner about 
this issue. We are working with the personnel function to 
properly classify the grade level of the position and one of 
the things that we are looking at is to what degree are they 
participating in our advocacy initiatives, because, again, we 
have two roles in PRP, two missions, so to speak, and one is to 
fix the taxpayer's problem but the other one is to advocate for 
the taxpayers by improving the processes.
    So we are looking at the possibility of enhancing the 
advocacy challenge of that position and using that as a grade-
enhancing item that would possibly result in more equity in 
that area. I think that that is something that we will have a 
response on relatively quickly.
    Mr. Portman. Have you made a recommendation to the 
Commissioner to enhance the rank of the Problem Resolution 
Officers?
    Mr. Monks. I have talked specifically with the Deputy 
Commissioner about this issue and I want to be able to get the 
leg work done specifically before I go back in with a final 
recommendation.
    Mr. Portman. Sorry I spoke so much and did not give you 
more of a chance. Obviously, I have a lot to say. I would also 
like to hear more from you. I look forward to continuing to 
work with you as the Commission completes its work.
    Thank you, Madam Chair.
    Chairman Johnson. Thank you.
    Mrs. Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    Mr. Monks, this is my first time on this Subcommittee and 
my first time dealing with this issue, so you will have to bear 
with me, but it is not the first time I have dealt with 
constituents who have to deal with the IRS. That, I think, all 
of us have in common up here.
    What I hear some Members saying is that, while you are 
trying to be the taxpayer's advocate, we are trying to be your 
advocate in helping you in your report to implement some of 
these programs that you see as your top 20 list, and I think 
that is important for you to remember.
    So if we seem frustrated, I think we are frustrated because 
for us to do that, we need to understand what our role is in 
any one of these issues, whether it be something that we need 
to bring to the attention of your superiors that nothing is 
happening and this is a result of 3 years or this is something 
that needs to be done as the result of legislation.
    So I think that if you take it from that, that we are just 
as frustrated as you are and in 3 years, if we see the same 
things, you can understand that we are not going very far.
    The other thing I will say is that since I have now been 
appointed to this Subcommittee and particularly to the 
Oversight, it is amazing how quickly that gets around in a 
rumor in your district; and all of a sudden you start getting a 
lot more inquiries and a lot more phone calls about these 
particular issues.
    One that really came to mind and one that was brought to me 
just recently, and quite frankly, I do not think I recognize 
that, but then I should not say this, but I have not had to be 
audited, so I do not know that I understood totally what some 
of them were talking about when they told me on this issue of 
when they are going through an audit and all of a sudden, 3 
years down the road, they may still be in the middle of an 
audit and they are continuing to have to pay penalties or 
interest and so on and so forth.
    Can you tell me what is going on with that, because I think 
that is a very serious issue. That is money that would be 
spent, in some cases for small businesses, to be able to 
expand, or for more employment or whatever, and I read in here 
that there are some things you are trying to do or that you 
were given some authorization last year or in 1993 for some 
abatement of this. What is going on in that area?
    Mr. Monks. And you are talking about the ability to abate 
interest on a case that perhaps has gone on for too long?
    Mrs. Thurman. It is really caused by IRS.
    Mr. Monks. Of course, TBOR2 addressed that, I thought, very 
effectively.
    Mrs. Thurman. Right.
    Mr. Monks. It does allow the IRS the capability to abate 
interest where a case has drug on and is--I think the wording 
in the legislation is due to management error and that could be 
construed as a case that perhaps has been transferred from one 
agent to another and has gone on for an inordinant amount of 
time, far longer than a normal audit. The IRS would have the 
capability to abate interest in those particular situations, 
and this, of course, has been legislated as part of TBOR2.
    Mrs. Thurman. How do they go about doing that? Is that 
initiated through them or is that initiated by IRS?
    Mr. Monks. The procedures have not been fully developed 
yet. This becomes effective with the tax year beginning after 
the date of enactment, so we have a little bit of time to work 
on them. We are working within the IRS with Legislative 
Affairs, with Examination, and other functional areas that are 
involved in this process to develop the actual procedures that 
will be utilized for that purpose.
    But I think it could be initiated by either the taxpayer at 
the taxpayer's request, or where IRS recognized that a serious 
problem took place, they could actually initiate that action. 
We will be working with the groups that are looking at this 
issue very closely to ensure that this particular element of 
TBOR2 is enacted appropriately.
    Mrs. Thurman. And that goes into effect, you said, this 
year?
    Mr. Monks. With the first tax year after the date of 
enactment, which was July 30, so I think it would begin with 
tax years beginning August 1.
    Mrs. Thurman. So those rules and regulations for that 
should actually be coming out so that those that are getting 
ready to go April 15----
    Mr. Monks. Very soon.
    Mrs. Thurman. We can expect that?
    Mr. Monks. Very soon.
    Mrs. Thurman. The mailing issue, as people move around, 
evidently, there have been some problems in determining and 
maintaining taxpayers' current addresses. Where are we on that 
issue at this time?
    Mr. Monks. That was a study, and, in fact, many of the 
recommendations from that study were a direct result of an 
effort that we initiated in the headquarters office. One of my 
employees took the lead in working that issue. I worked with 
that group very closely.
    We have initiated a number of actions. We are still in the 
process of trying to identify the appropriate means for 
taxpayers to notify us of their official address. Currently, a 
form--I cannot remember the number, 8822--is required, or the 
IRS will pick up the correct address from the filing of a new 
return.
    Mrs. Thurman. What happens if something is undeliverable 
and it comes back to you? What then happens?
    Mr. Monks. We do research, depending upon what the type of 
undeliverable mail it was. We do research on a number of 
sources to try to identify the taxpayer's current address so 
that we can get that address corrected and mail to the 
taxpayer.
    Mrs. Thurman. Mr. Monks, I have lots of other questions, 
but hopefully, in our next panel we will get some better ideas 
of some of the issues that are dealt with on an everyday basis 
and maybe some recommendations, as well, and we look forward to 
that. Thank you.
    Chairman Johnson. Thank you.
    Congresswoman Dunn.
    Ms. Dunn. Thank you, Madam Chairman, and welcome, Mr. 
Monks. This is a very short period of time to ask questions of 
you, I appreciate, and I know that you have worked very hard at 
your job, but I find myself often the translator of IRS policy 
and, embarrassingly sometimes, also of congressional statute 
about the IRS. The statute is our fault and we can get at it 
with the proper recommendations, but policy or regulation out 
of the IRS concerns me a bit.
    Where I have heard you say that last year, you were able to 
accept inquiries over the phone from 46 percent of the folks 
who would like to have talked to you over the phone, and I hear 
from my constituents that often that line is busy and it is 
difficult and you have to be on hold, all those things that are 
tough for people, I guess what concerns me more is what I would 
see as a policy or an administrative responsibility there that 
seems to be lacking.
    What I do hear from my constituents is that when they do 
get through, often, the answers are incorrect, in error, and 
that bothers me a lot.
    As I was going over your summary of the problems, which I 
think is an excellent summary and certainly reflects what I am 
hearing out there and I am very glad you worked through the 
regional folks to get this summary, I wonder if there is not a 
more scientific process you could use in addition to their 
firsthand information, I am bothered by a number of areas where 
I think there can be greater accountability from your point of 
view on the administrative level.
    For example, number 3, the lack of clarity and 
inappropriate tone of IRS communications with taxpayers. Number 
4, the erroneous IRS notices. Number 7, the problems in the 
administration of tax penalties. Number 8, the lack of 
understanding of taxpayers' concerns.
    Have you looked into ways, Mr. Monks, where we can, through 
the IRS, achieve greater accountability in the areas that I 
have just mentioned, for example, greater training, greater 
familiarity with what is already a complicated set of rules and 
regulations, that would assist you in producing a more 
effective output once people do get in contact with your folks? 
What is the answer to that problem, I guess is what I am 
asking.
    Mr. Monks. That is a complex question. One thing I did want 
to also address was the quality of the input, so to speak, in 
the report. I did indicate that one of the things that we plan 
to do are to conduct some focus groups this year with taxpayers 
to get more specific information from them on what things are 
most serious to them. In reality, our list of serious problems 
stems from our perception and from anecdotal information that 
we have received from taxpayers and from our own staff. We want 
to conduct these focus groups to get a better picture from 
their perspective. What do they see as the most significant 
issues?
    Then we are also going to be dealing with the practitioner 
community to get from their perspective what the most serious 
problems are and, hopefully, be able to go in with a multi-
faceted approach on where the problems are. Obviously, that is 
going to identify a significant number and we will deal with as 
many of those as we can.
    Accountability is a critical area. We are accountable for 
providing good service to the public on the telephones and we 
are also accountable for providing quality answers. We have a 
very significant quality review program that tries to monitor 
the quality of our responses to taxpayers and I think the 
quality rate is somewhere above 90 percent at this point in 
time, at least according to the statistics that are kept in 
that particular area.
    Is that an acceptable level? I am not sure. We need to be 
accountable. We need to provide the best service that we can to 
the public and this is an area that we do continue to look at.
    In the area of clarity of notices and communications, my 
office works with notice clarity and works with other 
functional activities to look at specific notices that are 
planned to be issued, to make a determination if they are 
appropriately worded, do they provide the right tone to the 
taxpayer. Obviously, we are dealing with compliance issues and, 
to some degree, the tone has to catch the taxpayer's attention. 
There are other notices where we have made recommendations for 
improving the tone or at least the clarity of the notice so 
that taxpayers can understand those notices easier.
    Some of the notices that we have had problems with are, for 
example, adjustment notices that do not necessarily fully 
describe the extent of the problem, so in effect--we 
automatically create the need for a taxpayer to call us. We 
recognize that that is a problem because we send a notice out 
that does not fully describe the situation. The first thing 
that is going to happen is a telephone call and that 
exacerbates the problem on toll free. So we do have to look at 
that area very carefully to try to depict the problem for the 
taxpayer more effectively.
    I do not know if that fully responded to your issue or not, 
if you could----
    Ms. Dunn. I think it is an answer. I just think that if you 
have been doing all those things and you still have these 
problems among your top problems, you had better start thinking 
about doing something else. I do not know if it is sensitivity 
training or what it is, but certainly learning the Code would 
be the first thing that we could expect from the folks who work 
for the IRS.
    Madam Chairman, may I ask one more question? My time has 
run out.
    Chairman Johnson. If it is brief.
    Ms. Dunn. Yes. Let me ask a really brief one. The recent 
McGill case, the old gentleman, a year or so ago was when I 
first learned about it, 93 years old. He wrote a check to the 
IRS for $7,000 when his bill had been $700. Later, he died. 
Four years later, he died and his daughter in looking through 
his bills found the error. The Supreme Court decided after the 
IRS decided, everybody, that it should not be money refunded to 
him and the Supreme Court a week or so ago decided that that 
was the proper decision.
    What do you think is the answer to that kind of a problem? 
They call it equitable tolling. You apparently do not have 
flexibility to refund $6,300 to a senile man whose daughter 
proved to you that it was an overpayment. How are we going to 
handle situations like that?
    Mr. Monks. I read about that particular case and that was 
one that, frankly, I have to say, bothered me somewhat, 
certainly from a Taxpayer Advocate's perspective. I had not 
heard of that case before or cases of that nature.
    Obviously, the statute had expired and the law precluded a 
refund from being issued. I would want to go back and look at 
the process that took place on a situation like that, because 
normally, if a payment went into an account, after a certain 
period of time, that should be identified and a refund issued. 
Obviously, if a return had been prepared, a zero-balance return 
or a balance due return, the balance of the money would have 
been refunded to the taxpayer at that point in time. Since one 
was not filed, the money just went into a holding status.
    What I would like to do is to identify the reasons that 
that did not become apparent to us before the statute expired, 
because it is my feeling that that money should have been 
refunded in a timely manner to the taxpayer once it became 
clear that there was no liability.
    Ms. Dunn. I agree with you, and I am glad to hear your 
point of view on that. I wish you would let me know what you 
find and certainly that should be one where your flexibility to 
allow you to make a decision that I think is more in line with 
real life. Thank you.
    Chairman Johnson. We certainly would look forward to that 
report. I think that is exactly the kind of responsive 
relationship that we want to have with you.
    Mr. Hulshof.
    Mr. Hulshof. Thanks, Madam Chair.
    Mr. Monks, following up on Ms. Dunn's situation, would a 
legislative enactment specifically allowing the statute of 
limitations to extend that period of time, would that cure the 
problem?
    Mr. Monks. Yes, it could.
    Mr. Hulshof. Do you make that recommendation? I think in 
your report, allowing an exception to the statute of 
limitations on refunds so that untimely requested overpayments 
can be credited, would that type of situation Ms. Dunn has 
mentioned, would that come within that legislative 
recommendation?
    Mr. Monks. I am not sure if that particular situation would 
fall into that recommendation. I would have to look at the 
circumstances behind that a little bit more. This is speaking 
more to the issue that came up when we were implementing our 
non-filer program, and it came to our attention that taxpayers 
were coming in to file past-due returns and on certain returns, 
they owed money. Obviously, we were going to assess the tax on 
those returns as appropriate.
    On other returns, they were actually due refunds and why 
they did not file a return is beyond me, but the statute had 
tolled on those returns and we were unable to refund that money 
or even offset--and this is basically where we are coming from 
on this recommendation, is that we ought to be able to allow 
it, to the extent possible, to be able to offset against a 
balance due.
    I would not necessarily be in favor of refunding money in 
that particular situation because the taxpayer had the 
opportunity to file a return and chose not to, but on a refund 
return where a balance due return was filed at the same time, 
it would seem that it would be appropriate to at least be able 
to offset that prospective refund against that balance due and 
that is what recommendation 2 is speaking of.
    Mr. Hulshof. Mr. Monks, let me ask you about a note that I 
jotted down during your oral testimony, and I think you said 
that 70 percent of the individual taxpayers in the country use 
the standard deduction, is that right?
    Mr. Monks. That is correct.
    Mr. Hulshof. Therefore, 30 percent were using the itemized 
deduction. Is it your belief that more individual taxpayers 
would use the itemized deduction method if the Code were 
simpler or if the forms perhaps not so onerous?
    Mr. Monks. I think that that is a very distinct 
possibility, because while 70 percent do use the standard 
deduction, it is very possible that the reason more people do 
not itemize is because of the complexity and the lack of 
understanding of what it is going to take to be able to claim a 
certain deduction, so they choose not to because it is easier.
    In many cases, of course, the Tax Code has eliminated some 
of the deductions that can be claimed and so when it is very, 
very close, taxpayers choose just to take the standard 
deduction rather than to go through the trouble of filing extra 
forms and add complexity to their return. But it is conceivable 
that more taxpayers would choose to itemize if it were easier 
to do so.
    Mr. Hulshof. Let me follow up on your testimony about focus 
groups, and I think you said back in 1993, there was a series 
of focus groups. Is that the last time that focus groups have 
been used?
    Mr. Monks. That is the last time we have used focus groups 
in Problem Resolution, and at the time, what we were trying to 
do was to validate whether our criteria for casework was 
appropriate, what taxpayers thought about the service that they 
received from PRP, and what we could do to be of more 
assistance. This next series of focus groups that will be 
conducted this year will be the first time since then for 
Problem Resolution specifically.
    Mr. Hulshof. Would you think that more frequent use of 
focus groups would be a benefit?
    Mr. Monks. I do. Yes, I do. In fact, I think with the 
advent of this report, certainly, I recognize the need to 
gather more input in terms of trying to determine what the 
taxpayer's perspective was on the most significant problems 
that they were facing. Absolutely.
    Mr. Hulshof. In your top 20 list, you talk about the cost 
to taxpayers of electronic filing and indicate that the cost of 
electronic filing is actually a burden to those low-income 
taxpayers that are trying to get their quick refunds, is that 
right?
    Mr. Monks. Yes.
    Mr. Hulshof. You also mentioned, or at least it is 
mentioned in the report, that the automated walk-in assistance 
was available, I think, to about 50,000 taxpayers but that 
certain criteria was necessary to use that service. Can you 
recall off the top of your head what some of those criteria 
would be?
    Mr. Monks. No, I am sorry, I cannot. I apologize.
    Mr. Hulshof. You mention as a recommendation that there 
might be some community-sponsored programs that might be an 
option for low-income taxpayers. Would you describe what you 
mean by community-sponsored programs? It sounds like a great 
idea, but I am not familiar with that and perhaps you can 
enlighten me.
    Mr. Monks. Right. In my former position, I was District 
Director for Arkansas and I was very active in promoting what 
we call a Volunteer Income Tax Assistance Program in that 
particular area. We tried to enhance the program because we 
recognized that the service that we were able to offer in our 
offices sometimes was perhaps only 1 or 2 days a week and there 
was a need for continuing service, so we did support the growth 
of the VITA program throughout the State and got a lot of 
service from our VITA volunteers who work throughout the filing 
period to assist taxpayers both with their questions and with 
their return preparation.
    We also had VITA programs with military sites, community 
interest groups, and we even went to private business to try to 
encourage the use of electronic filing in their offices for the 
employees. So that is what I meant by community-based type 
programs.
    Mr. Hulshof. Thank you, Mr. Monks.
    Thank you, Madam Chairman.
    Chairman Johnson. Mr. English.
    Mr. English. Thank you, Madam Chair.
    Mr. Monks, I want to focus on a couple of specific areas of 
your report and seek perhaps some elaboration. One of your 
missions, I believe, is to work with small businesses who are 
facing particularly high compliance costs in the current tax 
system. I am wondering, how often does your office assist small 
businesses? Can you quantify that in any way?
    Mr. Monks. I am not sure what the total is, but I would say 
that the majority of the taxpayers we deal with are individual 
taxpayers and it would be somewhere in the neighborhood of 25 
to 35 percent of the time we would be dealing with those 
involved with small businesses.
    Mr. English. Thank you. Could you provide the Subcommittee 
with a more detailed breakout on that point?
    Mr. Monks. I will try to do that. We generally track the 
issues by type of problem that the taxpayers are experiencing, 
but we will look to see if we can do that and I will provide 
that.
    Mr. English. When dealing with small business, do you focus 
on administrative and procedural issues or do you also get into 
structural issues in tax compliance with the Code itself?
    Mr. Monks. Primarily, administrative and procedural issues.
    Mr. English. I wonder, has your office sought to quantify 
the burden for small business of compliance, for example, with 
the alternative minimum tax, AMT? Do you have many AMT 
compliance cases coming through your office, requesting your 
help?
    Mr. Monks. No, we do not. That is not a major problem that 
taxpayers are coming, at least to our offices, with. I think 
they are dealing primarily with the examination function or 
other functions within the Service, but that has not been a 
high-volume area for us.
    Mr. English. You may have a different mix of people coming 
through your office than I have coming through my office, but 
we have run into an unusually high number of small businesses 
that have a terrible compliance problem with the AMT, having to 
maintain what amounts to an entirely separate set of books, 
depending upon their profitability, and particularly for small 
businesses, it is an enormous cost. I would encourage you to 
focus on that compliance side and perhaps, if available, give 
us a little more information.
    The other area I wanted to inquire about has to do with the 
earned income tax credit, which is both a critical program for 
the working poor to participate in the work force and also as a 
program significantly hit with very high fraud and inaccuracy 
rates.
    Now, as part of your taxpayer compliance effort, obviously, 
you do not focus as much on the fraud end, but I wonder, can 
you quantify whether your efforts have been helpful in 
improving the earned income tax credit accuracy rate?
    Mr. Monks. Let me just comment on the 1995 filing period, 
which was probably the hallmark of the IRS fraud efforts to 
detect and slow down refunds so that they could look at the 
returns and determine whether the credits claimed were 
appropriate.
    There were procedures implemented, obviously, at the 
beginning of that filing period that caused certain returns to 
be screened into this review. We knew that this was going to 
have a significant impact on the Problem Resolution Program, 
and, in fact, our level of casework went up substantially that 
filing period and for the months afterward.
    We normally handle somewhere in the neighborhood of 30,000 
to 34,000 applications for Taxpayer Assistance Orders in a 
year. That year, we handled almost 60,000 applications for 
Taxpayer Assistance Orders and over, I think it was 60 percent 
of those--67 percent involved refunds that were slowed down as 
a result of the review of earned income tax credit. These were 
taxpayers that were inadvertently caught up in that process, 
filing for a legitimate credit, but met the screening criteria 
and so the returns were slowed down.
    The Problem Resolution Officers in the field were 
inundated. The service centers were inundated. We worked to 
expedite those refunds once we validated that the credits were 
due and we made a number of recommendations, and those are 
outlined in the report, that were adopted by the Service, and 
as a result, the screening criteria were changed. This was not 
just the result of our efforts because the functional areas 
also made some recommendations, as well. The 1996 filing season 
was probably one of the smoothest ones on record in terms of 
these kinds of----
    Mr. English. Very good, Mr. Monks.
    With regard to some of the partnerships that you have 
outlined in your report to expand outreach to potential earned 
income tax credit recipients, I wonder, and Madam Chairman, if 
I can just take another quick moment, if you could elaborate a 
little more on your claims that the IRS has secured the 
cooperation of more than 80 major organizations to assist with 
the promotion of the earned income tax credit, that you have 
partnered with State and local governments to include stuffers 
in various public assistance mailings, and that you have worked 
with local school systems, education associations, and other 
similar organizations to get out information on earned income 
tax credit eligibility.
    In your view, were these IRS outreach efforts successful, 
and may I ask, can you describe them, even in writing, if it is 
more appropriate, to this Subcommittee in a little more detail 
exactly how you developed these partnerships?
    Mr. Monks. Yes. The responses in that particular section of 
the report actually came from the Chief Compliance Officer as 
to the actions that were taken by the organization to enhance 
the understanding and awareness of the earned income tax 
credit. I think it has been a successful effort, one that I was 
involved with when I was Director of the Arkansas District, but 
I would be more than happy to provide additional information to 
you in that area.
    Mr. English. I would welcome that. Thank you very much.
    Mr. Monks. Mr. English, if I also could, I know of your 
interest in small business. I wanted to let you know that I and 
the Small Business Liaison for the IRS met recently with the 
Small Business Fairness Boards that were recently initiated by 
Small Business Administration, SBA. We addressed a group of 
about 40 of those members of the ten Fairness Boards across the 
country to let them know what kind of services were available, 
if their small business taxpayers had problems with the IRS. We 
have designated each of our Regional Taxpayer Advocates as the 
contact point for small business, the Fairness Boards, to deal 
with on problems directly associated with small business.
    Mr. English. Thank you, Mr. Monks.
    Thank you, Madam Chair.
    Chairman Johnson. Thank you very much, Mr. Monks.
    Before we go on to the next panel, I just want to point out 
some of the simpler recommendations in your 20 that it would be 
useful to have your guidance on. They are the kind of thing 
that are particularly annoying to people.
    For instance, the number of computer-generated penalties 
that are generated every year and then abated, how can we do 
something about that?
    Taxpayers not getting notices of discrepancies between the 
income reported on the tax return for 1 to 2 years. We really 
have to have a more responsive system than that.
    How can we help you deal with the costs of electronic 
filing at a time when we want to encourage people to file 
electronically--at least, that is my understanding of the 
former Commissioner's goal and of the agency's goal. Why is it 
so costly? What would it take for the IRS to offer people that 
technology? What incentives would it take? What would be 
involved in employers offering this service to their employees? 
So that kind of thing, we could legislate on in the near 
future.
    This issue of taxpayers getting no response from the IRS, 
it is like a black hole. Well, you cannot write everybody back 
and say, we are glad to have received something from you, but 
if you are not going to make their payment in the sort of 
normal, timely fashion, why, every one of us have casework 
projects, and, of course, it is much smaller, but if you do not 
hear from my office for a month, you get a letter saying, I am 
sorry, we cannot respond to you yet. We have not heard from the 
Immigration Service.
    It seems to me that at 6 months or 8 months or sometime, 
there ought to be a tickler file that says, we are working on 
your case and this is the problem. If we could get the 
information from you, you would hear from us, or whatever. I 
think for constituents to simply get no communication, not to 
ever know what happened is really not an acceptable system.
    I will not go through more of the details but I would say 
that you will be back to us in June, on June 30, 1997, to 
report on another requirement of the Taxpayer Bill of Rights 
and that is how the agency is going to in the future deal with 
agents who treat members of the public poorly or abusively. I 
was surprised after we passed the Taxpayer Bill of Rights to 
know that you had no system of actually tracking how many 
complaints there were about any agent. I am pleased you are 
getting started on implementing that.
    But know that when you come back, please, we want a very 
much more specific report. We want to know how you are going to 
know how many complaints there were against someone, what steps 
do you take to find out whether the complaint was valid or not, 
what steps do you take to assure--and in hearings last year, we 
had absolutely outrageous stories of IRS employees telling 
people that we know that is a safe harbor there, take us to 
court, I mean, when the safe harbor was there and this person 
met the safe harbor criteria and there was sort of this high-
handed area of, if you do not like it, take us to court. We are 
having a lot of this problem in some of the gray areas like 
independent contractors and stuff like that.
    We want a substantive response here. This is very, very 
important. To have had no ability at all in the past to know 
who is arrogant with the public and who is not means that all 
IRS employees get painted with the brush of the actions of what 
are, I believe, a very few. I just call that report to your 
attention.
    Thank you for being with us. I congratulate you on some of 
the progress that you have made. I do remind you that the 
Congress cannot act without focus and we do call on you to be 
part of a more focused approach to taxpayer service, working 
with us to both change the law and support you in 
administrative change. Thank you very much, and I will welcome 
the next panel. Thank you, Mr. Monks.
    Mr. Monks. Thank you.
    Chairman Johnson. The next panel, we are very, very pleased 
to have. You are the people out there on the frontline. You 
deal with this all the time and I want you to know that I 
really regret statements that have been made in the past that 
tend to paint all IRS employees with the brush of the problems 
that have developed in the computer modernization program.
    It has certainly been my experience, working with people 
like Mr. Romano from the Hartford Office, and I welcome you 
here and am delighted that you were able to come, that the IRS 
has a lot of very fine people working for it who are 
knowledgeable and who really care whether the public gets the 
service they desire.
    Often, your job is not made easier by our propensity to 
pass extremely complex law for arcane and sometimes political 
reasons. So the problems that you are having are, in part, 
problems that we create, and one of the reasons this 
Subcommittee created the mechanism we have created is to allow 
a far more straightforward dialog. So do not worry about either 
insulting us or complaining that actually we might have been 
wiser, because one of the things we have to do a better job of 
in Congress is going back and fixing those things that happened 
sometimes at midnight, sometimes at 3 a.m., and result in an 
almost unadministerable Code provision. So we want to know from 
you what your experience is, and we thank you all very much for 
being here.
    Let me start on my left. Mr. Romano.

