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



 
                            TAXPAYER RIGHTS

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

                            WRITTEN COMMENT

                                  and

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                       Taxpayer Rights Proposals

                                  AND

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

                           SEPTEMBER 26, 1997

                               __________

                             Serial 105-62

                               __________

         Printed for the use of the Committee on Ways and Means


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 53-803 CC                   WASHINGTON : 1998
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                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

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

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman

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


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

                       TAXPAYER RIGHTS PROPOSALS

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

                                 ______

American Society for Quality, Milwaukee, WI, statement and 
  attachments....................................................     4
                               __________

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

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

                               WITNESSES

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

                                 ______

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

                       SUBMISSIONS FOR THE RECORD

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

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

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

                 Johnson Announces Request for Written

                              Comments on

                       Taxpayer Rights Proposals

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

BACKGROUND:

      
    Congress passed the original Taxpayer Bill of Rights in 1988 (P.L. 
100-647). It expanded taxpayer safeguards further by the passage of the 
Taxpayer Bill of Rights 2 (TBOR 2) in 1996 (P.L. 104-168). The Report 
of the Restructuring Commission builds on this foundation of taxpayer 
rights by proposing 21 additional measures to improve taxpayer rights.
      
    The taxpayer rights proposals of the Restructuring Commission are 
contained in Title III (Taxpayer Protection and Rights) of H.R. 2292. 
In general the recommendations would:
      
    1. Strengthen Taxpayer Assistance Orders by allowing the Taxpayer 
Advocate to consider more factors in determining whether or not a 
taxpayer is experiencing a ``significant hardship.''
      
    2. Expand the rights of taxpayers to recoup legal expenses from the 
IRS by allowing a taxpayer who prevails over the IRS to seek 
reimbursement of expenses incurred after the receipt of a preliminary 
notice of deficiency; i.e., the 30-day letter.
      
    3. Allow taxpayers to recover up to $1 million from the IRS for 
negligent collection actions.
      
    4. Require the IRS to disclose to taxpayers the reasons their tax 
returns were selected for audit.
      
    5. Improve the protection of IRS records by the National Archives.
      
    6. Direct the Joint Committee on Taxation to study the provisions 
of the tax law regarding taxpayer confidentiality and third party 
access to tax return information.
      
    7. Improve public access to IRS material under the Freedom of 
Information Act.
      
    8. Direct the IRS to ensure that ``offers-in-compromise'' provide 
taxpayers with an adequate means to provide for basic living expenses.
      
    9. Eliminate the interest rate differential on overpayments and 
underpayments of tax liability.
      
    10. Eliminate the ``failure to pay'' penalty on taxpayers who enter 
into installment agreements with the IRS.
      
    11. Provide most taxpayers with an automatic right to an 
installment agreement for tax liabilities of $10,000 or less.
      
    12. Require that checks for the payment of taxes be made payable to 
Treasurer, United States of America.
      
    13. Direct the IRS to make matching grants to support low-income 
taxpayer clinics.
      
    14. Expand the jurisdiction of the U.S. Tax Court and increase the 
ceiling on ``small cases'' from $10,000 to $25,000.
      
    15. Require the IRS to establish a toll-free ``hotline'' for 
taxpayers to register complaints about misconduct by IRS employees.
      
    16. Improve the rights of taxpayers during IRS interviews.
      
    17. Direct the IRS to establish procedures for alerting married 
taxpayers about their joint and several liabilities on all tax forms, 
publications, and instructions.
      
    18. Direct the IRS to notify taxpayers of their right to refuse to 
extend the statute of limitations.
      
    19. Direct the IRS Taxpayer Advocate to report to Congress on the 
administration and implementation of the tax penalty reforms contained 
in the Omnibus Budget Reconciliation Act of 1989.
      
    20. Direct the Secretary of the Treasury and the U.S. General 
Accounting Office (GAO) to study the feasibility of treating 
individuals separately for tax purposes, including recommendations for 
eliminating the marriage penalty.
      
    21. Direct the GAO to prepare a report for Congress on the burdens 
of proof for taxpayers and the IRS for controversies under the tax law.
      
    Title I of H.R. 2292 contains several proposed changes related to 
the IRS Taxpayer Advocate. For example, it provides that the selection 
of the Taxpayer Advocate be approved by the Oversight Board, that the 
Taxpayer Advocate must agree not to accept further employment with the 
IRS for the five-year period after he or she ceases to be Taxpayer 
Advocate, and that the Taxpayer Advocate must monitor the coverage and 
allocation of local taxpayer advocates. The Subcommittee on Oversight 
is especially interested in receiving written comments on the 21 
specific taxpayer rights proposals contained in Title III, and the 
changes proposed to the operation of the Taxpayer Advocate contained in 
Title I of H.R. 2292.
      
