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




 
          TREASURY DEPARTMENT REPORT ON INNOCENT SPOUSE RELIEF

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 24, 1998

                               __________

                           Serial No. 105-92

                               __________

         Printed for the use of the Committee on Ways and Means



                      U.S. GOVERNMENT PRINTING OFFICE
60-950                        WASHINGTON : 1999




                      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. KENELLY, 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
                                 ------                                

                       Subcommittee on Oversight

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

    Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, 
public hearing records of the Committee on Ways and Means are also 
published in electronic form. The printed hearing record remains the 
official version. Because electronic submissions are used to prepare 
both printed and electronic versions of the hearing record, the process 
of converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.



                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of February 19, 1998, announcing the hearing............     2

                               WITNESSES

U.S. Department of the Treasury, Hon. Donald C. Lubick, Assistant 
  Secretary for Tax Policy.......................................     7
U.S. General Accounting Office, Lynda D. Willis, Director, Tax 
  Policy and Administration Issues, General Government Division; 
  accompanied by Ralph Block, Assistant Director, Tax Policy and 
  Administration Issues, General Government Division, San 
  Francisco, California, and Jonda Van Pelt, Senior Evaluator, 
  Tax Policy and Administration Issues, General Government 
  Division, San Francisco, California............................    33

                       SUBMISSIONS FOR THE RECORD

American Institute of Certified Public Accountants, statement....    67
Koss, Freya B., Wynnewood, PA, letter and attachments............    74
O'Connell, Marjorie A., O'Connell & Associates, statement and 
  attachments....................................................    81




          TREASURY DEPARTMENT REPORT ON INNOCENT SPOUSE RELIEF

                              ----------                              


                       TUESDAY, FEBRUARY 24, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:07 p.m., in 
room B-318, Rayburn House Office Building, Honorable Nancy L. 
Johnson [Chairman of the Subcommittee] presiding.
    [The advisory announcing the hearing follows:]