     STATEMENT OF FRAN ROMANO, DISTRICT TAXPAYER ADVOCATE, 
CONNECTICUT/RHODE ISLAND DISTRICT, INTERNAL  REVENUE  SERVICE,  
                     HARTFORD,  CONNECTICUT

    Mr. Romano. Thank you, Madam Chairman.
    Madam Chairman and distinguished Members of the 
Subcommittee, I appreciate the opportunity to be here today to 
give you a local perspective of an Advocate from the 
Connecticut/Rhode Island District and to hopefully take you 
through the process and explain what it is we do at the local 
level to take a taxpayer through the process of providing 
relief.
    One of our most critical responsibilities as outlined in 
the Taxpayer Advocate's report is for us to process form 911, 
Application for Taxpayer Assistance Order. These cases are 
usually very sensitive, as you know, and we are dealing with 
taxpayers who are angry, and frustrated. Many times, they have 
exhausted all of their administrative remedies and they come to 
us seeking assistance. These cases usually involve an 
enforcement action when we have either attached a bank account, 
a wage levy that is attached to their pay, and it is their only 
source of income, their only remaining source of funds.
    In addition, we get taxpayers who are asking us to expedite 
the processing of a claim or a refund return because they are 
undergoing some financial hardship and they need to have the 
funds in order to alleviate that hardship.
    I have to point out, though, that not all Application for 
Taxpayer Assistance Orders are filed by taxpayers who have a 
hardship. In many cases, we find that some taxpayers will use 
the form to stall collection action or they will use the form 
even though they have not cooperated through the entire 
administrative process that has been available to them.
    Regardless of the issue, when a form 911, Application for 
Taxpayer Assistance Order, comes into my office, either I, 
myself, or a member of my staff that same day or the next day 
acknowledge receipt of the form to the taxpayer. We then 
contact the employee and the frontline manager involved and 
discuss the facts and circumstances of the case and see if we 
can come to some type of resolution. If we cannot at that 
level, we raise it to the next level of management, all the way 
up to the Division Chief level, if necessary.
    I have found, in my experience, that it is rarely necessary 
to raise it to that level, that reversing an action or 
negotiating some other type of alternative means of resolution 
for the taxpayer can be worked out at a lower level of 
management within the Service. I have to say that for this 
reason, the number of actual Taxpayer Assistance Orders, are 
low and I have never had to issue one in my district.
    Once we determine a hardship exists, we make sure that 
there is no enforcement action taken on the taxpayer, while we 
are negotiating for the taxpayer. Thus, no subsequent 
enforcement action takes place. We are usually able to make 
that type of determination very quickly and many times 
alleviate the hardship and then we go on to resolve the 
remaining part of the problem.
    As I stated before, many of the collection-type taxpayer 
assistance applications have to do with releasing a wage levy 
or a bank levy and those are usually resolved very quickly. We 
can get to the functional management, get the levy released, 
and place the taxpayer into some type of alternative 
arrangement, such as a payment agreement.
    Not everything is that simple, however. The Service has a 
program called the Substitute For Return Program, which we call 
the SFR. Many times, for taxpayers who have been nonfilers, the 
Service will take the wage information and payer information 
that we have and prepare returns on behalf of the taxpayer. The 
taxpayer goes through an entire administrative process and the 
tax is legally assessed.
    Regardless of that, the taxpayers do not agree with the tax 
that has been assessed legally and they many times get referred 
to our program for us to correct those situations. These 
usually involve several years and the enormity of the tax 
situation is something they cannot deal with. We are usually 
able to get corrected returns from the taxpayers, get the tax 
assessments corrected, and then set them up in an installment 
agreement, if that is appropriate.
    What comes into play here many times, is the issue that was 
raised before about the statute for claiming a refund on an old 
tax year. Many times, these taxpayers are faced with a 
situation where they do not file these returns timely. They 
perceive the fact that they cannot get the refund, nor can they 
apply the refund years toward the balance due returns, as very 
unfair and even punitive, the way the system is currently set 
up. So I think this is an area--in the Advocate's Report, where 
there is a legislative proposal to deal with this type of 
issue. I think this is something that needs to be considered.
    There are also situations where a taxpayer may file an 
assistance order, as I pointed out before, and may not be 
deserving of relief, based on the facts and circumstances of 
the case. We are charged with making it clear to the taxpayer 
that in this situation, we are not going to be able to provide 
relief. We are sensitive to the plight of everyone who comes to 
us. We do listen to them. We are out there trying to do our 
best for them, but there are some situations where we cannot 
provide relief for whatever reason.
    I just want to make the point at the end that with all the 
things we deal with, the technological advances, the changes in 
the law, and the reorganization within the IRS, I believe more 
than ever, there is a need for the taxpayers to have a place to 
go where they can get face-to-face help. None of us like 
dealing with a bureaucracy where we are always dialing phone 
numbers and talking to machines. So we really perform an 
important task and I think we have been very successful, the 
way the current structure is, in making some changes. Thank 
you.
    [The prepared statement follows:]

Statement of Fran Romano, District Taxpayer Advocate, Connecticut/Rhode 
Island District, Internal Revenue Service, Hartford, Connecticut