    The Subcommittee is also interested in receiving written comments 
on legislation introduced during the 105th Congress which is relevant 
to the objective of improving taxpayers rights. Examples of such 
legislation include H.R. 1227, the ``Internal Revenue Service 
Accountability Act,'' which would provide for increased accountability 
by IRS agents and other Federal officials in tax collection practices 
and procedures, and H.R. 367, which would place the burden of proof on 
the IRS in court proceedings and require judicial consent before the 
IRS could seize a taxpayer's property by levy.
      
    Finally, the Subcommittee is interested in receiving written 
comments from the public regarding other legislative proposals 
concerning taxpayer rights which it may wish to bring to the 
Subcommittee's attention.
      
    In announcing this request for comments, Chairman Johnson stated: 
``There will always be a need for stronger taxpayer rights as long as 
we continue to receive complaints from our constituents about their 
experiences in dealing with the IRS. The Subcommittee will be exploring 
various proposals in anticipation of a hearing later this month on the 
Commission's taxpayer rights recommendations.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record should submit at least six (6) single space 
legal size copies of their statement, along with an IBM compatible 3.5-
inch diskette in ASCII DOS Text or WordPerfect 5.1 format only, with 
their name, address and comments date noted on label, by the close of 
business, Monday, September 22, 1997, to A.L. Singleton, Chief of 
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515.
      

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 an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    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/'.
      

                                

Statement of American Society for Quality

             Taxpayer rights: a customer satisfaction issue

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

                          Title III Proposals

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

                                Summary

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

                                


EXHIBIT A

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

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

                         Doing The Right Thing

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

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


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

                     Doing It Right The First Time

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

                   Baldrige Core Values and Concepts

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

         Conflicting Functions: Customer Service or Compliance?

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

                      Preliminary Recommendations

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

How does the IRS set priorities?

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

Review of current improvement plans.

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

                                


EXHIBIT B

About the American Customer Satisfaction Index

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

                                

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

                              ----------                              


                       FRIDAY, SEPTEMBER 26, 1997

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

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

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

                      Johnson Announces Hearing on

             the Recommendations of the National Commission

             on Restructuring the Internal Revenue Service

                   on Taxpayer Protections and Rights

     Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing to examine the recommendations of the 
National Commission on Restructuring the Internal Revenue Service (IRS) 
with regard to taxpayer protections and rights. The hearing will take 
place on Friday, September 26, 1997, in the main Committee hearing 
room, 1100 Longworth House Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include, among others officials from the U.S. Department 
of the Treasury and the IRS, and representatives from tax practitioner 
organizations and other stakeholders with expertise in IRS practice and 
procedural issues. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing [See Advisory No. OV-8].
      

BACKGROUND:

      
    The National Commission on Restructuring the IRS was established by 
Public Law 104-52. Its purpose was to review the present practices of 
the IRS and to make recommendations for modernizing and improving its 
efficiency and taxpayer services. The Commission's June 25, 1997, 
report contains recommendations relating to Executive Branch governance 
and management of the IRS, Congressional oversight of the IRS, 
personnel flexibilities, customer service and compliance, technology 
modernization, electronic filing, tax law simplification, taxpayer 
rights, and financial accountability.
      
    The Commission's recommendations are embodied in H.R. 2292, the 
``Internal Revenue Service Restructuring and Reform Act of 1997,'' 
which was introduced on July 30 by Reps. Rob Portman (R-OH) and Ben 
Cardin (D-MD). H.R. 2292 contains a number of provisions designed to 
build upon the original Taxpayer Bill of Rights passed by Congress in 
1988 (P.L. 100-647), and expanded in last year's Taxpayer Bill of 
Rights 2 (TBOR 2) (P.L. 104-168).
      
    On September 8, 1997, Chairman Johnson released an Advisory 
requesting written public comments on these taxpayer rights proposals 
[See Advisory No. OV-8]. On September 26, 1997, the Subcommittee will 
receive oral testimony on the taxpayer rights proposals contained in 
Title III of H.R. 2292 from invited witnesses.
      
    In announcing the hearing Chairman Johnson stated: ``I am 
enthusiastic about exploring more ways to strengthen protections for 
taxpayers in their dealings with the IRS. The combination of the 
written public comments and the testimony at our hearing will help us 
develop the best possible legislation to improve taxpayer rights. Our 
objective is to do the groundwork on taxpayer rights issues in 
anticipation of full Committee action on H.R. 2292 sometime in 
October.''
      