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    Chairman Johnson of Connecticut. Good morning. The hearing 
will come to order.
    As the Congress develops legislation to restructure and 
reform the Internal Revenue Service, we have learned of a 
number of disturbing cases in which taxpayers have been grossly 
mistreated by the IRS. Out of all the horror stories that have 
surfaced in recent months, none have been more heartbreaking 
than those involving innocent spouses--taxpayers who in many 
cases have been left to rear children as single parents, often 
without child support, only to find that their former spouses 
have saddled them with a crushing debt. Many of these horror 
stories have been going on for years without the IRS helping 
the spouses who are seeking relief from mounting tax 
liabilities, interest, and penalties. I have seen dozens of 
letters from innocent spouses who find themselves in this sort 
of jam--and I really do mean dozens.
    I also want to just stray from my written statement to 
share with you one of those letters. It says, ``I was so 
thrilled to see an article in USA Today regarding your 
organization. I started to feel like the Lone Ranger. It's good 
to know that I'm not alone, and that others are outraged by the 
treatment of innocent spouses, and attempting to effect a 
change in the system.'' This comes from a woman from 
California. ``I'm a single mother with one daughter at NYU on 
scholarship, a daughter who's graduating from high school this 
year, and a 6-year-old son. I get very little child support and 
struggle to make ends meet every month. My ex-husband was self-
employed during several years of our marriage and did not pay 
his taxes because he was a cocaine addict. He accrued a debt of 
$14,000 to the IRS and $8,000 to the Franchise Tax Board during 
the years that we were married.
    ``I, on the other hand, worked diligently, and had the 
usual taxes taken out of my pay. In addition, I put money into 
a 401(k) at work for our children's college education, so that 
he could not touch it and blow it all up his nose.
    ``Since our divorce, he has cleaned up his act. We had a 
meeting with the IRS together, and he told them that he was a 
cocaine addict, and that he was the one that did not pay his 
taxes, and wanted to take full responsibility for the entire 
debt. They agreed and had me fill out some forms.
    ``One of the questions on the form asked if I had a thrift 
savings plan. When the IRS agent saw that I had one, her eyes 
lit up like a Christmas tree. She indicated that they were 
going to levy all of my 401(k) and take the money out. I 
started crying hysterically, and just after destroying my life, 
the agent said, `Sweetheart, Jesus will see you through this.'
    ``She retired and there was a new agent that took her 
place. I was crying on the phone when discussing the case with 
her, and she said, `Miss Smith, it's not that big a deal. I 
refuse to talk to you if you're going to cry.' ''
    She goes on with some other things, and in the end, she was 
forced to file bankruptcy, to stop the levy on her 401(k) and 
the garnishment of the Franchise Tax Board, and so on. I mean, 
this is unconscionable, and I know there is no one in the 
Congress and no one in the IRS that would defend it, but when 
you get as many letters as this committee has gotten on this 
issue, and as many letters, and have seen as many cases as 
individual Members have seen, you know that this is one of 
those horrendous problems that simply must be solved.
    As Elizabeth Cockrell, who started an organization called 
Women for IRS Finance Equity, testified before the Senate 
Finance Committee recently, ``All they''--that is, many of 
these women--``are guilty of is trusting their husbands and 
signing a joint tax return with him.''
    I had hoped we could address this problem when the 
subcommittee began developing recommendations for the Taxpayer 
Bill of Rights 2 nearly three years ago, but I was persuaded 
that the issues associated with joint and several liability 
were so complex that we should not act in haste. We, therefore, 
asked the Treasury Department and the General Accounting Office 
to help us better understand these issues.
    On July 30, 1996, the President signed the Taxpayer Bill of 
Rights Act 2 into law. The law directed both the GAO and 
Treasury to study the innocent spouse issue and report back to 
us within six months; that is, by January 30 of 1997, more than 
a year ago. The GAO's report was issued on March 12 of 1997, 
and Treasury's report was on my desk February 9 of 1998, over a 
year late.
    During that year, the National Commission on Restructuring 
the IRS issued a report; the Subcommittee on Oversight 
developed TBOR 3 recommendations; the Committee on Ways and 
Means has reported the IRS Restructuring and Reform Act, and 
the Clinton administration has supported that reform and 
approved and sent H.R. 2676, the IRS restructuring bill, to the 
Senate--all without the benefit of the Treasury's guidance on 
the innocent spouse issue.
    You'll remember that we have made a little progress on the 
innocent spouse issue in these bills by working together, but 
it has been minimal. I have been very disappointed that the 
Treasury couldn't have come forward with their report on time. 
I truly believe that the kinds of cases, the kinds of families 
that have been affected by the innocent spouse provisions 
represent some of the Americans that are simply most abused by 
the greatest free nation in the world. It is saddening; it is 
embarrassing; it is intolerable, and we have to change it.
    I welcome the Treasury here today to share with us their 
report and their recommendations. Overdue as they may be, they, 
nonetheless, are welcome. We do intend to work with you. We 
hope that we can do this in such a way that it could still be 
part of the IRS reform as it moves through. I know that the 
Senate had earlier hearings, that they could try to get it into 
their form of the IRS restructuring bill. And while you are a 
day late, I hope you're not a dollar short in the quality of 
your recommendations.
    Thank you very much for being here, Mr. Lubick, and before 
you proceed, let me recognize Bill Coyne, my ranking member of 
the Oversight Subcommittee of Ways and Means. Bill?
    Mr. Coyne. Thank you, Madam Chairwoman.
    Today the Ways and Means Subcommittee on Oversight will 
discuss two excellent reports recently issued by the Department 
of Treasury and the U.S. General Accounting Office. I look 
forward to receiving the experts' views on ``joint liability'' 
issues raised by married individuals filing joint returns and 
innocent spouse issues raised under current law and in 
proposals for reform.
    I am particularly pleased to note that the innocent spouse 
legislative recommendations discussed in the reports are 
included in our House-passed ``Taxpayer Bill of Rights 3'' 
legislation pending before the Senate. To summarize, the bill 
expands the availability of innocent spouse relief by, No. 1, 
eliminating the various dollar thresholds; No. 2, broadening 
the definition of eligible tax understatements, and three, 
providing partial innocent spouse relief in certain situations, 
and No. 4, providing tax court jurisdiction over denials of 
innocent spouse relief.
    In addition, I want to mention that the President's Fiscal 
Year 1999 budget contains an additional proposal to expand 
innocent spouse relief, which should be enacted into law. The 
proposal would suspend collection actions, in a joint liability 
case while one spouse is contesting the tax liability in Tax 
Court.
    Finally, IRS Commissioner Rossotti announced last month 
that the IRS is developing a special form and administrative 
process to facilitate claims for innocent spouse relief.
    Our bipartisan efforts to initiate, and follow up on, pro-
taxpayer legislative reforms have been successful, and must 
continue.
    Thank you.
    Chairman Johnson of Connecticut. Ms. Thurman, do you have 
an opening comment?
    Ms. Thurman. No.
    Chairman Johnson of Connecticut. OK. Mr. Lubick.