    I appreciate the opportunity to be here today as the 
Taxpayer Advocate for the Connecticut/Rhode Island District of 
the Internal Revenue Service. I would like to take this 
opportunity to provide the committee with the perspective of a 
local Advocate along with a synopsis of the types of inquiries 
I receive and how the process of providing assistance and 
relief to taxpayers transpires in the District Office. I have 
been involved in the Problem Resolution Program since 1983 as a 
Caseworker, Group Manager, Assistant Problem Resolution Officer 
and Problem Resolution Officer (Now Taxpayer Advocate).
    I would like to preface my remarks by noting that, due to 
Code Section 6103, restriction on disclosure, the examples I 
will discuss are some of the general scenarios that I may face 
on any given day and do not reflect the individual 
circumstances of any particular taxpayer. I would also like to 
point out that becoming involved with Individual Taxpayer 
problems is only part of what an Advocate is responsible for in 
the District Office. Participating in Regional and Local 
Advocacy Projects, acting as a contact point for the 
practitioner community to raise critical issues, and monitoring 
the newly instituted Customer Feedback System are also 
important aspects of our positions. I am currently involved in 
our Northeast Regional Project to study Federal Tax Deposit 
penalties, one of the top five most serious problems 
highlighted in the Advocate's report. As an Advocate, I am 
continually trying to place myself mentally in the position of 
a taxpayer having to deal with the IRS, and trying to gauge how 
the IRS actions would affect me. Advocacy projects and becoming 
involved at the front end of policy implementation is as 
important as assisting the individual taxpayers who come to us 
for help.
    The Taxpayer Advocate's report outlined the major issues 
that were the source of Problem Resolution casework in both the 
Service Centers and District Offices. I would agree that these 
are the major issues at the District level in Connecticut/Rhode 
Island although not in the same order. Audit Reconsiderations 
are a good example. These were the number one source, by volume 
of casework, in FY96 nationwide. In our District, these were 
the fourth highest volume.
    There are a variety of reasons why these cases end up in 
the Problem Resolution Program. Taxpayers may have failed to 
submit information requested by the IRS, during the original 
audit, to verify their returns. The documents provided may have 
been incomplete. The Service may not have received 
correspondence or it may not have been received timely. In some 
cases, the Service may have misplaced the taxpayer's 
documentation or failed to associate it with the taxpayer's 
file. Whatever the case, many of these inquiries end up in the 
Problem Resolution Program. When accepted into the program, the 
taxpayer is given the opportunity to submit documentation to 
verify the item in question. If the taxpayer responds with the 
necessary documentation, we adjust the assessment to reflect 
the correct tax. If the taxpayer fails to respond we close the 
case and the original assessment stands.
    One of our most critical responsibilities is to handle Form 
911, Application for Taxpayer Assistance Order (ATAO). These 
cases are usually very sensitive and are submitted by taxpayers 
who are many times angry, distraught, very emotional and 
frustrated with the enormity of the situation. Almost all of 
these taxpayers have gone through either the examination or 
collection process or both. They have usually exhausted all of 
their administrative remedies and reach out to us for 
assistance. I must add that there are some who use this 
procedure to delay collection activity and have not cooperated 
throughout the entire administrative procedure available to 
them.
    ATAOs are usually filed due to an enforcement action or 
proposed enforcement that the taxpayer believes is causing 
hardship. Applications are also filed by taxpayers who are 
seeking to expedite the processing of claims and refund returns 
to relieve some financial hardship they may be undergoing. 
Regardless of the issue, either I, or a member of my immediate 
staff, will contact the taxpayer within two days and 
acknowledge receipt of their application.
    We first determine if a hardship situation exists and, if 
so, put a hold on any imminent enforcement action pending a 
decision on whether relief will be provided. Our next action is 
to contact the employee and the front line manager on behalf of 
the taxpayer to discuss the facts and circumstances of the case 
and determine if relief is warranted. If no agreement is 
reached, the next level of management is consulted and, if 
necessary, a discussion of the case is held with the Chief of 
the Division involved.
    It has been my experience during the years I have been 
involved with this process that it is rarely necessary to raise 
these issues to the Division Chief level. I have found 
management in all functions willing to revisit issues. Many 
times, reversing actions or using alternatives will not put the 
government's interest at risk and is in the best interest of 
the taxpayer and the government. It is incumbent upon me as the 
Taxpayer Advocate to build a credible relationship with our 
District Collection and Exam Managers so that when I bring a 
case to their attention, they can be assured it is one that 
deserves consideration. I realize that there may be instances 
when a Chief may disagree with the relief that should be 
provided; thus far I have not been presented with this 
situation. It has not been necessary to use my authority to 
issue a Taxpayer Assistance Order in the years I have been in 
this position.
    During FY96, in the Connecticut/Rhode Island District, 
65.6% of those cases where hardship was found to exist resulted 
in relief provided to taxpayers. For those who were not 
provided relief 6 % were due to the law preventing change. I 
will address this issue later in this testimony.
    I offer the following examples where we have provided 
relief to taxpayers. Many times, taxpayers will write or walk 
into my office and request relief from a wage or bank levy ( 
attachment of funds) because it has attached their only means 
of support. These levies can be the result of a breakdown in 
communications by the service or the taxpayer, inaction by the 
taxpayer, or a combination of both. In most of these instances, 
we can provide relief and allow the taxpayer some type of 
alternative arrangement such as an Installment Agreement. These 
cases are not complex and are quickly resolved. However, they 
provide good examples of how someone who gets caught up in the 
system can get relief and continue to meet their tax 
obligation.
    Unfortunately, not all situations which come across my desk 
are this simple and easily resolved. An example would be 
taxpayers who have been assessed through the Service's 
Substitute for Return Program (SFR). These are people who have 
not, for whatever reason, filed returns for several years. The 
tax liabilities through SFR are sometimes extremely large and 
taxpayers' financial position is such that they are unable to 
pay the tax, interest and penalties associated with these tax 
years. Many times, these taxpayers are referred to Problem 
Resolution since they disagree with the tax legally assessed by 
the Service in the absence of their original returns. Usually, 
we can obtain correct returns from the taxpayer and expedite 
the adjustments to reflect the correct tax. If there is a 
remaining balance, we instruct them as to payment alternatives.
    I do not want to paint a picture that everyone who seeks 
assistance through my office and files an Application for 
Taxpayer Assistance Order is deserving or receives the relief 
requested. Providing assistance and relief to taxpayers through 
this procedure becomes a delicate balancing act. As the 
Taxpayer's Advocate I must keep in mind what is fair for all 
taxpayers. There are times when, in the interest of fair and 
consistent treatment, I do not provide the relief requested. An 
example would be when a taxpayer requests adjustments to an 
Installment Agreement to allow expenses which are beyond the 
guidelines set in the service's allowable expense criteria. 
Another situation, which is not uncommon, is businesses 
requesting relief from enforcement action to collect payroll 
taxes. Many times these taxpayers are repeat delinquents and 
have been given several opportunities to comply with the tax 
laws. While I am sensitive to their economic position and will 
ensure that all alternatives are explored, it would be unfair 
to allow them to use withholding taxes to remain in business, 
while the vast majority of taxpayers comply.
    There are also instances when we are unable to provide 
relief to taxpayers due to the law preventing us from taking an 
action. An example is a taxpayer who may have undergone some 
event in his or her life that has contributed to not filing 
returns for several years. Taxpayers in this position will file 
all prior returns, some of which are refund returns. Others may 
have a balance due. If the statutory period for claiming a 
refund has passed it is difficult to explain why the Service 
cannot allow the credit, while at the same time the Service is 
requesting they pay additional amounts to cover the balance 
due. This issue is addressed in the Advocate's Report on 
Legislative Proposals. If this provision were adopted in some 
format, it would provide us the authority to assist taxpayers 
who are trying to comply but are faced with liabilities that 
are overwhelming. I believe this will help change the public 
perception that the tax system is unfair, and even excessively 
punitive, on this issue. The recent provisions of TBOR II, 
specifically those allowing us to provide relief in certain 
situations regarding liens and levied property, will assist us 
in aiding taxpayers. The broadening of interest abatement 
authority to include managerial acts should also help us to 
provide relief to taxpayers when the amount of interest they 
are assessed is excessive through no fault of their own. This 
is an area that taxpayers view as extremely unfair.
    One final issue I would like to address is the cost to 
taxpayers for electronic filing and the need for assistance 
with the preparation of tax returns. This year, the 
Connecticut/Rhode Island District is offering walk in 
assistance at least one day a week in each of our offices. 
Electronic filing is offered free to those who have all the 
necessary information when they come into the office. In 
addition, there are slightly over 200 Tax Counseling for The 
Elderly (TCE) sites and 75 Volunteer Income Tax Assistance 
(VITA) sites located throughout the two states. Hopefully, this 
will assist in making the 1996 Filing Season a better 
experience for Connecticut/ Rhode Island Taxpayers.
    I truly believe that as the Internal Revenue Service 
continues to administer the tax system, and strives to do so 
more efficiently, the Taxpayer Advocates at all levels will 
play an important role. Technological advancements, tax law 
changes and recent reorganization efforts within the Internal 
Revenue Service make it more important than ever that the 
taxpayer have a place to turn within the system for help. As 
Advocates, we need the continued support of all IRS executives 
at all levels. I believe that maintaining a line of authority 
with the District Director facilitates accomplishing many of 
our goals . Placing the Advocate's position as an Independent 
Office may make the effectiveness of his role more difficult to 
achieve, especially to future Advocates. Having said that, I 
also would like to point out that ensuring the Advocate's 
position is placed at a grade level that legitimizes the 
authority and responsibility that go with the job is necessary 
to ensure a respectable peer level and independence of the 
Advocate. I believe we play an important role in enhancing the 
confidence and credibility of the organization with the 
taxpaying public. I believe I speak for all when I say we are 
committed to listening to taxpayers' individual and collective 
issues and ensuring that each individual receives the 
courteous, professional, fair and consistent treatment to which 
they are entitled.

                                

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

  STATEMENT OF TOM GEORGE, DISTRICT TAXPAYER ADVOCATE, SOUTH 
   TEXAS DISTRICT, INTERNAL REVENUE SERVICE,  AUSTIN,  TEXAS

    Mr. George. Madam Chairwoman and distinguished Members of 
the Subcommittee, I appreciate the opportunity to be here today 
to discuss with you the Problem Resolution Program and the role 
of the District Taxpayer Advocate.
    For the past 7 years, I have served as a Taxpayer Advocate, 
formerly entitled the Problem Resolution Officer, for the South 
Texas District, and that was formerly called the Austin 
District. Prior to this assignment, I was a Revenue Officer 
assigned with the difficult and sometimes complex 
responsibility of collecting delinquent taxes and returns from 
both individual taxpayers as well as businesses. I have had the 
opportunity to serve on a number of national and regional task 
groups, including an advocacy project which looked at tax 
issues that affect divorced and separated taxpayers.
    In my role as a District Taxpayer Advocate, I am 
responsible to ensure that taxpayers' rights are protected, 
serve as an advocate for the taxpayer within the Internal 
Revenue Service, and represent their many needs and interests. 
To assist me in this role, the Taxpayer Bill of Rights was 
enacted in 1988 and expanded by the Taxpayer Bill of Rights 2 
in 1996.
    The Subcommittee has asked me to focus on the provisions of 
the bill that authorizes the Taxpayer Advocate or his or her 
representative to issue a Taxpayer Assistance Order when a 
taxpayer is suffering or about to suffer a significant hardship 
as a result of the administration of the tax law. The taxpayer 
or his or her representative can ask for a Taxpayer Assistance 
Order by letter, by phone, or by completion of the form 911, 
Application for Taxpayer Assistance Order, ATAO.
    In addition, Internal Revenue Service employees are 
responsible for identifying situations that warrant the 
immediate intervention of the Advocate or the Taxpayer 
Advocate, and during the review of the application and 
hardship, all enforcement actions are suspended.
    I would like to share with you a couple of scenarios in 
which it was necessary for me to invoke the ATAO authority. 
Both of these examples involve cases that occurred prior to the 
Taxpayer Bill of Rights 2.
    The first scenario concerns the filing of a Federal tax 
lien on real property. The scenario also involves three 
different parties. Because of the complexity of this issue, I 
would like to read verbatim the background that created the 
issuing of the order.
    Our taxpayers, the taxpayers referred to my office, 
purchased a parcel of land from a local home developer the 
first part of 1986 and had built a home on that property the 
same year. The warranty deed was properly recorded in the 
county where the property was located at the time of the 
purchase. The developer purchased the land from the original 
owner in 1994, 2 years prior to our taxpayers purchasing that 
property. However, the developer inadvertently filed the 
original warranty deed in an adjacent county instead of the 
county where the property was physically located.
    In 1993, the original owner accrued Federal tax liabilities 
and a Federal tax lien was filed. The Federal tax lien attached 
to all real property and the rights to property owned by the 
original owner, including our taxpayers' property. The 
taxpayers owed no Federal taxes and they were in full 
compliance with all Federal filing requirements. They were 
unaware that a Federal tax lien had been filed on their 
property until they attempted to sell it in the fall of 1995.
    They applied for a Certificate of Discharge of Property 
from Federal Tax Lien and that request was denied. The Service 
maintained that the original deed was not properly filed and 
that our taxpayers did not have clear title prior to the filing 
of the Federal tax lien against the original owner in 1993.
    The title company involved in the original transaction was 
no longer in business. The underwriter never issued the title 
insurance policy because it went into receivership.
    Our taxpayers were referred to me for assistance. At that 
time, they knew nothing about the Problem Resolution Officer or 
the role of the Problem Resolution Program at all. Hearing the 
circumstances surrounding their unique situation, I initiated 
an ATAO on their behalf. After additional research was 
completed, I concluded that the government could assert 
legitimate legal theories to support the lien but the equities 
would not favor the Service. A Taxpayer Assistance Order was 
issued to relieve the hardship and a Certificate of Discharge 
was issued to the taxpayers.
    The second scenario, and I know I am limited with time, 
involved a business. The first scenario involved an individual 
taxpayer. The second one involved a seizure of a business that 
had been what we refer to as continuing accruing trust fund 
taxes. After investigation, the taxpayer came to me. I 
researched his inquiry and discovered that the taxpayer had 
also accrued the same type of taxes in another State prior to 
moving to the State of Texas.
    The taxpayer had also made an attempt to contact the 
Service over a period of about 4 months to request an 
installment agreement so that he could satisfy those back 
taxes. The first contact that he received was with our 
Collection Division when a revenue officer knocked on the 
business door asking for full pay. The taxpayer was unable to 
full pay the account and filed an Application to Relieve 
Hardship on those grounds.
    The compliance check also conducted by the revenue officer 
revealed that the taxpayer had failed to pay employment taxes 
in another business. Because the taxpayer was considered a 
repeat delinquent taxpayer, the Service denied the request for 
a short-term installment agreement. This company had a number 
of employees. They did have cash flow problems. They were 
having problems with costs of starting up a new business. But 
one thing that was in their favor was that they had struggled 
for a year and finally landed a very large purchase order from 
a major company in Texas.
    After reviewing the circumstances surrounding that case, I 
determined that because of the number of employees affected, 
because of the likelihood of them being able to get back into 
compliance, I authorized a short-term installment agreement. 
The taxpayer full paid the account within about 60 days.
    In closing, I would like to emphasize, this program has 
been highly successful in helping taxpayers. The majority of 
hardship applications received in PRP are resolved 
administratively by the Advocate. Rarely is there a need to 
invoke the ATAO authority, but we will invoke it when it is 
necessary, and in the two examples that I gave you here this 
afternoon, I felt it was necessary.
    This concludes my opening statement. I would be happy to 
address any questions you may have at this time.
    [The prepared statement follows:]

Statement of Tom George, District Taxpayer Advocate, South Texas 
District, Internal Revenue Service, Austin, Texas

    I appreciate the opportunity to be here today to discuss 
the Problem Resolution Program and the role of the District 
Taxpayer Advocate. For the past seven years, I have served as 
the Taxpayer Advocate, formerly titled the Problem Resolution 
Officer, for the South Texas District. Prior to this 
assignment, I was a revenue officer assigned with the difficult 
and sometimes complex responsibility of collecting delinquent 
taxes and returns from both individual taxpayers and 
businesses. I have had the opportunity to serve on a number of 
national and regional task groups including an advocacy project 
which looked at tax issues that affect divorced or separated 
taxpayers.
    In my role as the District Taxpayer Advocate, I am 
responsible to ensure that taxpayer rights are protected, serve 
as an advocate for the taxpayer within the Internal Revenue 
Service, and represent their interests and concerns. To assist 
me in my role as an advocate, the Taxpayer Bill of Rights was 
enacted in 1988 and expanded by the Taxpayer Bill of Rights II 
in 1996.
    The Committee Staff has asked me to focus on the provision 
of the Bill that authorizes the Taxpayer Advocate or his/her 
designee to issue a Taxpayer Assistance Order (TAO) when a 
taxpayer is suffering, or is about to suffer, a significant 
hardship as a result of the administration of the tax law. The 
taxpayer or his/her representative can ask for a TAO by letter, 
phone, or by completion of the Form 911, ``Application for 
Taxpayer Assistance Order'' (ATAO). In addition, Internal 
Revenue Service employees are responsible for identifying 
situations that warrant the immediate intervention of the 
Taxpayer Advocate. During the review of the application and 
hardship by the Advocate, all enforcement actions are 
suspended.
    I would like to share with you a couple of scenarios in 
which it was necessary for me to enforce, that although most 
TAOs are resolved informally, there are occasions when it 
becomes necessary to invoke the TAO authority we have been 
provided. Both of these examples involved cases that occurred 
prior to the enactment of TBOR II.
    The first scenario concerns the filing of a Notice of 
Federal Tax Lien (NFTL) on real property. The scenario involves 
three different parties. Our taxpayers, the taxpayers referred 
to my office, purchased a parcel of land from a local home 
developer the first part of 1986 and had a home built on the 
property the same year. A Warranty Deed was properly recorded 
in the county where the property was located at the time of 
purchase. The developer purchased the land from the original 
owner in 1984. However, the developer inadvertently filed the 
original Warranty Deed in an adjacent county instead of the 
county where the property was located. In 1993, the original 
owner accrued Federal tax liabilities and a NFTL was filed. The 
NFTL attached to all real property and rights to property owned 
by the original owner, including our taxpayers' property. Our 
taxpayers owed no Federal taxes and were in full compliance 
with all Federal filing requirements. They were unaware that a 
NFTL had attached to their property until they attempted to 
sell the home in the fall of 1995. They applied for a 
Certificate of Discharge of Property from Federal Tax Lien, 
which was denied. The Service maintained that the original Deed 
was not properly filed and our taxpayers did not have clear 
title prior to the filing of the tax lien against the original 
owner in the spring of 1993. The title company involved in the 
original transaction was no longer in business, and the 
underwriter never issued the title insurance policy because 
they went into receivership. They were referred to me for 
assistance. Hearing the circumstances surrounding their unique 
situation, I initiated an ATAO on their behalf. After 
additional research was completed, I concluded that the 
government could assert legitimate legal theories to support 
the lien but the equities would not favor the Service. A 
Taxpayer Assistance Order was issued to relieve the hardship, 
and a Certificate of Discharge was issued to our taxpayers.
    The second scenario concerns delinquent employment taxes 
and the seizure of the business assets. The business had 
pyramided unpaid employment taxes in excess of $100,000.00 and 
was having cash flow problems along with start-up costs. The 
company employed a large number of employees and had just 
received a large purchase order from a major company. In an 
attempt to bring the company into compliance, they hired an 
accountant to run the day-to-day operation of the company. The 
taxpayer had attempted to contact the Service and request an 
installment agreement (IA) and pay the delinquent employment 
taxes over a twelve month period. The taxpayer did not receive 
a response from the IRS until he was contacted by our 
Collection Division approximately four months later. Once 
contacted by a revenue officer, the taxpayer attempted to 
negotiate an installment agreement for six months. As a matter 
of procedure a compliance check of the taxpayer's filing 
requirements was completed. The compliance check revealed the 
taxpayer had failed to pay employment tax for another business 
he owned out of state prior to moving to Austin. Because the 
taxpayer was considered a repeat delinquent taxpayer and 
currently pyramiding trust fund taxes, the Service denied the 
request for an IA based on current collection procedures 
outlined in the Internal Revenue Manual (IRM). The taxpayer was 
advised to full pay or the business would be seized. Since the 
taxpayer was unable to satisfy the liability, the assets were 
seized and the company closed. The taxpayer filed an ATAO with 
my office. After reviewing the application and based on the 
description of the significant hardship, the number of affected 
employees, and the fact the company had just received a large 
purchase order, I issued a TAO to release the seizure and allow 
a short installment agreement. The company full paid the 
liability in less than sixty days.
    In closing, I would like to emphasize that I believe this 
program has been highly successful in helping taxpayers. As I 
mentioned, the majority of the hardship applications received 
in PRP are resolved administratively at the local level by the 
district advocate and the functional area. Rarely is there a 
need to invoke the TAO authority. But on the limited occasion, 
it does become necessary, we can and do take the appropriate 
action.
    This concludes my prepared comments. I would be happy to 
address any questions you may have.

                                

    Chairman Johnson. Thank you very much, Mr. George.
    Mr. George is from Texas and Mr. Romito is from Pittsburgh, 
Pennsylvania. Welcome, Mr. Romito.