FOCUS OF THE HEARING:

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

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

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

FORMATTING REQUIREMENTS:

      
    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 an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    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 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                


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

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

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

                                


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

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

               IRS Reform Bill Addresses Taxpayer Rights

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

                                


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

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

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

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

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

                                

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[GRAPHIC] [TIFF OMITTED] T3803.002

                                


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

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

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

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

                            Specific Cases:

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

                                Culture

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

                         Fairness and Measures

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

                                


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

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

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

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

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

                   The Importance of Taxpayer Rights

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

                   Recent Taxpayer Rights Initiatives

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

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

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

``Administrative TBOR''.

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

Taxpayer Bill of Rights 2.

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

Taxpayer Bill of Rights 3.

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

                   Policy Criteria for Further Action

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

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

Taxpayer Advocate.

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

Taxpayer privacy.

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

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

Areas of concern.

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

                               Conclusion

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

                                

APPENDIX--RECENT TAXPAYER RIGHTS INITIATIVES

                  ``Administrative TBOR'' initiatives.

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

                           TBOR 2 provisions.

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

                           TBOR 3 provisions.

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

                                


    Chairman Johnson. Mr. Brown.

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

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

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

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

                                


APPENDIX

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

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

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

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

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

Section 303--Civil Damages for Negligence in Collection Actions

    Discussed in text.

Section 304--Disclosure of Criteria For Examination Selection

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

Section 305--Archival of Records of Internal Revenue Service

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

Section 306--Tax Return Information

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

Section 307--Freedom of Information

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

Section 308--Offers-in-compromise

    We support Section 308.

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

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

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

    Discussed in text.

Section 311--Safe Harbor for Qualification for Installment Agreements

    Discussed in text.

Section 312--Payment of Taxes

    We support this proposal.

Section 313--Low Income Taxpayer Clinics

    Discussed in text.

Section 314--Jurisdiction of the Tax Court

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

Section 315--Cataloging Complaints

    We support this proposal.

Section 316--Procedures Involving Taxpayer Interviews

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

Section 317--Explanation of Joint and Several Liability

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

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

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

Section 319--Review of Penalty Administration

    We support this provision.

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

    We support this provision.

Section 321--Study of Burden of Proof

    We support this provision.
      

                                


    Chairman Johnson. Mr. Monks.

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

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

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

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

                                


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



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


      

                                


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

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

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

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

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

                 Overview of IRS Audits of Tax Returns

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

    IRS Data on Audit Burden and Taxpayer Complaints about Treatment

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

            IRS' Indicators To Measure the Impacts of Audits

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

                IRS' Use of Financial Status Techniques

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

   Barriers to Selecting the Most Noncompliant Tax Returns for Audit

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

                                


Appendix I

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

      

                                


Appendix II

               IRS Examination Division Measures for 1997

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

                                


Appendix III

              IRS' Examination Quality Measurement System

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

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



Standard Success Rate

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

[GRAPHIC] [TIFF OMITTED] T3803.004


Key Element Pass Rate

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

[GRAPHIC] [TIFF OMITTED] T3803.006

      

                                


Appendix IV

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


                      Definitions of Audit Sources

Claims for Refund

    Ammended returns audited because of taxpayers' claims for refunds.

Compliance Projects

    Returns identified through IRS' information gathering projects.

DIF/DIF Related

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

Non-DIF Multiyear

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

Nonfilers

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

Other Sources

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

Regular Classification

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

Return Preparers

    Returns identified for audit due to questionable tax preparers.

Self-Employment Tax

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

Service Center Studies and Tests

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

State Information

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

Tax Shelter Related

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

Unallowable Items

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

                                


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

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

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

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

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

            I. Taxpayer Rights Legislation--General Comments

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

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

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

A. Provisions We Generally Support

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

B. Provisions We Generally Oppose

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

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

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

D. Provisions We Do Not Oppose

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

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

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

    IV. Additional Taxpayer Rights Legislative Proposals We Support

1. Withholding When IRS Seizes Funds From Pension Plan

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

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

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

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

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

4. Statutory Notice of Deficiency

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

5. Communication With Taxpayers--Last Known Address

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

6. Disclosure of Service Tax Policies

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

                             V. Conclusion

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

                                


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

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

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

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

                            I. Introduction

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

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

A. Provisions Supported by the AICPA

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

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

Expansion of Authority to Issue Taxpayer Assistance Orders

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

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

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

Offers in Compromise

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

Elimination of Interest Differential on Overpayments and 
Underpayments

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

Low Income Taxpayer Clinic

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

Review of Penalty Administration and Development of 
Recommendations

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

Cataloging Taxpayer Complaints of IRS Misconduct

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

Procedures Involving Taxpayer Contacts and Interviews

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

Studies of Reducing the ``Marriage Penalty''