  STATEMENT OF DONALD C. LUBICK, ASSISTANT SECRETARY FOR TAX 
              POLICY, U.S. DEPARTMENT OF TREASURY

    Mr. Lubick. Thank you, Madam Chairman, Mr. Coyne, Mrs. 
Thurman. I am pleased, finally, to be here to discuss our 
report on innocent spouse issues. As my written statement, 
submitted for the record, indicates in quoting Secretary Rubin, 
it is imperative that we protect taxpayers whose spouses 
violate the tax laws without their knowledge, and we assure you 
that both Treasury and IRS are committed to taking steps to 
achieve this goal and to working with the Congress to find a 
solution.
    I apologize for the lateness of this report. In point of 
fact, the essence of it was in my hands last April, and I think 
I mentioned this to you several times. We continued to search 
and explore every possible way to make the relief as meaningful 
and as broad as possible. And, indeed, the matters that were 
included in your markup of the restructuring bill were matters 
which we, indeed, with you, had recommended. But we promise you 
now that we will work with the greatest speed and diligence to 
complete the job.
    The report I believe you have. In its detail it speaks for 
itself. I do wish to take some time this morning to summarize 
the principal issues raised by the report and its conclusion.
    We start with the basic notion that the general rule under 
present law, and one which we think is appropriate, is that 
married couples ought to be able to file a joint return with 
all of their income and deductions as one, and we recognize 
that to make that effective, the general principle ought to be 
joint and several liability for the taxpayers filing that 
return.
    There are a number of reasons for this. One is that we 
think it's essential to preserve the simplicity of a married 
couple as an economy unit filing one return instead of two 
returns, or perhaps even three. We want to avoid the complexity 
that be required if we had to make specific allocations of 
items of deduction and credit, in particular, and we want to 
encourage the allowance of the offset of items of deduction and 
credits against the income and tax liabilities of the combined 
unit.
    We want also to reduce the administrative demands on the 
Internal Revenue Service. In 1996, there were 49 million joint 
returns filed by married couples. If we were to abandon the 
principle of joint filing, under some circumstances it might 
require the IRS to deal with separate returns, much closer to 
100 million returns, and that, of course, would make obvious 
difficulties for the administration of the tax law.
    The principle of filing a joint return was first enacted in 
1948, and it accomplished its purpose of achieving equality 
between the common-law States, which are most of the States of 
the United States, and those community-property States, where 
married taxpayers, before the 1948 act, had the advantage of 
splitting their income and achieving a much lower rate of 
taxation than those in the common-law States.
    We believe that joint and several liability in the case of 
taxpayers filing a return is necessary to prevent manipulation. 
In the collection area, if we did not have that, it would be 
very possible for interspousal transfers to occur, which can be 
done currently without any gift or estate tax consequences, in 
order to avoid collection. If the tax liability is separated 
from the assets, that would jeopardize the revenue.
    The signers of a tax return should assume the liability on 
the tax return because they receive all of the various benefits 
of filing jointly--the ones I've outlined of common pooling of 
income and deductions, the benefits of split income, which in 
the case of most married couples provides a bonus of tax 
liability.
    Then, too, I think it is important in the administration of 
the tax laws that the return have legal significance and that 
taxpayers attest to its veracity and be encouraged to be aware 
of what is in the return.
    In addition, separating liability could, indeed, as we will 
see as I go through some of the other alternatives, have the 
result of not particularly benefiting one spouse or the other, 
but rather in the collection area of benefiting other creditors 
of the marital community, at the expense of the IRS, and I 
think it's inappropriate, the IRS being an involuntary 
creditor.
    And, finally, we would certainly preserve the option of 
present law to permit married couples to file separately. So if 
there is, indeed, a particular situation, even though it may 
involve the loss of some particular benefits, the privilege of 
filing separately would remain as it has since 1948.
    That brings us to the innocent spouse situation, and that 
rule has developed as an equitable rule. I recall, 
incidentally, when this issue first came before the Treasury 
Department by a lawyer in New York, Lillian Vernon, who came to 
our office in 1963 to press for a change in the code. We didn't 
make it while I was here, but in 1971 the origins of the 
present law did come into the statute.
    We believe that where it is inequitable to hold a 
victimized spouse liable for a tax liability caused by his or 
her--and usually her--spouse who has deluded or defrauded both 
her and the Government, we should afford relief, carefully-
targeted relief, although we would, in general, preserve the 