    STATEMENT OF LOUIS ROMITO, ASSOCIATE TAXPAYER ADVOCATE, 
  PENNSYLVANIA DISTRICT-PITTSBURGH, INTERNAL REVENUE SERVICE, 
                    PITTSBURGH, PENNSYLVANIA

    Mr. Romito. Thank you. Madam Chairman and distinguished 
Members of the Subcommittee, I appreciate the opportunity to be 
here today to talk to you about the operations of a field-level 
Taxpayer Advocate. As was noted, I am the Associate Taxpayer 
Advocate for the Pennsylvania District located in the 
Pittsburgh office. I have been the Taxpayer Advocate in 
Pittsburgh for the past 8 years.
    As Mr. Monks noted in his program overview and his report, 
we have increased our emphasis on the application of process 
analysis techniques for the long-term resolution of taxpayer 
problems, but we still need to solve the short-term problems 
and in doing so, we encounter situations that exemplify the 
continuing spirit and commitment of the Problem Resolution 
Program.
    Foremost among those situations are those involving 
requests for relief from hardship. The numbers of these 
requests are relatively small in relation to our overall case 
inventory, yet they have the most immediate impact on the 
taxpayer.
    Although regular Problem Resolution cases are worked in the 
function that has the responsibility for the issue that is 
involved, these special hardship requests are worked in my 
office by my analysts or myself and we have encountered suicide 
threats, physical threats, and emotional grief. But 
fortunately, we have been able to provide relief in over 60 
percent of those cases that are qualified for consideration.
    The current top 20 systemic problems facing taxpayers are 
addressed in Mr. Monks' report, also. The resolution of these 
problems will measurably reduce the direct burden that the 
Service has placed on the taxpayer. However, there are other 
organizational areas of concern that can be addressed through 
advocacy-based actions that will indirectly reduce taxpayer 
burden and provide improved service to the taxpayer. Perhaps 
they reflect concerns unique to a discontinued district. 
Nevertheless, as an advocate for the taxpayer, they are 
suggestions that I feel I have a responsibility to pursue.
    For instance, because of our restructuring, the concept of 
centralization of operations in the remaining headquarters 
cities seems to have been adopted as a policy. If the Service 
must centralize operations, the operations should be 
centralized in those locations that can best carry out the 
mission, irrespective of whether that location is a 
headquarters city. Our computer and our telecommunication 
capabilities transcend geographic considerations.
    There are also a number of computer-related needs at the 
field office level. The Advocates need to have all PRP 
technicians work their cases on a computer, online. We need to 
have our remote offices on the PRP case network so that 
referred cases can be transferred electronically in order to 
meet our cycle time objectives.
    We need to have computer networks that stay up, and when 
they go down, we need to have help near at hand to get them 
back up again. Help desks hundreds of miles away are only a 
partial solution and outsourcing to contractors who will have 
response time allowances, who will need extensive training and 
monitoring, and who will be another source of security and 
confidentiality concerns is, in this instance, not the answer.
    As the report notes under Communication, the understanding 
of our role as an advocate for the taxpayer requires continued 
education of executives, managers, and employees. Much of the 
complaint activity that we get results from our frontline 
contact employees forgetting a basic concept--to treat a 
taxpayer as they would want to be treated if the roles were 
reversed. Employees need to remember that their contact may be 
a once in a lifetime experience for a taxpayer. The taxpayer's 
perception of the IRS is formed in great part from that contact 
and the perception can have an effect on the taxpayer's future 
voluntary compliance.
    Examples at the other end of the organizational spectrum of 
situations that could have benefited from sensitivity to 
taxpayer impact are presented in my written statement.
    My final comment is on the number one taxpayer concern 
highlighted in the Advocate's Report--the complexity of the tax 
law. As an Advocate, I have never heard any taxpayer accept the 
socio-economic rationale for the complexity of the Tax Code. To 
the contrary, irate taxpayers are frustrated with the system 
and its perceived heavy-handedness and unfairness. Taxpayers 
ask me why the IRS runs a welfare system or they point out how 
big businesses get taken care of but the little guys get no 
consideration. Taxpayers don't have the time and the money to 
fight the system. As a result, they often succumb to its 
enormity and complexity.
    I would only ask that the distinguished Representatives and 
their colleagues anticipate the impact on the taxpayer as they 
contemplate legislation that would use the machinery of the 
Service to implement social and economic change.
    Thanks for the opportunity to speak with you.
    [The prepared statement follows:]

Statement of Louis Romito, Associate Taxpayer Advocate, Pennsylvania 
District-Pittsburgh, Internal Revenue Service, Pittsburgh, Pennsylvania

    I appreciate the opportunity to discuss the operation of a 
typical field level Taxpayer Advocate's office. In particular, 
I would like to share my perceptions of the Advocate's Report, 
examples of my interactions with taxpayers, and suggestions for 
improving the service the Problem Resolution Program staffs can 
provide to the taxpaying public.
    I have thirty-one years of government service as a program 
analyst in positions with the Air Force Logistics Command, 
General Services Administration, and the Internal Revenue 
Service. I have been the IRS Taxpayer Advocate in the 
Pittsburgh Office for eight years, and previously served as the 
Disclosure Officer and the Public Affairs Officer.
    When the Taxpayer Bill of Rights 2 (TBOR2) was implemented 
this past July, I received a copy of the Bill as well as a 
Summary of Act Provisions document prepared by our Office of 
Chief Counsel. The paper delineated the activities that the 
report was to address. In comparing the Report to the 
expectations, I think the report meets the challenge. However, 
the Report did indicate that feedback of the problems facing 
taxpayers came from the regional offices. The field did, in 
fact, get to provide input which was assimilated into the 
regional response.
    As the Advocate notes in the Program Overview of the 
report, we have increased our emphasis on the application of 
process analysis techniques for the long term resolution of 
taxpayer problems. Still, we need to solve the short term 
problem and, in doing so, we encounter situations that 
exemplify the continuing spirit and commitment of the Problem 
Resolution Program.
    Foremost among these situations are those involving 
requests for relief from hardship, Taxpayer Assistance Order 
(TAOs). The numbers of these requests are relatively small 
compared to our overall case inventory, yet they have the most 
impact on the taxpayer. Although regular Problem Resolution 
cases are worked by technicians located in the function 
responsible for the respective issue, these special hardship 
requests are handled in my office by my analysts or me. The 
situations are almost as traumatic to me as they are to the 
taxpayer. We have encountered suicide threats, physical 
threats, grief, and emotional breakdowns. Fortunately, we have 
been able to provide relief in 61% of the cases that qualified 
for consideration.
    As implied before, the mission of the office has two parts. 
The first provides appropriate relief to the problems that 
taxpayers are currently encountering. So in Fiscal Year 1997 we 
are concentrating on reducing the time it takes for Problem 
Resolution to resolve a taxpayer's problem, otherwise known as 
cycle time, and increasing the quality of the way we resolve 
these problems in terms of timeliness, communication with the 
taxpayer, and accuracy. The second part addresses continuing 
long term and/or systemic problems through the application of 
process analysis techniques that identify and allow us to 
correct the underlying causes of taxpayer problems. This second 
part is referred to as the advocacy component of our mission.
    The current top twenty of these systemic problems are 
addressed in the report. The resolution of these problems will 
measurably reduce the burden we have placed on the taxpayer. 
However, in addition, there are other organizational areas of 
concern that can be addressed through advocacy based actions 
that will also reduce taxpayer burden. These actions are not as 
high profile as the Top Twenty and may be transparent to the 
taxpayers. But they are important because of their potential 
impact at the field office level. In my opinion, these advocacy 
actions would have a long term beneficial effect in reducing 
taxpayer burden and providing improved service to the taxpayer. 
Perhaps they reflect concerns unique to a discontinued 
district. Nevertheless, as an advocate for the taxpayer, they 
are suggestions that I feel I have a responsibility to pursue. 
My efforts may be perceived at times to ignore political 
reality, but that's the line the Advocate sometimes has to walk 
between the best interest of the taxpayer and the best interest 
of the Service.
    If the Service intends to run like a business, it needs to 
use good business sense. For instance, because of our 
restructuring, the concept of centralization of operations in 
the remaining headquarters cities seems to have been adopted as 
policy. In any school of management thought, you can find as 
many proponents for decentralization as you can for 
centralization. If the Service must centralize operations, the 
operations should be centralized in those locations that can 
best carry out the mission, irrespective of whether that 
location is in a headquarters city. Our computer and 
telecommunication capabilities transcend geographic 
considerations.
    There are also a number of computer related needs at the 
field level that may have been overlooked in the Service's 
preoccupation with Tax Systems Modernization. Filling these 
needs will enable the Advocates to deliver the advocacy program 
that we have promised.
    For instance, we need to have all PRP able to work their 
cases on a computer--on line. This will reduce case processing 
time by eliminating unwieldy paper casework and increase the 
quality of the casework by providing instantaneous managerial 
review of casework activity. We need to have our remote offices 
on the PRP case networks so referred casework can be 
transmitted electronically in order to meet our cycle time 
objectives. We need to have computer networks that stay up. The 
greatest danger in being dependent on a sophisticated computer 
network infrastructure is that if the system goes down we are 
out of business and so is the taxpayer. And defective programs 
need to be corrected expeditiously--in weeks, not months.
    In the case of system failure, we need to have competent 
help at hand to get the system up. Radical downsizing of the 
Information Systems staff is counterproductive. Help desks 
hundreds of miles away are only a partial solution and 
outsourcing to contractors who will have response time 
allowances, who will need extensive training and monitoring, 
and who will be another source of security and confidentiality 
concerns is, in this instance, not the answer. The point to 
this litany is that in considering implementing one or more of 
these suggestions, management may do a cost benefit analysis 
and see only a few days case processing time being saved here 
and there. To us that time may be insignificant. But to the 
taxpayer, my customer, a few days can be an eternity.
    Another important factor that the Service needs to keep in 
focus is the functional support our program requires. As the 
Advocate's Report notes under IID, Communication, the 
understanding of our role requires continued education of 
executives, managers, and employees. All functions need to 
remember that taxpayers in our program have already been in the 
system--the normal channels--and, for whatever reason, the 
system has failed them. This failure is not perceived, 
projected, or proposed. It is real and it is now. The efforts 
to correct and resolve the problem should not be secondary to 
competing priorities.
    Beyond that is the fact that much of the taxpayer complaint 
activity we get results from our contact employees forgetting a 
basic concept--to treat a taxpayer as you would want to be 
treated if the roles were reversed. I am sympathetic towards 
the contact employee who encounters the same scenario many 
times a day, every day for twenty years. But those employees 
need to remember that their contact may be a once in a lifetime 
experience for the taxpayer. The taxpayer's perception of the 
IRS is formed, in a great part, from that contact. And that 
perception can have an effect on the taxpayer's future 
voluntary compliance.
    This need, to be aware of the bottom line impact of our 
actions on the taxpayer is also applicable to higher levels of 
the organization. For example, recently the Advocate had to 
request an opinion from the General Litigation Office of our 
Chief Counsel concerning the release of a lien or levy under 
Section 501 of TBOR2. We asked when the Advocate would need to 
make a determination that such a release would be in the best 
interest of the taxpayer. The response concluded that the 
authority to make a positive determination should be delegated 
to the Collection Division. I have yet to identify a situation 
when a release of a lien or levy would not be in the best 
interest of the taxpayer. Further, the release requires two 
determinations; the second being that the release is also in 
the best interest of the government. It would be inconsistent 
to also have that decision made by the Collection Division. 
This exercise could have been avoided if the legislative 
language had been less muddled.
    Additionally, within the past year, the Service has 
implemented a little known process called the Collection 
Appeals Program for the use of taxpayers who disagree with the 
decision of a revenue officer who has proposed enforcement 
action such as lien, levy, or seizure. In theory, when 
petitioned by the taxpayer after the taxpayer has met with the 
Collection supervisor, the Appeals Office can decide in favor 
of the taxpayer and suggest some alternative collection method 
that may be more appropriate. Some reviews have indicated that 
the system is working. My limited observations suggest that 
Appeals, which is staffed by revenue agents, sees its 
involvement as being limited to determining procedural accuracy 
rather than questioning the judgment of a revenue officer or 
determining the appropriateness of any action taken by a 
revenue officer. I realize that a collection issue is not the 
same as an examination issue which can have an assessment 
reduced outside of Tax Court because of the hazards of 
litigation without questioning the judgment of the revenue 
agent. On the other hand, as an Advocate I feel the current 
Appeals philosophy, if I've interpreted it correctly, does not 
capture the spirit and intent of what a Collection Appeals 
process should be.
    My final comment is on the number one taxpayer concern 
highlighted in the Advocate's Report--Complexity of the Tax 
Law. The text of the report states that the complexity is not 
intentional but rather is the cumulative effect of numerous tax 
law changes, each of which is enacted for a presumably 
desirable public purpose. The Commissioner was just as 
diplomatic in her testimony last month before the National 
Commission on Restructuring the Internal Revenue Service. She 
stated that as our society and economy have grown more complex, 
so have parts of the Code. The complexity arose from a struggle 
for fairness and the need to keep pace with an ever-changing 
economy.
    As an Advocate, I have never heard those socio-economic 
arguments from any taxpayer. To the contrary, irate taxpayers 
are frustrated with the system and it's perceived 
heavyhandedness and lack of fairness, Taxpayers ask me why the 
IRS runs a welfare system or they point to how big business 
gets taken care of but the little guy gets no consideration. 
Taxpayers are aware of what's going on. They just don't have 
the time and money to fight the system. As a result they often 
succumb to its enormity and complexity. I would only ask that 
the distinguished representatives anticipate the impact on the 
taxpayer as they contemplate legislation that would use the 
machinery of the Service to implement social and economic 
change.
    Thank you for the opportunity to speak with you.

                                

    Chairman Johnson. Thank you for being with us, Mr. Romito.
    Ms. Goldstein from Wisconsin.

 STATEMENT OF ELAYNE M. GOLDSTEIN, DISTRICT TAXPAYER ADVOCATE, 
   MIDWEST DISTRICT, INTERNAL REVENUE SERVICE,  MILWAUKEE,  
                           WISCONSIN

    Ms. Goldstein. Thank you. Madam Chairman and distinguished 
Members of the Subcommittee, it is an honor for me to be here 
today to talk to you about the Taxpayer Advocate's Report to 
Congress. I was very pleased to see that many of the issues 
that we have raised to the Taxpayer Advocate in fact, have 
shown up in the report that he submitted to you.
    My name is Elayne Goldstein and I am the Taxpayer Advocate 
for the Midwest District. The Midwest District consists of the 
three States of Wisconsin, Iowa, and Nebraska. I have been a 
Taxpayer Advocate for 8 years and in the Problem Resolution 
Program a total of 11, 3 of those as a Problem Resolution 
Specialist.
    In my opinion, both as a Taxpayer Advocate and a taxpayer, 
the number one problem for taxpayers today is the difficulty 
with the tax law. The complexity of the law pervades almost 
every problem resolution case I see coming into the Problem 
Resolution Program. Whether it is a business taxpayer who is 
having difficulties complying with the Federal tax deposit 
system or a low-income taxpayer that is having difficulties 
complying and getting credit for the earned income tax credit, 
most of the problems I see coming into the program stem from 
the complexity of the tax law.
    In many cases, it is not only the complexity of the tax law 
that creates problems for the taxpayer but their inability to 
seek out or have the resources available to find out about how 
to comply with the tax law. The IRS is very often faced with 
the very difficult task of reducing tax law into easy to 
understand language for the general public. We make attempts to 
do that in our publications and in our instructions and in our 
tax forms.
    However, very often, because of the complexity of the law, 
it is difficult, if not impossible at times, to reduce the 
language to easy to understand language for the general public. 
Any tax legislation that is passed must consider the impact the 
wording of that legislation will have on the ability of the IRS 
to put that law into practice.
    I believe the way to simplify the earned income tax credit 
is to eliminate it from the Tax Code. The funds could be made 
available through another agency that would have the ability to 
check on the eligibility of the credit on the front end for 
those people who need it. Generally at the IRS, we first send 
the money to the taxpayer and we ask questions later. When we 
then make an attempt to collect that money back from that 
taxpayer who we determine is not eligible for that credit, we 
are perceived as being harsh and cruel.
    It is my opinion that if the earned income tax credit, or 
whatever the name would be for this particular benefit, would 
be administered through another agency, it would allow that 
agency to apply a system where the criteria is checked up front 
and that only the people who are, in fact, entitled to the 
benefit, receive it.
    One of the burdens placed on taxpayers today, particularly 
business taxpayers, is the requirement to verify taxpayer 
identification numbers for payees on documents they transmit to 
the IRS. Although the business may exercise business care in 
obtaining and verifying those identification numbers, they may 
at times still be subject to a penalty for providing an 
incorrect number to the IRS. If that is not the case, they 
still need to use their valuable resources to track down the 
taxpayer so that they can go through the process of validating 
the identification number that in the front end may have been 
incorrect.
    It would greatly reduce the burden placed on taxpayers and 
the errors made if the IRS was given the resources needed to 
establish a system where the payor could call into the IRS and 
verify the identification numbers up front.
    Many of the calls that I receive in the Problem Resolution 
Office, whether it is from taxpayers, practitioners, or 
congressional staff, have to do with complaints about their 
inability to get into the toll-free system. Those complaints 
also include those from people who, although able to get into 
the system, are unable to speak to what they refer to as a 
``live person.''
    While I strongly believe that the IRS has made enormous 
strides in providing alternative sources of information for 
taxpayers, such as the availability of tax forms, publications, 
answers to frequently asked questions on the IRS home page of 
the Internet, we have provided a separate telephone number for 
people who have refund inquiries, and have tax information on 
over 150 tax topics available to the public, I still believe 
there is a certain segment of the population that is not able 
to reach those alternative sources of information, either 
because they do not have the resources to allow them to do that 
or, in fact, they do not have the sophistication to use those 
alternative sources.
    I believe a government that imposes laws and regulations 
upon its citizens has an obligation to explain those laws and 
regulations to those people. While I do not believe that a lot 
of these problems can necessarily be cured by throwing money 
their way, I do believe that Congress needs to recognize that 
unless we give the taxpayer the information they need to do a 
complete and accurate tax return, our voluntary compliance 
rates are not going to increase.
    The answer may be that additional resources are needed on 
our toll-free system, I do not think that should be discounted. 
If that is what is needed to provide a level of service that is 
acceptable to our customers so they can comply with the tax 
law, I believe that is what needs to be done.
    We need to attack the causes of taxpayer burden head on and 
I do not envy your task, but I do believe it is important that 
Congress seek the opinion of field personnel in order to do 
reduction in taxpayer burden justice, and I applaud your 
efforts in bringing those of us from the field before you to 
give you our opinion.
    I would like to thank you again for the opportunity to 
speak to you today and I will be glad to answer any questions 
you may have.
    [The prepared statement follows:]

Statement of Elayne M. Goldstein, District Taxpayer Advocate, Midwest 
District, Internal Revenue Service, Milwaukee, Wisconsin