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

Study of Burden of Proof

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

              III. Additional Recommendations by the AICPA

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

Confidentiality in Tax Matters

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

Consistent Standards for Raising an Issue in an IRS Examination

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

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

Timely Case Resolution

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

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

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

Interest Netting

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

Elimination of Interest Differential on Overpayments and 
Underpayments

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

Detailed Interest Computations

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

Payroll Tax Collection

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

Disclosure Changes (PIN/POA)

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

Consistency When Implementing IRS Policies

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

Notification of Intention to Offset

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

Protection from Retroactivity

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

Rounding

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

Technical Advice in Employee Plans and Exempt Organizations

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

IRS ``Test'' Programs

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

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

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

                            VII. Conclusion

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

                                


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

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

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

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

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

                    H.R. 2292 Title III Provisions 

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

Freedom of Information (Section 307)

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

Offers in Compromise (Section 308)

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

Procedures Involving Taxpayer Interviews (Section 316)

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

Evaluation of Joint and Several Liability (Section 317)

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

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

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

Review of Penalty Administration (Section 319)

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

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

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

                   Additional Taxpayer Rights Issues

Protecting a Taxpayer's Right to Confidentiality

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

Revise the Unreasonable Compensation Statute

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

Register All Commercial Tax Return Preparers

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

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

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

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

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

Tax Penalties Should Not be Used for Revenue Raising

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

The Number of Years to Claim Refunds Should be Lengthened

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

                                Summary

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

                                


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

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

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

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

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

                       Focus On Taxpayer Remedies

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

                TRAUMA Level One: The Taxpayer Advocate

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

               TRAUMA Level Two: Taxpayer Representatives

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

          TRAUMA Level Three: The Legal Profession and Courts

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

               Safeguard the Right to be Self-Supporting

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

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

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

                      Employers Need Remedies Too

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

             Protecting Confidentiality of Taxpayer Advice

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

           Legal Aliens Also Deserve Greater Taxpayer Rights

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

           Taxpayers Need a Remedy for Careless IRS Behavior

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

                     Unlocking the Courthouse Door

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

                      Tax Complexity Invites Abuse

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

                               Conclusion

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

                                


Attachment 1

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

                                


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

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

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

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

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

                  Customer Service and Taxpayer Rights

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

                      Office of Taxpayer Advocate

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

     Expansion of the Authority to Issue Taxpayer Assistance Orders

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

     Removal of Preparer's Social Security Number from Tax Returns

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

                           Performance Awards

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

                          Offers in Compromise

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

                 Safe Harbor for Installment Agreements

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

                           Tax Penalty Reform

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

                  Problems with Interest and Penalties

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

                      Low Income Taxpayer Clinics

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

                     Other Pro-Taxpayer Initiatives

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

                               Conclusion

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

                                


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

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

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

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

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

                               Background

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

                     Taxpayer Representation Issues

    Section 313. LOW INCOME TAXPAYER CLINICS.

The Need for Clinics:

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

The Need for Funding:

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

Outreach and Education:

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

                     Employee Accountability Issues

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

                           Collection Issues

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

                   Taxpayer Information and Education

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

                               Conclusion

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

                                


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

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

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

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

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

                                


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

Statement of Mortimer M. Caplin, Caplin & Drysdale

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

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

                         Private Sector Control

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

                        Reject Risky Experiment 

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

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

                                

Unsworn Statement of George Christian

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

            Signed:
                                           George Christian
                                              U.S. Citizen/Taxpayer
      

                                





      

                                


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

The 1% Freedom Fee for 1998

                      What Should Government Cost?

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

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

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

                            Tax Definitions

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

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

Sales Taxes

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

                          Tax Reform Proposals

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

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

National Sales Tax, Federal (Sen. Lugar proposal)

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

Consumption Taxes

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

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

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

                                


Q&A

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

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

                          Is 1% enough money?

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

                How will the 1% Trade Charge affect you?

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

                   Who will pay the 1% Trade Charge?

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

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

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

                   How is the Trade Charge collected?

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

         Can legislatures take funds from schools, roads, etc?

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

             Will the 1% Trade Charge really save me money?

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

                                


Consequences & Comments

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

                                


Benefits

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

It Will Eliminate All of the Following:

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

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

                                

Statement of the Price Waterhouse LLP, Interest Netting Coalition

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

                              The Problem

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

                       IRS Position, Consequences

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

                Congressional Mandate, Treasury Response

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

                         Action under H.R. 2292

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

                                

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

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

             Role of Securities Firms In Tax Filing Process

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

               Need To Change Information Return Deadline

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

                             Recommendation

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

                                  
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