    It is an honor for me to appear here today to provide you 
with my assessment of the issues raised in the Taxpayer 
Advocate's Report to Congress. I was pleased to see that many 
of the issues raised by field personnel as those causing the 
greatest burden for taxpayers were included in this report.
    My name is Elayne Goldstein and I am currently the District 
Taxpayer Advocate in the Midwest District. The Midwest District 
consists of the three states of Wisconsin, Iowa, and Nebraska. 
I have been the Problem Resolution Officer, now the District 
Taxpayer Advocate, for eight (8) years and in the Problem 
Resolution Program a total of 11, three of those years as a 
Problem Resolution Specialist.
    It is my opinion, both as a District Taxpayer Advocate and 
a taxpayer that the most serious problem facing a taxpayer 
today is the complexity of the tax law. The complexity of the 
law pervades almost every Problem Resolution case I see coming 
into the program. Whether it is penalties assessed against a 
business for failing to deposit trust fund taxes correctly or 
it is a low income taxpayer who does not understand how to 
compute the Earned Income Tax Credit, the root cause of the 
problem is that the individual does not understand how to apply 
the tax law or have the resources to find out.
    The IRS is very often faced with no other option than to 
explain the law in notices, publications, and instructions in a 
language that is not easily understood by the general public. 
We are very often challenged to simplify the language of the 
law; however, because of its complexity, it is difficult, if 
not impossible at times, to reduce it to easy to understand 
language. Any tax legislation must consider the impact the 
wording of that legislation will have on the ability of the IRS 
to put the law into practice.
    I believe the way to simplify the Earned Income Tax Credit 
is to remove it from the tax law. The funds can be made 
available through another federal agency whose procedures allow 
them to qualify a person for the monies upfront. Through the 
tax system, we release the money first and ask questions later. 
The IRS is then perceived as harsh and cruel in its attempts to 
collect the money when it has been determined that the taxpayer 
is not eligible for the credit. An application system for 
eligibility for the Earned Income Tax Credit through another 
agency would, in my opinion, ensure that people who are 
eligible get the benefit.
    One of the burdens placed on taxpayers, particularly 
business taxpayers, is the requirement to verify the Taxpayer 
Identification Numbers of payees they place on information 
documents transmitted to the IRS. Although the business may 
exercise good business care in obtaining and verifying these 
numbers, they still face the possibility of being assessed a 
penalty for providing an incorrect number or must use their 
valuable resources to track people down. It would greatly 
reduce the burden placed on business taxpayers and the errors 
made if the IRS was given the resources to establish a system 
for payers to call into the IRS to verify the identification 
number upfront.
    Many of the calls I receive in the Problem Resolution 
Office from taxpayers, practitioners, and congressional staffs 
are complaints about their inability to get through on the IRS 
toll-free lines. These complaints also include those from 
people, who although able to get through the lines, are not 
able to speak to a ``live'' person, as they refer to it. While 
I strongly believe the IRS has made enormous strides in making 
alternative sources of information available, such as tax 
forms, publications, and answers to frequently asked questions 
on the IRS Homepage of the Word Wide Web, providing a separate 
number for refund inquiries and recorded tax information on 
almost 150 different tax topics, and the availability of tax 
forms by facsimile, there is still a certain segment of the 
population that either does not have the resources available to 
access these alternative sources of information or the 
sophistication to use them. I believe a government that imposes 
laws and regulations has an obligation to its citizens to 
provide a certain level of personal service to explain those 
laws and regulations. While I do not believe that this problem 
can necessarily be cured by throwing money at it, Congress has 
to recognize that voluntary compliance rates are not going to 
increase unless we can make sure all taxpayers have the 
information they need to prepare a complete and accurate tax 
return. If that means having to provide sufficient resources to 
increase the level of access to our toll-free system, then we 
need the commitment that this will be done.
    We need to attack the causes of taxpayer burden head on and 
I don't envy your task, but I do believe it is important for 
Congress to seek out the opinions of field personnel on how we 
can make it better for the taxpayers of this nation. I applaud 
you for seeking out such opinions.
    I would like to thank you for the opportunity to speak to 
you today and would be glad to answer any questions you may 
have.

                                

    Chairman Johnson. Thank you very much, Ms. Goldstein.
    Ms. Williams from Jacksonville, Florida. You may be Ms. 
Thurman's constituent. Jacksonville is also the home of my new 
twin grandsons.

STATEMENT OF JEANNE WILLIAMS, DISTRICT TAXPAYER ADVOCATE, NORTH 
   FLORIDA DISTRICT, INTERNAL REVENUE SERVICE, JACKSONVILLE, 
                            FLORIDA

    Ms. Williams. I have been the North Florida Taxpayer 
Advocate, formerly the Problem Resolution Officer, for 10 
years. I want to thank you for giving me the opportunity to be 
here today. It is a treat I did not think I would look forward 
to after 50 years with Internal Revenue, but it is one that I 
will always remember.
    During 1996, we assisted over 7,000 taxpayers on issues 
ranging from individual taxpayer problems to complex corporate 
returns. We look for the root cause of why the problems were 
not resolved when they followed established guidelines. It is 
an area that we pursue very actively. We have many of the same 
top 20 issues in our district that Mr. Monks' report referenced 
but not necessarily in the same order.
    During filing season, we have an increased volume of form 
911, Application for Taxpayer Assistance Orders. I am going to 
talk more to the hardship manual refunds which we issue as 
opposed to the collection issues that the others have talked 
about.
    They ask for expedited refunds of currently filed returns. 
Sometimes they have not filed the return, they send it to us 
and we issue the manual refund and then send the return for 
processing after we have had the check cut. These taxpayers 
have low income and must have their refund quickly. The cases 
are handled expeditiously to help them relieve hardships, such 
as evictions and the shutoff of utilities. In Florida, the 
eviction process is very quickly served. We ask for 
documentation of the hardship and they send us eviction 
notices, they send us utility cutoffs, their car is being 
repossessed. It is an area that gets a lot of attention during 
filing season.
    In addition to the normal expeditious contact for taxpayers 
experiencing hardship, the Service has a procedure in place 
where the taxpayer is provided the relief much quicker. We have 
an excellent working relationship with the functions as do the 
other Taxpayer Advocates except for the one gentleman. I never 
have felt it necessary to issue a Taxpayer Assistance Order.
    One example I can remember, and it is not in the testimony, 
was a foreign gentleman who had put a car in layaway with a 
used car dealer to send to his father. Well, the used car 
dealer had a tax problem and we seized the car lot and sold all 
the vehicles in the lot, including this gentleman's car. Of 
course, he filed a 911 and was told, sorry, your car is gone. I 
mean, when he went to collection. So a 911 was filed with us. 
We investigated and that was the initial response we received, 
that there is nothing we can do. We sold the car.
    But I elevated it to the Division Chief and his answer was, 
we were wrong to sell that car. Let us give the man his money 
back, and that is what was done, which is the way it should be, 
which is why I say we have not felt it necessary to issue a 
Taxpayer Assistance Order when you can deal with your 
counterparts and resolve the problem.
    One area that I feel we need to change in the law is the 
area that prohibits us from issuing a manual refund when there 
is a debtor master file. That is where another agency has 
notified us that the taxpayer owes them money and they have a 
refund coming, they have a hardship, but we are prohibited from 
issuing that refund as long as they owe that debtor master 
file. If they owe taxes, we can bypass the taxes and give them 
a refund, but if they owe another agency, we have no authority 
to bypass that.
    The kind I see most are those where there is a single 
mother who years ago perhaps went to college, owes student 
loans. She now has two or three children and is desperate for 
the money and there is nothing we can do to give her that money 
because she owes another agency. But that is something you 
would have to fix.
    We also deal with the earned income credit. Taxpayers live 
on minimum wages and we expedite the refunds on those, also.
    One activity we are doing in my district which I am very 
proud of is we have a conflict management initiative. We were 
chosen as a prototype location to test the applicability of 
conflict management tools and techniques for frontline 
employees in the performance of their duties. My program was 
chosen because of our direct involvement with the Application 
for Taxpayer Assistance Orders and the collection field 
function.
    Historically, our process to collect taxes has been 
position based. This initiative has a unique twist. Although 
taxpayers often dislike tax administration, we believe that 
using the interest-based approach will enhance our skills in 
identifying and addressing taxpayers' concerns. We also hope 
that using this approach to problem solving will help taxpayers 
recognize their interests are being considered even if the 
outcome cannot be changed.
    What we have done is identified one revenue officer group 
and we brought the group in plus all of my collection employees 
and trained them in conflict management to enable them to deal 
better with each other, with the public, and even in their own 
personal lives. We are now in a monitoring stage. We also have 
a control group which did not receive the training, so we are 
checking the results of the group that received the training 
against the results of the group that did not receive any 
training to see if this, in fact, is something that we can 
apply in more areas of the Service.
    I strongly agree with Mr. Monks' recommendation that 
something be done about the statute for refunds when several 
delinquent returns are filed and the taxpayer is not given the 
opportunity to have at least a credit applied to their 
accounts. Again, I see my light is on, and I thank you very 
much for allowing me to appear before you.
    [The prepared statement follows:]

Statement of Jeanne Williams, District Taxpayer Advocate, North Florida 
District, Internal Revenue Service, Jacksonville, Florida

    My name is Jeanne Williams and I have been the North 
Florida District Taxpayer Advocate, formerly Problem Resolution 
Officer for ten years. Thank you for giving me the opportunity 
to be here today as the Taxpayer Advocate for the North Florida 
District. Due to Code Section 6103, relating to restrictions on 
disclosure, the examples I am going to discuss are some of the 
general scenarios that I may face and do not reflect individual 
circumstances of a particular taxpayer.
    Whenever a taxpayer's problem is accepted into the Problem 
Resolution Program (PRP), it is generally because the normal 
procedures for resolving the problem have failed. We have a 
two-fold responsibility:
     to resolve the taxpayer's problem in a 
professional manner as quickly as possible; and,
     to identify areas where we can improve our 
processes and be more efficient.
    The North Florida District has been very active in both 
areas. During 1996, we assisted over 7000 taxpayers on issues 
ranging from individual taxpayers' problems to complex 
corporate returns. Looking for the root cause of why taxpayers' 
problems were not resolved when they follow the established 
guidelines is also an area that we pursue very actively. An 
example of our involvement in improving our internal processes 
are the various projects that we have conducted in the last few 
years. We have many of the same top 20 issues in our district 
but in different ranking order from the national identified 
issues.
    During Fiscal Year 1996, we conducted a project involving 
Collection PRP issues. The average days to resolve these issues 
in our office was 78 days. We made several improvements in the 
way cases were processed. The average days to resolve this 
issue dropped to 30 days. We are very concerned about timely 
contact with taxpayers. When a taxpayer reaches our office, 
they have already had multiple contacts with Service employees. 
It is imperative that we respond as quickly and professionally 
as possible to help improve the image of the Service.
    During the filing season, we have an increased volume of 
Forms 911, Applications for Taxpayer Assistance Orders (ATAOs) 
for expedited refunds on the current filing of returns. In the 
majority of these cases, the taxpayer has a low income and must 
have the refund quickly. These cases are handled expeditiously 
for the taxpayer to help relieve hardships such as evictions 
and shut-off of utilities. In Florida, the eviction process can 
be very quickly served. Documentation by the taxpayer of the 
hardship is required. In addition to the normal expeditious 
contact to the taxpayer experiencing the hardship, the Service 
has a procedure in place where the taxpayer is provided relief 
much quicker. Our District has developed an excellent 
relationship with all Division Chiefs and has not had to issue 
a Taxpayer Assistance Order. Cooperation by all levels of 
managers has enhanced our ability to assist the taxpayer unless 
the issue involves an area where the law prevents us from 
allowing the relief. For example, IRC Section 6402(c) generally 
prohibits the issuance of a refund if there is an outstanding 
liability to any federal agency.
    During fiscal year 1996, 61% of our ATAOs where hardship 
was found to exist, resulted in relief provided to taxpayers. 
For those who were not provided relief, 3.1% were due to the 
law preventing the change. I want to give examples of cases 
where we have provided relief to taxpayers. Taxpayers will 
contact their local offices, call into the toll-free assistors, 
or contact my office seeking relief from their hardships. These 
taxpayers live on minimum wages and need their refunds of 
earned income credit to prevent evictions and/or having their 
electricity, water, or gas shut off. We are able to provide 
relief by expeditiously processing their refunds. We have the 
ability to manually prepare the refunds, and the taxpayers can 
expect their checks within 10 days. We have provided homeless 
people with their refund checks by having the checks sent 
directly to my office or the local offices where the taxpayers 
reside in order to provide the relief when the taxpayers have 
no permanent addresses. Each case received is reviewed 
thoroughly for determination of true hardship. We work 
diligently to prevent our system from being abused by 
individuals seeking a fast refund without a legitimate reason. 
We want to assist the true hardship cases and provide them 
relief if at all possible. In some instances, we are unable to 
provide relief to the taxpayer due to other federal agency 
liabilities. The law requires that the refund be applied to 
these liabilities. Many times the refund has already been 
applied to their tax liabilities prior to the taxpayers' 
contacts with our office, and we are unable to assist them. For 
many single mothers raising children with no child support, 
this creates an extreme hardship for them. However, in these 
cases, we instruct the taxpayer of other alternatives for the 
next year, such as requesting Advanced Earned Income Credit 
through their employers. This will not relieve their immediate 
problem, but will provide relief in future years.
    One activity in my District that we are very proud of is 
the Conflict Management Initiative. We were chosen as the 
prototype location to test the applicability of the conflict 
management tools and techniques for front line employees in the 
performance of their duties. The Problem Resolution Program was 
chosen because of our direct involvement with the ATAOs and 
Collection field function. Historically, our process to collect 
taxes has been position-based. This initiative has a unique 
twist. Although taxpayers often dislike tax administration, we 
believe that using the interest-based approach will enhance our 
skills in identifying and addressing taxpayer concerns. We also 
hope that using this approach to problem solving will help 
taxpayers recognize their interests are being considered, even 
if the outcome cannot be changed.
    The Taxpayer Advocate Report identified many areas which 
tremendously effect our taxpayers. Of those, I strongly concur 
with the statute of limitations on refunds and the delays by 
IRS in processing Offers-in-Compromise. Additionally, while we 
understand the need for the imposition of certain penalties to 
ensure compliance, we have found that the imposition of the 
Failure to File penalty on tax exempt organizations under Code 
Section 6033 creates an undue hardship on the small non-profit 
organizations in my district. These are your PTA's, homeowners' 
associations, women's clubs, softball leagues, Veterans 
Associations, etc. The problems these small organizations 
encounter in complying with the filing requirement are 
compounded by the fact that their officers are volunteers, are 
not knowledgeable about tax filing requirements, and are often 
changed from one year to the next. Therefore, the majority of 
these penalties are abated due to reasonable cause. However, 
the abatements usually occur after considerable utilization of 
resources on the part of the non-profit organizations and the 
Service. For example, the issuance of failure to file notices, 
the filing of the returns by the tax exempt organizations, the 
assessment of Failure to File penalties, the requests for 
abatements due to reasonable cause, and the consequent removal 
of the penalties by the Service are quite consuming and not 
cost effective.
    If the filing requirement under Code Section 6033 were to 
be increased from $25,000 to $50,000, this would alleviate the 
filing requirements for many of these small non-profit 
organizations and reduce taxpayers' burden. Another issue that 
is not uncommon in the Problem Resolution Office is the 
guideline governing Federal Tax Deposits. With the present 
guidelines, employers are having difficulty applying the 
deposit requirements correctly. Specifically, the problem lies 
with the ``look-back'' period used for determining whether an 
employee deposits monthly or semi-weekly. The ``look-back'' 
period consists of the first and second quarters of the prior 
year and the third and fourth quarters of two years prior. For 
example, in tax year 1997 the ``look-back'' period is the first 
and second quarters of 1996 and the third and fourth quarters 
of 1995. Many employers misinterpret the ``look-back'' period 
to be the prior four quarters, thus possibly creating errors in 
the method of depositing. The Problem Resolution Office reviews 
each case on an individual basis to determine if the resulting 
federal tax deposit penalty should be waived.
    Generally, the guidelines are misinterpreted by the 
bookkeeper and the employer. Our office educates the taxpayer 
on how to determine the deposit method, and if warranted, abate 
the applicable penalty charge.
    In closing, I would reiterate the need for the Taxpayer 
Advocate positions to remain an intricate part of Internal 
Revenue Service.

                                

    Chairman Johnson. Thank you very much. It is a pleasure to 
have you and we look forward to the dialog between us 
developing each year so that it is more and more specific.
    I appreciate your comments about the arbitrariness of the 
statute of limitations law and some of the other things you 
have brought up. I thought your comment, Ms. Goldstein, about 
the EITC was a very interesting one, because it is odd when you 
do something to help low-income people that it is so 
complicated that they cannot do it themselves and, furthermore, 
they have to pay someone else to do it, which they cannot 
afford to do. We had planned to come back to that this year, 
but we have been through this before and it is very hard to fix 
because it does become too burdened, in my estimation, with 
social policy.
    I just want to, by way of opening, I want to ask you 
whether the expanded authority to release liens and return 
levied property, the expanded authority to abate interest, and 
the ability to establish a process for termination of 
installment agreements, those expanded authorities that were in 
our last Taxpayer Bill of Rights, have been of any help to you 
and whether there are specific new powers, now, clearly, this 
right to override the statute of limitations is one of them, 
but are there other authorities that you feel you need to deal 
fairly with the problems that you face? Have the things we have 
done helped and are there new things that we should do?
    Mr. Romano.
    Mr. Romano. I guess I would like to start by saying that it 
may be a little bit too early to tell on a couple of the issues 
that were in TBOR2. The expanded authority for interest 
abatement should help because it is an issue that we have seen 
raised with us locally for many years, and as the claims come 
in and the process rolls out, I think we will be able to have a 
better feel for whether or not it is going to be effective. But 
it does at least open the door for taxpayers to come in and 
request relief for not just a ministerial act on the part of 
the Government but a managerial act, which is something that 
they have been asking for.
    The lien and levy procedures, I believe, will also help. We 
had to go in and ask for--we needed to have that clarified 
somewhat because we were not quite sure how we were going to be 
given the authority to make that determination. It is always 
going to be in the best interest of the taxpayer, obviously, to 
release a lien.
    The way the language in the law was written, I think there 
is some perception out there on the part of the public and the 
taxpayers that in every case where there is an alternative 
means provided for payment, that the lien will be released. I 
am not sure that was the intent but that is the way it may be 
perceived by the public. So I think we are also going to see 
some development in that area as we get requests from taxpayers 
and we are going to be charged with taking the position and 
going to the functions in cases where we have to make a 
decision whether it is in both parties' best interests to do 
that.
    I do not know if anybody has anything to add to that.
    Chairman Johnson. Mr. George.
    Mr. George. I would just like to add that on the scenario 
where we issued a Certificate of Discharge on the Federal tax 
lien, this was the second time that I had to go in and issue an 
order on it. I worked with Donna Steel several years ago on a 
like issue.
    It was not necessarily that the Collections Department or 
the Service did not want to release the lien or withdraw the 
lien, but because of statutory requirements, it states as long 
as the Service has an interest or the Secretary has an interest 
in the property, it would make it very difficult to withdraw 
the lien.
    I would like to say that with the Taxpayer Bill of Rights 
2, I believe that we will be able to work much easier on those 
issues.
    Chairman Johnson. Thank you.
    I thought the point you made, Ms. Williams, about student 
loans and other agencies was a very interesting one that, 
frankly, I was totally unaware of. Thank you. Any other 
comments?
    Mr. George. I have to agree with her. We see this happening 
this time of the year, where we have taxpayers that come in 
that have significant hardship and request that their refund be 
manually sent to them for whatever reason. Normally, it is 
because of eviction or just to provide necessary living 
expenses. And when we pull the account up on our system and 
there is a debtor master file where that particular individual 
has a student loan several years ago and has failed to pay it 
back, we cannot bypass it. We are able to bypass the earlier 
tax liabilities, but as far as bypassing any debtor master file 
conditions, we cannot and I think we need to be able to.
    Chairman Johnson. I would like to yield to my colleagues. 
Let me ask you a very simple question first, though. What 
portion of your caseload is small business and what portion is 
individual and has that proportion changed over the last 5 
years, roughly?
    Mr. Romito. I do not have that information available and I 
cannot pull it off the top of my head.
    Chairman Johnson. I do not want specifics. Just generally, 
is it mostly small businesses you deal with or individuals and 
has that changed?
    Mr. Romito. We deal mostly with individuals, but it depends 
on your definition of small business. If you are talking about 
sole proprietors also, there is probably a 70 : 30 mix in my 
organization.
    Chairman Johnson. Thirty percent being the small businesses 
or individual and sole proprietors?
    Mr. Romito. Thirty percent small businesses.
    Ms. Goldstein. In my district, I would estimate about 50 
percent are businesses. We do not have a means of segregating 
the small business from the larger corporation, but about 50 
percent of the cases coming through the Midwest District, I 
would say, are from business taxpayers, usually surrounded 
around the issue of Federal tax deposits, the penalties that 
are assessed against them for failing to deposit timely. It is 
about 50 : 50.
    Ms. Williams. I would tend to agree with her. It probably 
runs about 50 percent, more so when you get an application for 
a Taxpayer Assistance Order. You run heavier to business where 
they have seizures or liens or levies than you do individuals, 
though, unless it is during filing season when we are 
processing their manual refunds.
    Chairman Johnson. Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman, and thank you all 
for coming here today and helping us out with the issues that 
we face here.
    Mr. Romito, does the Pittsburgh Office entertain free 
taxpayer filing to any extent, where people can just walk in 
and get their taxes done or have them done by electronic 
filing?
    Mr. Romito. We do not have a free operation. In prior 
years, we used to have a concept called self-help where we 
would gather taxpayers into groups as they queued up at the 
entrance and take them into a classroom setting and go through 
the preparation of simple tax returns with them, but the mix of 
resources has precluded that in the last few years.
    What we have done instead--this year, for instance, we have 
set up a Volunteer Income Tax Assistance site in the Federal 
Building and as the taxpayers come in who need forms 
preparation, we set them up with appointments at the taxpayer 
assistance site. As they ask normal tax questions at the walk-
in area, we will be glad to answer those, but to the extent 
that you start taking them through the form line by line by 
line, we have not been doing that this year. We also do not 
have free electronic filing this year, either.
    Mr. Coyne. Do any of the other panelists provide that 
service?
    Mr. Romano. In Connecticut, Rhode Island, we do offer 
electronic filing at least 1 day a week in all of our offices 
within the States. The offices are open--some of our larger 
offices are open more days a week and our smaller ones are only 
open 1 day a week, but any taxpayer who comes in with the 
necessary documentation is offered free electronic filing, 
assuming they have everything with them when they come in, and 
then we offer the other tax assistance, paper preparation and 
also the question and answer type assistance.
    Ms. Goldstein. In the Midwest District, we are similar to 
the other two offices. We have a Voluntary Income Tax 
Assistance site one floor below the walk-in service of our 
customer service division. What we have been doing, I believe 
nationally as an agency, is aggressively marketing the 
availability of TeleFile to the almost 26 million people who 
are eligible to use it. We are hoping that by increasing the 
level of access for those people eligible to use TeleFile, it 
may relieve some of the burden from people who ordinarily think 
they could file electronically but, in fact, have a much 
simpler way of doing that and that is file by telephone.
    Mr. Coyne. Mr. Romito, what advocacy projects have you 
initiated in an effort to make the IRS and the Problem 
Resolution Program more effective and fair for taxpayers? Is 
there something that you could elaborate on that you initiated?
    Mr. Romito. Advocacy takes many faces and we have a lot of 
small projects that we work on, but the major significant 
project that we have attacked this year is one of those that I 
alluded to in my testimony, where we are attempting to take 
care of internal problems, organizational problems that to the 
taxpayer might be transparent. Unique to our situation is the 
fact that we have the office in Pittsburgh that used to be a 
district office and the office in Philadelphia and the way we 
processed Problem Resolution cases was not necessarily the same 
in both.
    Now that we have consolidated the two offices into one 
district statewide, we have undertaken new process analysis to 
go through the processes in handling cases in both districts, 
taking the best practices from each of the offices, sharing 
those, developing a singular process that we can then reduce to 
a written guideline so that no matter where the taxpayer is 
located in the State of Pennsylvania, their case is going to 
get processed the same way on either side of the State so that 
we have consistency of approach and consistency of treatment.
    Mr. Coyne. I am interested in your reaction to the 
sentiment that exists that the EITC program is rife with fraud. 
Is that your sense from your experience with the IRS, that the 
taxpayers purposely mislead the IRS in order to get the 
benefits of the earned income tax credit program?
    Mr. George. Congressman, I am not sure whether it is a 
deliberate attempt by taxpayers to defraud the Internal Revenue 
Service from earned income credit. It definitely does happen 
and it is happening where the taxpayers do, in fact, file 
deliberately head of household, for example, so that they can 
maximize the amount of earned income credit that they would 
qualify for.
    The reason why I do not believe that across the board it is 
a deliberate attempt in all cases, there was an incident last 
year where there was a single parent who had three children. 
The maximum earned income credit, it maxes out at two children 
so she went ahead and allowed her mother to take the exemption 
for the third child. She said that on television. I believe 
that she did not know any different.
    I believe the Service is doing a good job. Each year, we 
enhance the capabilities of detecting these fraudulent returns. 
The math error notice that is going out this year will be one 
area that is going to be very helpful to assist taxpayers who 
have fallen in the crack and may not deserve a math error 
notice, where last year it was an exam issue and we had to go 
through the 90-day statute letter.
    Mr. Coyne. So many of these instances that might be labeled 
as fraud are, indeed, as a result of the complexity of filing 
the EITC return?
    Mr. George. I believe it is complex. I was talking to a 
taxpayer not too long ago, as a matter of fact, several weeks 
ago, and they did not know the mechanics of the form.
    The form itself is fairly simple. But it is the 
instructions this is overwhelming in many cases, and those 
individuals that most deserve the earned income credit are 
forced to go to practitioners and other agencies to prepare the 
return for them.
    Mr. Coyne. Thank you very much.
    Chairman Johnson. Mr. Portman.
    Mr. Portman. Thank you, Madam Chair.
    I appreciate the testimony from all five of you. It is very 
interesting and I am glad that, Ms. Williams, after how many 
years with the Service?
    Ms. Williams. Fifty.
    Mr. Portman. After 50 years with the Service, that you are 
able to come here and give us your two cents worth. You may 
give us more before the afternoon is over.
    Quickly, Ms. Goldstein mentioned her role in this Taxpayer 
Advocate's Report by saying, I was glad to see some of the 
things I recommended. Did you get asked your opinion by the 
Taxpayer Advocate as to what the 20 leading problems were? Did 
you get asked in terms of the 10 areas that he listed that are 
paperwork problems and so on? How did you participate in this 
process?
    Ms. Goldstein. Every quarter, District Taxpayer Advocates 
are required to provide a report to our Regional Taxpayer 
Advocates on the activities of our office for the quarter and 
one of the requirements of the report in the Mid-States Region, 
which is headquartered in Dallas, is they want us to list what 
we believe are the top 10 problems that are causing burden for 
taxpayers. Many of the items that I saw in the Taxpayer 
Advocate's Report to Congress were, in fact, the same items I 
had advanced in those quarterly narratives to our Regional 
Problem Resolution Officer.
    Mr. Portman. Is that the same with all of you here? So you 
feel as though you are getting input into this annual process 
through these quarterly reports?
    Mr. Romito. Not directly to the Taxpayer Advocate, perhaps, 
but through the regional staff.
    Mr. George. Through our quarterly narrative.
    Mr. Portman. But, Mr. Romito, you do not feel there is any 
problem in getting that to the Advocate, even though you do not 
report to the Advocate? You are getting those through?
    Mr. Romito. No. None.
    Mr. Portman. Of course, my second question is one that I 
addressed to Mr. Monks earlier and I saw kind of a shaking of 
heads and maybe some reaction. Some would say it would be self-
interest for you to say that there should be a different grade 
for the District or Regional Taxpayer Advocate. Some would say 
that maybe you should not address the problem because Mr. Monks 
is here and other IRS senior people. But can you give me your 
honest evaluation of this? Is this a problem? Let me just 
restate it, if I might. The concern is, a guy like Mr. George 
has issued two of the five ATAOs, as I understand it, is that 
correct?
    Mr. George. That is correct.
    Mr. Portman. Here he is, a guy who has been with the 
Service for a long time, maybe not 50 years yet but working his 
way----
    Mr. George. Not quite.
    Mr. Portman. Not quite. He is working on it. Obviously, you 
would like to progress. You would like your career to progress, 
and you are at the point now, as I understand it, within the 
Taxpayer Advocate ranks where you are at the highest level you 
could be in, at least within the South Texas Area.
    Mr. George. That is correct.
    Mr. Portman. Unless maybe you came to Washington, DC. Yet, 
you are working with these other functional heads who are of a 
different rank and they are of a higher rank and that would be 
maybe what you would aspire to if you were to proceed on your 
career. Does it make sense to increase your rank so that your 
rank is comparable to those that you deal with every day, 
including those who you are going to with ATAOs?
    Mr. George. I can only speak on behalf of my own opinion 
here, is that I have not found my grade as a hindrance on 
dealing with either the Branch Chief, the Division Chief, or 
even the District Director. I believe the authority that has 
been given to the Taxpayer Advocate in the Taxpayer Bill of 
Rights and the Taxpayer Bill of Rights 2 sends a clear message 
that we do have the authority to act on behalf of the taxpayer 
when that issue may arise. I do not know if it has anything to 
do with grade. The grade is a problem as far as a normal 
progression within our career fields. I am, in fact, at the 
highest grade that I can achieve right now.
    Mr. Portman. As long as you stay as a Taxpayer Advocate.
    Mr. George. That is correct.
    Mr. Portman. So you would have to leap back into one of the 
other areas and perhaps that would influence not you but 
perhaps, objectively speaking, just knowing human nature as we 
do, might influence someone's performance even as a Taxpayer 
Advocate if that person knew that person had to then move to 
one of the other functional areas.
    Mr. George. Right, because my background is mainly with 
collection and I have had some taxpayer service background. So 
for me to go anywhere from my current position, I would go back 
into collection.
    Mr. Portman. Any other thoughts on that? We are running out 
of time, unfortunately.
    Ms. Williams. Since I am going to retire, they cannot fire 
me. [Laughter.]
    Mr. Portman. I am glad you are here.
    Ms. Williams. I am the same grade now that I was 10 years 
ago when I came in as the Problem Resolution Officer. In that 
time, my responsibilities have tripled. You gave me the first 
Taxpayer Bill of Rights. Now you have given me TBOR2. You have 
given me life and death control over taxpayers' futures, as to 
whether I release a levy or not, whether they are going to get 
paid this week or next week. And yet, I am the same grade as 
most branch chiefs.
    I feel that, perhaps not all the PROs, and this is my own 
personal opinion, but those that have toll-free cites, excuse 
me, customer service sites now, and those that are service 
center PROs deserve some recognition of the additional 
responsibilities and the duties they have, and I know it is not 
for me because it is too late, but there are a lot of them that 
do deserve more recognition than they now receive.
    Mr. Portman. In terms of the grade?
    Ms. Williams. In terms of the grade.
    Mr. Portman. And that would relate to whether they were at 
a service center or whether they were at a regional level 
rather than district level?
    Ms. Williams. Well, not regional.
    Mr. Portman. But at a customer service site?
    Ms. Williams. Customer service sites are much larger, as 
are the service center PROs.
    Mr. Portman. Any other thoughts on that?
    Ms. Goldstein. The only thing I would like to add is the 
fact that for those of our districts that consolidated, we went 
from one State to responsibility now in the Midwest District 
for three States, so we are virtually taking over, if you want 
to call it three Problem Resolution Programs and putting the 
responsibility for the three onto my shoulders.
    Now, of course, the other side would say as Division Chiefs 
in the Midwest District who have now assumed three Collection 
and three Examination Divisions, their grade has not increased 
although the work has dramatically increased by placing the 
headquarters office for the Midwest District in Milwaukee.
    My greatest concern, really, is the fact that--and it is 
not based on grade, whether we will have sufficient resources 
so that we can continue the level of service in our associate 
districts that we had in the past. That would be more of a 
concern to me as far as servicing our customer than the grade 
level.
    Mr. Portman. You kept a Taxpayer Advocate in those 
locations?
    Ms. Goldstein. They are considered Associate Taxpayer 
Advocates, yes.
    Mr. Portman. Any other thoughts on that, and then I 
relinquish my time.
    [No response.]
    Mr. Portman. Again, thank you all for being here.
    Thank you, Madam Chair.
    Chairman Johnson. Actually, I think Mr. Portman raises a 
very good point. Part of the change from Ombudsman to advocacy 
and part of the reason for this direct report is to try to 
enable the agency from the frontline to talk more directly to 
Congress and to have no way of advancing your career through 
this, I think, extremely important function of the IRS and one 
that has a certain accountability of the other division does 
seem to me a problem and it is one we will think about. I 
appreciate your comments.
    Mr. Hulshof.
    Mr. Hulshof. Thank you, Madam Chair.
    Chairman Johnson. Excuse me. I am sorry.
    Mr. Hulshof. Go ahead. I defer.
    Chairman Johnson. We will go to Mrs. Thurman. I thought you 
had left.
    Mrs. Thurman. I did not leave.
    Chairman Johnson. I am glad you did not.
    Mrs. Thurman. Thank you, Madam Chairman.
    Ms. Williams, in your statement that you submitted, you 
talked about fiscal year 1996, you had done a project involving 
collection PRP where you were looking at an average day of 
resolution of issues from about 78 days and you dropped it to 
30 days.
    Ms. Williams. Yes.
    Mrs. Thurman. That is pretty remarkable. Did you share that 
with other offices, or when you are able to do something like 
this and show that kind of result or an efficiency in 
government, how does that get back to the other regional 
offices and offices?
    Ms. Williams. We share it with our Regional Problem 
Resolution Office--excuse me, the Regional Taxpayer Advocate. 
This was really an opportunity for us to look at what our 
employees were doing and to utilize the computer system we have 
got more effectively. It was also a change in management in the 
area. There were a lot of things that contributed to the large 
timeframe and then our reduction efforts. But it was a systems 
review of all the work they did and how they controlled their 
cases, how they did their follow ups to make certain they met 
all their deadlines and timeframes.
    Mrs. Thurman. So I guess the next thing I should ask the 
other panelists is, did you hear about this program and this 
project and, in fact, have you looked at a way of implementing 
this to do something similar or did you not have a problem with 
78 days?
    Mr. George. We did not have a problem exactly with the 78 
days. What we did do was look at that report. We had a problem 
with timely response back to congressional offices, when a 
constituent writes. We did an advocacy project to see what we 
could do to reduce that timeframe. After we have gone through 
the steps of analyzing the process, we determined that what was 
delaying the movement of the letters was the many management 
levels of approval up to the Director.
    After about 6 months of reviewing the possibility of 
reducing the number of approval levels, I presented the project 
to the District Director and it was agreed that--congressional 
inquiries fall into two different categories. They fall into 
very highly sensitive issues and very easy to answer issues, 
``Your refund will be sent out in a day or two.''
    So we tested the feasibility of having the manager or the 
caseworker sign the less complex congressionals and the other 
ones go forward for the District Director signature. This has 
reduced the cycle time immensely in getting back to the 
congressional offices so that they can, in turn, get back to 
their constituents.
    Mr. Romito. Whatever perceived lack of communication there 
may have been in the past, I think that is going to be 
addressed through what we have just established in the way of 
regional advocacy councils, where each of the four regions will 
have teams of executives and field people meeting to discuss 
what can be done to help the taxpayer and then when those 
regional council representatives get together, they will share 
what has surfaced in the other regions so that we will have 
that across the board ability to be able to take the best 
practices from one and apply it, as appropriate, to another.
    Mrs. Thurman. Mr. Romano, did you wish to comment?
    Mr. Romano. Quite frankly, we did not have a problem with 
the 78 days.
    Mrs. Thurman. OK.
    Mr. Romano. We have not had a serious problem with the 
cycle time for processing in our district. I think we have 
been--I mean, we are always going in and looking at ways where 
we can continually improve the systems that we are currently 
using and when we do come up with a new way, we share that.
    Lou mentioned before that they work cases online, on a 
computer, in his district and we do the same in Connecticut-
Rhode Island and we found that that is going to be a process 
that, hopefully, the whole country some day will be able to get 
on where we can take a look at not only what is going on out 
there as far as resolving taxpayers' problems but look at 
individual cases to make sure that there is no duplication of 
work and that kind of thing.
    Mrs. Thurman. You called it the Advocacy Council?
    Mr. Romito. Yes.
    Mrs. Thurman. When was that started, and has that started 
yet?
    Mr. Romito. It has started. Every region has had their 
teams assembled. The composition may vary from region to 
region. I guess one of the basic spinoff points was that within 
the Advocate's report, you may have noted that there were some 
major topics that needed to be addressed and various topics, 
various issues have been assigned to each of the councils that 
they can work on.
    Mrs. Thurman. I guess the other part of this is that many 
of you have said that when you are asked to identify major 
areas, Ms. Williams said that she probably would have sent up 
the same one in different priorities. When you are asked to 
identify that, are you asked to give suggestions as to ways to 
resolve those problems or are you just supposed to identify 
what the problem is and that is it, or do you get input into 
ways----
    I guess the issue here is, if there are several of these 
problems out there and if there are things that each one of you 
have been doing in your own offices that have maybe alleviated 
that or cut down that as a problem, I mean, we hear across 
every agency that there is always a lack of communication from 
one place to another. We can identify problems, but can we fix 
them and are you given that opportunity with input to fix them?
    Ms. Goldstein. Generally speaking, when they solicit our 
ideas for what the problems are, they will ask for recommended 
solutions at the same time.
    Mrs. Thurman. And do you do that?
    Ms. Goldstein. Usually, if, in fact, I have a recommended 
solution.
    Mrs. Thurman. Do you see them implemented?
    Ms. Goldstein. Not necessarily, but only because sitting in 
a district, I am probably a little bit of a Pollyanna in that I 
may go forward with a solution but, in fact, it may not be the 
solution that can be implemented under the structure we now 
have.
    Mr. George. As a Taxpayer Advocate, I have participated on 
several issues involving the trust fund recovery penalty, 
formerly known as the 100-percent penalty. I am currently on 
the lockbox task force because we are looking at that.
    I think Lee has done an excellent job in involving the 
functions in saying that we need to look at a process but we 
also need to look at reducing taxpayer burden while we are 
looking at that process. So it is because of our position and 
the promotion of our program that we have representation on 
most national and regional levels.
    Mrs. Thurman. And I think that is probably true. My concern 
mostly, though, is representation is not enough. It is once 
that you give a suggestion that you have tested in your own 
field office, based on the issues that you know to be your 
biggest problem, where does it go after that? That is the 
issue. I think that is what we are all trying to get to. And 
then, does that get done? We would like to think that the 
people on the frontline are the ones with most of the answers, 
quite frankly.
    Mr. George. With the trust fund recovery penalty 
initiative, yes, there were recommendations that were made to 
the Executive Committee and they were implemented. With the 
lockbox, we are currently studying that and a report is going 
to go to the Commissioner and to the Deputy Commissioner on 
what our findings are. So to answer your questions, yes, I have 
seen our recommendations implemented and move forward.
    Mrs. Thurman. Madam Chairman, may I just ask one more 
question?
    Chairman Johnson. Yes.
    Mrs. Thurman. Do any of you feel that you cannot talk to 
your representatives about issues that might be affecting how 
we do business better?
    Mr. Romito. No. We have excellent relations with the 
representatives.
    Mrs. Thurman. We just hear sometimes, not necessarily from 
you all, I am not pointing fingers, but sometimes we are told 
they cannot come tell us what is going on out there, so I just 
wanted to make sure that I can pick up the phone and call any 
one of you and you can tell me what is going on. Thank you.
    Chairman Johnson. Thank you very much for your 
participation today. I think that----
    Mr. Hulshof. One more.
    Chairman Johnson. Excuse me.
    Mr. Hulshof. That is OK, Madam Chair.
    Chairman Johnson. I am sorry. Mr. Hulshof.
    Mr. Hulshof. Thank you very much.
    Thanks for your participation, to follow up on Madam 
Chair's comment. I appreciate you being here. Ms. Goldstein, I 
happen to represent the hard working overburdened taxpayers in 
Missouri's Ninth District, which is in the Midwest Region, so I 
want to direct some comments to you or questions to you, but 
please, the rest of you, feel free to chime in.
    Your last answer, Ms. Goldstein, about great ideas or 
innovative ideas that you come up with, but I detected that the 
rules are somewhat inflexible or that you lack some flexibility 
due to the structure that is in place. Is that fair?
    Ms. Goldstein. No. Actually, in the past, I think most of 
the field PROs would agree that when we would submit a problem 
with a recommended solution to that problem through our 
channels, it fell into a black hole. We very rarely would even 
get a response back as to whether or not they recognized and 
acknowledged the problem and whether or not they believed that 
the solution was good enough to implement.
    Since the inception of the Advocacy Councils, I believe 
that is a much more structured way I can get my voice heard up 
to the Taxpayer Advocate through the region, and I do not feel 
in any way that the Regional Taxpayer Advocate filters any of 
that information through her office before it gets forwarded on 
to the Taxpayer Advocate.
    As Mr. Romito had mentioned, many of the issues that we 
raise as field advocates are the real nitty-gritty, can you fix 
this line on this tax return? They are not the large global 
issues that we probably are dealing with here in the 
congressional hearing.
    So yes, I would have to probably recant what I said earlier 
and say, yes, those types of issues that I have elevated for 
example, if a certain segment of the population is not 
receiving their refund checks and, there seems to be a problem, 
I get very quick response and they generally will implement a 
solution to fix that problem. It is usually the larger issues, 
the situations with how do we increase access to toll free 
under the limitations we now operate that I do not see 
implemented, but also, I know the difficulty in getting that 
done.
    Mr. Hulshof. Earlier, during Mr. Monks' testimony, I think 
we discussed briefly a celebrated case recently that went all 
the way to the United States Supreme Court and there was some 
discussion about legislative changes as opposed to perhaps 
administrative changes.
    Again, Ms. Goldstein, I will throw this question to you but 
would invite other response. Do you believe that most problems 
that you deal with on a day-to-day basis can be dealt with on 
the legislative side or the administrative side? Ms. Goldstein.
    Ms. Goldstein. It is probably a two-edged sword. I have to 
remember in my role as a Taxpayer Advocate that I am also the 
advocate for the millions of taxpayers out there who do not 
bring a problem to my attention, the people who file their 
return timely, and pay their tax timely. When I consider the 
type of situation that the Chair had mentioned in regard to 
that Supreme Court decision, I have to also think about, what 
will the impact of a decision or a legislative change have on 
all those taxpayers who are complying and filing on time?
    I think we have to look at the fairness for all of those 
people. The example you gave of that case, how would the 
general public feel if we gave certain situations the allowance 
to extend the statutory period for filing a claim when, in 
fact, they might feel, I file my return timely. Why can't this 
other person do the same?
    So I think whatever legislation, whether it is 
legislatively mandated or administratively mandated, I believe 
it is important we look at that silent majority out there who 
are complying with the tax law and do not bring the problems to 
our attention.
    Mr. Hulshof. Does anyone else want to comment on that 
question or Ms. Goldstein's response? Mr. Romito.
    Mr. Romito. Yes. I think that just a quick note. In both 
TBOR1 and TBOR2, many of the provisions that were codified by 
that legislation were already in place administratively. So the 
answer to your question is, depending on the situation and the 
issue, a lot of it can be handled administratively.
    Mr. Hulshof. I see my time is quickly expiring. Let me move 
to this last area that I am really interested in. Some of you 
touched on VITA, as you call it, the volunteer help, taxpayer 
assistance. In the Midwest, Ms. Goldstein, I wanted to give you 
a chance, what are you seeing as far as community-sponsored 
ways or employer-sponsored ways to help people as far as 
electronic filing is concerned, because I think this is 
something that is worthwhile. Could you share with me on that?
    Ms. Goldstein. I feel we get a lot of support from the 
community, not only through VITA, the Volunteer Income Tax 
Assistance sites, but through another community-based help 
system which is called Tax Counseling for the Elderly, TCE, 
which is generally staffed by people who are members of AARP. 
They are there also to assist older Americans in filing their 
return and understanding the tax law. We also do partner with 
many employers, asking them to take on electronic filing as a 
benefit for their employees.
    I personally feel we have a very strong relationship with 
our community. Our taxpayer education coordinator does a 
wonderful job signing up these companies to support us in 
getting the taxpayers' returns timely filed.
    Mr. Hulshof. Thank you all.
    Chairman Johnson. Thanks, and let me say that there will be 
3 days for Members to insert matters in the record, if they 
care to.
    On this last point about the telephone service, in general, 
do you have a message on the machine that tells about these 
other settings in which they could get advice? Do you use the 
SBA's corps of volunteers who offer their services for free to 
small businesses to help them get up and running? I mean, why 
only the AARP?
    There are a lot of avenues of reaching very capable 
retirees who would be very good at helping, giving advice, and 
the senior volunteer corps, I guess it is called, at SBA would 
be sort of a natural that is already a known list to you in 
each district. But certainly, some kind of notice to all the 
senior citizen centers, if they have people who are interested 
in running a training session seems to me a way to spread that 
capability.
    Let me just say in closing that it is, and I have noticed 
this over the 2 years that I have chaired this Subcommittee it 
is unfortunate that the public does not know the many positive 
things that the IRS does, not only in your division but in many 
divisions and many of the real reforms that you have adopted to 
speed processing, to make it more accurate, and to help people 
deal with the IRS.
    But it is also true that we really do have a job to do and 
one of the things that we need you to think about as we develop 
this process of more direct communication between you and the 
Ways and Means Committee is we need you to think about 
solutions. If a tax law is really complicated, we need to have 
that noted down, what area in as much information as you can 
give us. If you have suggestions about deleting portions and 
what you think would be the fairness, because, see, sometimes 
your comments would be couched in, this would be a great 
solution. It may mean that you will have to change this other 
thing over here because it will be unfair.
    So it is very important, I think, for you all to focus as 
much on solutions and legislative solutions as you do on 
problem identification, because we have, particularly over the 
last decade when we did not want to raise taxes, we have made 
an absolute art of raising taxes in ways that nobody can see, 
but they have the same effect. The handmaiden of that approach 
to revenue is complexity. It is not just fairness and social 
justice. Some of this complexity is motivated by subterfuge, 
and it is infuriating, but that does happen, you know it and I 
know it, and we have to take more responsibility for it.
    One of the reasons we wanted you to be part of this 
exchange, and you will be every year, is so that you can hold 
us accountable. Do not worry about us being insulted. Relative 
to what you could say to us, we hear much worse every time we 
are home, and if you do not believe it is to our advantage as 
much as to your advantage to do something about the complexity 
of the Code, forget it.
    The other thing that you might think of, and I say this to 
Mr. Monks, too, is that maybe 20 is too long a list. Maybe we 
should be really asking you for 10 and the 10 projects that you 
are going to work on that are going to be part of what you are 
going to do the next year.
    So do not hesitate to identify both strengths and 
weaknesses of this new process we are developing because I 
really think it has the potential to be a very important driver 
of the Subcommittee's work and we have never, ever had solid 
input from the agency as to how to change the tax laws. They 
tell us about what the administrative problems are. We talk 
about budget. We talk about what they think about what we think 
we might do. I mean, there is some level of exchange but we do 
not have any carte blanche way, no open door where you can say 
to us, these are the problems the taxpayer faces and this is 
the reason and this might be the answer and you have to look at 
this chunk of the law that you have got out there.
    So I really invite you to think creatively in the future. 
We would like to come back to you with things that we are going 
to follow up on from the testimony that look to us like they 
are sort of doable in the near term because we want not only to 
keep this ball rolling from the point of view of the responsive 
relationship we would like to develop but also from the 
responsive relationship we would like to develop with the 
Committee so that they get accustomed to each year the 
Oversight Subcommittee coming forward with changes that are in 
everybody's interest.
    This is not about we/they in the end so much as it is about 
all of us, and if a country does not have an enforceable and 
fair Tax Code, it cannot collect the revenue. One of the sort 
of ironies and terrible tragedies in Russia is that the revenue 
is not coming forward because it was never structured to come 
forward in a fair way and so they do not have a Tax Code in our 
sense of the word and nobody feels any obligation to pay 
anything for anyone, much less for the public good. We are the 
freest society with an excellent record of compliance and we 
need to protect that by addressing the problems as they 
develop.
    I thank you for your input to this Subcommittee and I look 
forward to working with you. You will be hearing from our 
staff. Thank you. The Subcommittee is adjourned.
    [Whereupon, at 4:12 p.m., the hearing was adjourned.]
    [A submission for the record follows:]

Statement of Amercian Institute of Certified Public Accountants Working 
Group, Mark H. Ely, Alvin M. Feit, Linda Martin, William F. Marutzky

                            I. Introduction

    These comments on the Taxpayer Advocate's first Annual 
Report to Congress are being submitted in response to an 
invitation the American Institute of Certified Public 
Accountants (``AICPA'') received from the House Subcommittee on 
Oversight. The AICPA appreciates the request for comments and 
welcomes the opportunity to work with the Subcommittee and the 
Taxpayer Advocate in addressing the concerns noted herein.
    The AICPA is the national, professional organization of 
certified public accountants comprised of 331,000 members. Our 
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 we offer our comments.
    The Taxpayer Advocate is in the unique position of being 
inside the Internal Revenue Service, yet having the specific 
charge of scrutinizing the Service's activities and 
recommending changes that will improve taxpayer services and 
the IRS's responsiveness to taxpayers. We understand that 
because the Taxpayer Bill of Rights 2 (``TBOR2'') was enacted 
near the end of the year, the Taxpayer Advocate had little time 
to gather material for the first report. The Taxpayer 
Advocate's Report did identify many areas for improvement of 
the IRS; however, the tenor and tone of the Report is that of a 
self-evaluation by the Service. Given his role, the Taxpayer 
Advocate should be a more zealous advocate of taxpayers, rather 
than speak for the Service.
    In section 101 of TBOR2, Congress directed the Taxpayer 
Advocate to provide the annual report and expressly stated that 
the report is not to be subject to prior review by the 
Commissioner of Internal Revenue, the Secretary of the 
Treasury, or any other officer or employee of Treasury or the 
Office of Management and Budget. The legislative history of 
that provision notes that ``[t]he objective is for Congress to 
receive an unfiltered and candid report of the problems 
taxpayers are experiencing and what can be done to address 
them.'' Joint Committee on Taxation 104th Cong., 2d Sess., 
General Explanation of Tax Legislation Enacted in the 104th 
Congress 21 (1996).
    Congress clearly expressed its desire for frankness in the 
report of the Taxpayer Advocate. The Taxpayer Advocate should 
take a more assertive role on behalf of taxpayers when 
addressing the Service's shortcomings. We hope that future 
reports of the Taxpayer Advocate will take a more critical view 
of the Service from the perspective of taxpayers, thereby 
offering members of Congress the candor they sought.
    With the Problem Resolution Program celebrating its 
twentieth anniversary this year, it is an appropriate time to 
highlight the unique role the Taxpayer Advocate and the Problem 
Resolution Program play within the tax administration system 
that of representing the interests of the American taxpayers, 
serving as the advocate of the taxpayers, not the advocate of 
the Service. In that role it is the Taxpayer Advocate's 
responsibility to ensure that the IRS abides by the fundamental 
principles of tax administration established for it, as set 
forth in Rev. Proc. 64-22, 1964-1 C.B. 689. (See Exhibit 1.)

Rev. Proc. 64-22 states, in part:
    --The function of the Internal Revenue Service is to 
administer the Internal Revenue Code. Tax policy for raising 
revenue is determined by Congress.
    --With this in mind, it is the duty of the Service to carry 
out that policy by correctly applying the laws enacted by 
Congress; to determine the reasonable meaning of various code 
provisions in light of the Congressional purpose in enacting 
them; and to perform this work in a fair and impartial manner, 
with neither a government nor a taxpayer point of view.
    --At the heart of administration is interpretation of the 
Code. It is the responsibility of each person in the Service, 
charged with the duty of interpreting the law, to try to find 
the true meaning of the statutory provision and not to adopt a 
strained construction in the belief that he is ``protecting the 
revenue.'' The revenue is properly protected only when we 
ascertain and apply the true meaning of the statute.
    Keeping the unique role of the Taxpayer Advocate in mind, 
we offer the following input for consideration.

                    II. Problem Areas for Taxpayers

    The following are areas that we believe the Taxpayer Advocate and 
his staff should review and consider advocating needed changes and/or 
corrective actions.

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) 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. Sec. 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 comments regarding unfairness with 
claims 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 
against concerns of taxpayer fairness. The Taxpayer Advocate notes in 
his report that he has ``a responsibility to address continuing 
systemic problems.'' Interest netting is one such problem.
    For these reasons, we recommend that the Taxpayer Advocate work to 
ensure that guidance be issued to implement comprehensive netting in 
all situations in which the IRS currently has the administrative 
capability to do so. In all other situations, as an interim measure, 
guidance should be issued providing that the Service will net 
comprehensively at the request of the taxpayer, provided the taxpayer 
furnishes the Service with relevant information and interest 
computations. 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. This interim 
recommendation is similar to the elective approach recently 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.
    We also recommend that 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. 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 ``[i]nterest netting is an [sic] problem that 
Congress has long expected would be resolved administratively and I 
certainly hope that Treasury will reexamine its position on this 
issue.'' This would be an appropriate area for the Taxpayer Advocate to 
work to see that the interests of taxpayers are protected. If it is 
determined that the Service is legally prohibited from netting in 
certain circumstances, the Taxpayer Advocate should recommend a 
legislative remedy.

Consistency When Implementing IRS Policies

    Often, the Service 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. 
At times 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 
to the detriment of both the taxpayer and tax administration. One such 
example is cited above, in reference to interest netting. However, 
other examples exist.
    On June 3, 1996, 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 a taxpayer representative, it is 
imprudent to bypass the revenue agent; taxpayers often must comply with 
these IDRs, which can be time-consuming and costly. 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.
    This problem is partially a result of the fact that more and more 
National Office directives to field offices are issued by memorandum 
rather than through the Internal Revenue Manual (``IRM'). This practice 
causes problems when a policy set forth in a memorandum is never made 
official and permanent by incorporation into the IRM and is eventually 
forgotten or overlooked and is often unknown by those outside the IRS. 
The Taxpayer Advocate should review this practice and work to assure 
that policies are made a permanent part of the IRM and are applied 
consistently and uniformly.

Method of Evaluating Revenue Agents

    The IRS Mission Statement states ``[t]he purpose of the Internal 
Revenue Service is to collect the proper amount of tax revenue....'' It 
is noteworthy that the IRS's mission is to collect the proper amount of 
tax, as opposed to maximizing revenue or protecting the Treasury. 
However, the Service's methods of evaluating its personnel focus on the 
latter, maximizing revenue and protecting the Treasury. Examination's 
Program Letter for Fiscal Year 1997 includes the following Examination 
measures:
     Total Recommendations: Proposed additional tax and 
penalties.
     Total Recommendations per FTE: Total recommendations 
divided by the total full-time equivalents.
     Total Revenue Protected: Total dollars protected as a 
result of disallowing claims for refund.
    As these measures indicate, the Examination Division's performance 
is evaluated solely based upon factors other than determinations as to 
the proper amount of tax. The conflict between performance measurement 
and correct determinations can result in overly aggressive positions or 
determinations by revenue agents. (It should be noted that revenue 
agents are also evaluated based upon Recommendations per FTE.) To 
ensure a fair application of the tax laws, the Taxpayer Advocate should 
encourage the Service to abandon the practice of evaluating performance 
based solely upon factors that may conflict with the IRS Mission 
Statement and instead develop evaluation measures based on making 
proper determinations of tax.

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. It is the intent of the Service that to the extent 
a test program proves to be effective, it will be expanded to other 
groups of taxpayers. Unfortunately, expanding the scope of taxpayers 
who may avail themselves of some of these programs often takes years, 
if it in fact ever occurs. 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. The Taxpayer 
Advocate should encourage the Service to expand these programs to 
taxpayers in general, or to other focused groups of taxpayers who would 
use these programs to everyone's benefit.

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 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. The Taxpayer Advocate should review 
the practices of Examination and advocate changes, as needed, to assure 
more timely case resolution.

Penalty Abatements

    The IRS assesses numerous penalties in response to which taxpayers 
spend a great deal of time documenting reasonable cause for having the 
penalties abated. The process is both time consuming and expensive. 
However, on both reasonable cause and IRS errors, the IRS abates as 
much as 50 percent of some types of penalties it proposes. 
Unfortunately, taxpayers without representation are often unaware of 
the opportunities for abatement. It may be possible to achieve a more 
cost-effective 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 Taxpayer Advocate review the penalty assessment and abatement 
practices of the Service and advocate improvements to the system. One 
suggestion is for the IRS to 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 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 this 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.

Offers in Compromise

    The Taxpayer Advocate's Report discusses the Service's inability to 
respond timely to the increased number of offers in compromise that 
have resulted from the 1992 change the Service policy. Prior to 1992, 
many districts had low acceptance rates for offers and there was a wide 
disparity of acceptance rates between districts. In 1992, the Service 
liberalized the rules for accepting offers, which resulted in a 
substantial increase in the number of offers being filed with the 
Service. Although the Service had a policy of making a decision on an 
offer within six months, a substantial number of offers were not 
completed within this time frame, some of which were due to a delay in 
district counsel's review of the recommendation to accept the offer. 
The Taxpayer Advocate's Report states that the problem may be 
alleviated on a high volume of cases because TBOR2 provides that 
counsel only has to approve offers when the liability exceeds $50,000.
    However, over the last four years, more significant problems with 
the program have developed other than timely response. These problems, 
discussed below, should be addressed by the Taxpayer Advocate.
    1. Non-Processibility of Offers
    In 1995, standards were developed in an attempt to eliminate the 
disparity of expenses allowed by the various district offices as well 
as between offices in the same district. Although the standards were 
developed to create uniformity among the various district offices, we 
believe that the standards have been used to return offers to taxpayers 
before accepting them for processing, in order to decrease the time 
cases are in inventory. We are concerned with the substantial increase 
in the number of offers that are being rejected as non-processable or 
insufficient in amount and, therefore, not being taken into inventory. 
In regard to non-processability, offers are being rejected and returned 
to the taxpayer or the representative because of minor errors in 
completing the forms. In many of these cases, a telephone call by the 
revenue officer could have led to corrections allowing the case to be 
taken into inventory in a matter of days.
    In other cases, offers have been rejected for insufficiency in the 
amount offered. The Service's rejections are due to a number of factors 
including:
    a. The lack of uniform standards among offices. This includes the 
lack of a uniform ``available income'' discount rate to arrive at 
present value and the lack of a uniform discount rate to arrive at 
quick sale value per the Internal Revenue Manual.
    b. Not allowing the use of expenses in excess of the national and 
local standards although there was justification for the excess. One 
example is excess housing costs. In some cases, it would be more 
beneficial to allow the excess than to have the taxpayer sell the 
residence, incur capital gains tax and increased commuting expenses and 
then be forced to pay nondeductible rent which increases the overall 
tax liability.
    c. Disagreeing with reasonable values placed on assets by the 
taxpayer.
    2. Revenue Officer Discretion
    We believe revenue officers should be allowed to use the discretion 
contained in the Manual to allow variances from national and local 
standards when circumstances justify the variance. The standards should 
generally be followed but exceptions should be allowed if documented by 
the taxpayer. In many cases, justifiable exceptions are not being 
allowed.
    3. Updating Standards
    The standards should be updated and adjusted for inflation 
annually, based on the most current statistics available. We also 
recommend that the Service adjust the standards by moving the cost of 
food from a national standard to a local standard and by localizing the 
cost of housing by zip code rather than by county to allow for 
variances within a within a state. Further, the Service should adjust 
the housing standard to account for the taxpayer's income and the size 
of the family as it does for the national standards.
    4. District Counsel Review
    Offers that have been recommended for acceptance by revenue 
officers and appeals officers have been rejected by district counsel on 
grounds other than for legal sufficiency. We have heard offers have 
been rejected by counsel because counsel did not agree with the 
valuation placed on certain assets, concluded that the taxpayer should 
pay more with no support for this conclusion, or concluded that the 
assets might appreciate in the future. We do not believe this should be 
the role of district counsel in the offer process nor do we find 
support in the regulations for this role. The district counsel 
attorneys are not specifically trained in valuation, discounts for 
quick sale value or present value, or uncollectibility matters. The 
issue of collectibility should be left to collection and appeals 
personnel and counsel should opine only on the legal issues. If 
necessary, this may entail a clarification of the roles of each.
    We believe the Taxpayer Advocate should undertake a study of the 
offer program to determine the reason for the acceptance rates 
declining, the increase in non-processable offers, the amount for tax 
dollars collected on rejected offers, and other problems discussed 
herein. Statistics from each district office should be analyzed to 
determine trends and the reasons for them and should be shared with 
interested stakeholders. We also recommend that the Taxpayer Advocate 
study the uniformity problems and fairness issues and make 
recommendations to the Service and/or Congress for changes to the offer 
program. We believe that the offer process is a viable tool for the 
Service to collect delinquent taxes and allow taxpayers a ``fresh 
start''.

Employee-Independent Contractor Issues

    The seemingly simple question of whether a worker is an employee or 
an independent contractor continues to confound both individual and 
business taxpayers. Currently, the classification of a worker is based 
upon the ``twenty common-law factors,'' which generally means that 
there is no single defining set of rules to determine a particular 
worker's status. As a result, businesses must make their ``best guess'' 
based upon the variety of authorities that exist, with costly 
consequences if the worker is misclassified.
    An employer that has misclassified its workers may be liable for 
several years of withholding taxes that were not paid over on behalf of 
the worker, such as Federal income tax withholding and social security 
taxes. Furthermore, the employer's qualified retirement plans may be at 
risk for failure to include a worker who should have been deemed an 
eligible employee. For the worker, several consequences exist, as well. 
If an independent contractor, the worker may be ineligible for numerous 
benefits offered by the business; however, the worker is entitled to 
deduct business expenses from revenues without limitation. A worker who 
is reclassified as an employee can lose the ability to deduct some or 
all business expenses.
    Guidance by the Service on the issue of worker classification has 
historically been one-sided in favor of classification as an employee. 
Statistics indicate that over 90% of Forms SS-8 that are evaluated by 
the Service in order to make a determination as to worker 
classification result in classification as an employee. Rather than 
address each employment situation objectively, the Service seems to 
presume that a worker is an employee, unless independent contractor 
status can be proven. The Service needs to recognize that independent 
contractor relationships are a legitimate form of business and do not 
exist solely for the purpose of avoiding taxation. Each work 
relationship should be evaluated on its merits, without preconceived 
notions as to a worker's status.
    To solve the problems that arise in the area of worker 
classification, the Taxpayer Advocate should work with Congress to 
establish a set of clear rules through which both employers and workers 
can readily define the workers' true status. Clear rules in this 
important area would increase certainty in the application and 
administration of the tax laws.

Entering the Electronic Age

    The IRS has made progress in moving the organization toward the 
electronic age. One such example is the recent finalization of 
regulations that would permit the Commissioner to specify methods other 
than by mechanical signature to verify the accuracy of return 
information. In furthering its goal of paperless filing, the IRS held 
an ELF (Electronic Filing) Summit with taxpayers and practitioners 
during Fiscal Year 1996. At the meetings, the IRS was able to learn of 
the obstacles that prevent taxpayers and practitioners from increasing 
their usage of various means of electronic filing. The meetings seemed 
to be very educational for both the IRS and the taxpayer/practitioner 
community.
    The IRS should continue to meet with taxpayers and tax 
practitioners regarding the myriad of issues that arise in the 
electronic age; the Taxpayer Advocate should gather information about 
those issues and communicate them within the Service to ensure that 
taxpayers' concerns (and potential concerns) are addressed by the 
Service in its development of the Electronic Tax Administration system. 
The technological abilities of taxpayers varies as widely as their 
income levels (and not necessarily correspondingly), yet the Service 
attempts to establish rigid policies that are intended to govern all 
taxpayers. Furthermore, the Service, through some of its guidance, 
seems to be attempting to give added focus to safeguards, to the 
detriment of computerization.
    One example is the Service's draft revenue procedure regarding the 
electronic imaging of documents. One of the provisions in the draft 
revenue procedure stated: ``For example, the imaging system and the 
taxpayer's books and records must be cross-referenced, so that all 
imaged documents that support an entry in the taxpayer's books and 
records can be automatically identified and retrieved for viewing or 
printing.'' However, if a taxpayer has original books and records, 
there is no requirement of a specific method of cross-reference.
    The Service seems to be attempting to use the availability of 
electronic systems to place unwarranted additional burdens on 
taxpayers. The cliche image of the taxpayer with a shoebox full of 
receipts may be amusing, but if those receipts substantiate the items 
on the return, that shoebox is an acceptable method of record 
retention. The Taxpayer Advocate should take an active role in guiding 
the Service into the electronic age as it has evolved, rather than 
attempting to mold the electronic age around the IRS's goals.

             III. Taxpayer Advocate's Legislative Proposals

    We would also like to comment on the legislative 
recommendations endorsed by the Taxpayer Advocate for further 
study and consideration. The first deals with a proposal to 
simplify the computation and assessment of the estimated tax 
penalty for individuals. We agree that the current statutory 
rules are complex for taxpayers and difficult for IRS to 
administer and we recommend that the Taxpayer Advocate work 
with the Congress to develop appropriate legislative remedies.
    We also support reviews of the proposed exception to the 
statute of limitations on refunds so that untimely requests for 
overpayments may be credited to liabilities in other years, and 
of the proposed elimination of the failure to pay penalty on 
deficiency underpayments. We recommend that the Taxpayer 
Advocate work with the Congress on these proposals.

 IV. Recommendations for Future Reports and Activities of the Taxpayer 
                                Advocate

    TBOR2 requires that the annual report cover the activities 
of the Taxpayer Advocate for the prior fiscal year. It 
specifically requires that the report identify initiatives the 
Taxpayer Advocate has undertaken to improve taxpayer services 
and IRS responsiveness. In our view, the Taxpayer Advocate's 
Annual Report to Congress should serve as a report card on how 
well the IRS is doing in improving its service to and treatment 
of taxpayers. We recommend that future reports of the Taxpayer 
Advocate take a more critical view of the Service's operations 
and treatment of taxpayers, not only from the standpoint of 
individual cases, but from a systemic viewpoint. The role of 
the Taxpayer Advocate is to serve as an objective observer of 
IRS operations, to advocate on behalf of taxpayers and to 
candidly report to Congress on those operations. We encourage 
the Taxpayer Advocate to provide a frank review of the 
Service's performance.

Comparative Evaluation Standards

    We recommend that the Taxpayer Advocate consider using the 
IRS Policy Statements that deal with the treatment of taxpayers 
as a yardstick against which the behavior of Service employees 
can be measured. It is recommended that the Taxpayer Advocate 
adopt a standardized comparative report format to detail the 
IRS's performance in meeting its own enumerated policies. A 
comparative report format could detail performance by 
functional areas of the agency and, over a period of time, 
serve to illustrate changes in those functional areas.
    We also recommend that the Taxpayer Advocate develop 
measurement standards, in addition to the IRS policies, to be 
used for comparative evaluations. In preparing those 
measurement standards, the following principles of tax 
administration, set forth in Rev. Proc. 64-22, should be 
considered.
    The Service also 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.

Review of IRS Practice Standards
    We recommend that the Taxpayer Advocate and his staff 
review IRS practices to assure that the Service is being held 
to the same standards as taxpayers and their representatives. 
For example, if taxpayers are required to file and pay on time 
and respond timely to IRS requests for information, then the 
Service should also be timely in its actions. If taxpayers and 
their representatives face possible penalties if they take 
positions on their returns that do not have either substantial 
authority for taxpayers or a realistic possibility of being 
sustained for preparers then revenue agents should face 
sanctions if they propose audit adjustments that do not meet a 
minimum standard such as having a realistic possibility of 
being sustained.

Publication of the Advocacy Memoranda

    The Advocate indicated in his report that he had issued a 
number of Advocacy Memoranda. However, these Memoranda were 
only referenced and were not identified in detail. It is 
recommended that the Memoranda issued by the Advocate's Office 
be published and made available for public inspection. We 
believe inspection will create an atmosphere that encourages 
public comment and ultimately improved service by the IRS.

Interaction with Professional Organizations

    The Advocate's Report indicated that he has initiated an 
interaction with professional organizations. Indeed, the 
Advocate has met with the AICPA Tax Practice and Procedures 
Committee. However, to the best of our knowledge, no formal 
communication channel has been established nor has any formal 
system for interaction been adopted between the Advocate's 
Office and professional organizations. Yesterday, we received a 
letter from the IRS Office of Public Liaison extending to the 
AICPA an invitation to meet with the Taxpayer Advocate. We hope 
this constitutes the initial step in structuring an ongoing 
working relationship between the Taxpayers Advocate and the 
AICPA.
    Professional organizations such as the AICPA are 
stakeholders in the tax system. However, the AICPA also acts in 
the public interest in performing its function. For example, 
the AICPA has worked, in cooperation with the IRS, to learn 
more about the public's perception of the agency by conducting 
a survey of the attitudes of its members toward the IRS. The 
results of that study were made available to the IRS. 
Hopefully, the AICPA study offered insight into strengths and 
weaknesses of certain operational areas.
    We recommend that the Taxpayer Advocate immediately 
endeavor to formalize relationships with stakeholders from the 
professional community, so that communications from these 
groups can be considered in the next report.

Detailed Reporting of IRS/Treasury Studies and Other Projects

    Advocate's Report indicated references to a number of 
studies being conducted by the IRS either by Congressional 
mandate or by IRS/Treasury initiative. The Advocate's report 
did not identify completely nor provide a detailed explanation 
of those studies. It is recommended that the Advocate have a 
section in his report that identifies the studies and other 
projects relevant to tax administration being conducted by the 
IRS/Treasury; the report should outline the progress of those 
studies and projects and the specific activities of the 
Taxpayer Advocate in representing taxpayer interests in 
connection with them. It is further recommended that a section 
of the Advocate's Report be dedicated exclusively to the 
ongoing IRS/Treasury studies and projects.

Advocate Report Format

    We recommend that the Advocate's Report adopt a 
standardized format by way of index and content. If the report 
is submitted in a standardized format, much of the information 
that would be presented could be used for comparative analysis. 
Since similar information would be prepared and submitted in 
subsequent reports, readers might find it more communicative.

                               V. Closing

    The AICPA appreciates the opportunity to offer these 
comments and is willing to provide the Subcommittee and the 
Taxpayer Advocate with additional assistance and comments as 
requested.

                               Exhibit 1

    Rev. Proc. 64-22 n1
    n1 Also released as Technical Information Release 592. 
dated May 1, 1964. 26 CFR 1.9100-1: Extension of time for 
making certain elections. (Also part I, Section 614; 26 CFR 
1.614-2.)
    1964-1 C.B. 689; 1964 IRB LEXIS 361; REV. PROC. 64-22

Statement of some principles of Internal Revenue tax 
administration.

    The function of the Internal Revenue Service is to 
administer the Internal Revenue Code. Tax policy for raising 
revenue is determined by Congress.
    With this in mind, it is the duty of the Service to carry 
out that policy by correctly applying the laws enacted by 
Congress; to determine the reasonable meaning of various Code 
provisions in light of the Congressional purpose in enacting 
them; and to perform this work in a fair and impartial manner, 
with neither a government nor a taxpayer point of view.
    At the heart of administration is interpretation of the 
Code. It is the responsibility of each person in the Service, 
charged with the duty of interpreting the law, to try to find 
the true meaning of the statutory provision and not to adopt a 
strained construction in the belief that he is ``protecting the 
revenue.'' The revenue is properly protected only when we 
ascertain and apply the true meaning of the statute.
    The Service also 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.
    Administration should be both reasonable and vigorous. It 
should be conducted with as little delay as possible and with 
great courtesy and considerateness. It should never try to 
overreach, and should be reasonable within the bounds of law 
and sound administration. It should, however, be vigorous in 
requiring compliance with law and it should be relentless in 
its attach on unreal tax devices and fraud.