rule of joint and several liability.
    Now let me review what some of the alternatives are, which 
are discussed in the report, and let me see how they test up 
against this general standard.
    One possibility, of course, is to go back to the situation 
before 1948 by having every taxpayer file as an individual and 
have separate filing. This could be done either through 
individual separate returns or, as some States do, having two 
or three columns on the return in which each of the spouses 
lists his or her separate income, and then there is a column 
for the aggregate.
    The obvious problem with that is that it might require 
close to 49 million persons to prepare a second return. It 
would mean that the IRS would have to process close to 49 
million additional returns. The IRS would have to set up close 
to 49 million separate accounts, and would have to send notices 
out separately, perhaps up to another 49 million taxpayers. 
And, most importantly, it might mean the loss of the benefits 
of the joint return unless the substantive tax law were changed 
accordingly. So we ruled out in the report the notion of going 
back to separate return filing.
    That led us to dealing with the possibility of the filing 
of a joint return, but making the liability proportionate. In 
other words, husband and wife could file a joint return, but 
their liability would be separate, based upon some proportion 
of the income attributable to each one.
    There are two ways in which proportionate liability can be 
determined. One is what we call front-end proportionate 
liability. It is determined at the time of the filing of the 
return. The difficulty with that is that, for the vast majority 
of cases, fortunately, the issue of liability would never 
arise. But, nevertheless, if it's to be determined at the front 
end, that increases the paperwork burden, the complexity of 
double returns, and that seems to us to be extremely 
undesirable, both for the taxpayers and the Internal Revenue 
Service.
    Indeed, a separate liability also would in the run-of-the-
mill case simply result in perhaps a preference to creditors 
other than the IRS, to private creditors, and we think that is 
inappropriate.
    The allocation in preparation of these returns of 
deductions between the husband and the wife is a very 
complicated issue. Unless one of the married couple earned or 
received all of the income, one would have to allocate the 
deductions in order to determine the proportionate income of 
each member of the community.
    The most damning principle, however, that we discovered, 
when we studied front-end, proportionate liability, is that you 
would still need to have the system under the law today of 
equitable relief for an innocent spouse, because suppose we 
have a situation where a return was filed and the return was 
inaccurate because of the concealment of income or the claiming 
of an erroneous deduction by one of the spouses, and then the 
additional liability is discovered. That means that the total 
income of the marital community is increased, and if that's so, 
when you apply the ratio of income of the two spouses, even if 
the additional income is attributable solely to the one spouse 
that was concealing the income, it would result in an increase 
for the innocent spouse because her proportionate percentage, 
applied to a larger amount, would increase her liability.
    So the result would be that you would have gone through all 
of this effort of additional recordkeeping, difficulty of 
allocations, complications in the tax law, and while there may 
be a lesser amount of innocent spouse relief that would be 
necessary, nevertheless, there still would be a need to go into 
all of these questions again of protecting the innocent spouse.
    So then we turn next to the notion of what we call the 
back-end proportionate liability, along the lines of the bill 
which was worked out by a committee of the American Bar 
Association. In that situation, nothing would be done at the 
time of filing a return other than what is done today. A joint 
return would be filed. Both members of the marital community 
would sign it. When the situation arose that there was an audit 
by the Internal Revenue Service, then a determination would be 
made as to what the proportionate liability of the two members 
of the community would be, based upon the relative proportions 
of their income.
    Again, the rules for allocating income and deductions, 
particularly those that are generated by joint assets or 
obligations, would be quite complex and potentially difficult 
to administer. The fact is that most married couples share 
their economic attributes without tracing it, and to have to go 
to tracing means either the maintenance of records and 
paperwork from the beginning--and most couples at the beginning 
probably would assume that they weren't going to get into this 
situation, and so it would be a difficult problem to determine 
the allocation.
    Additional assessments could still be made against the 
innocent spouse, as I described in the case of a front-end 
determination, because, again, if the Internal Revenue Service 
discovered that one spouse had made an omission from gross 
income or taken an erroneous deduction, and there was a 
significant increase in the total tax liability of the 
community, the problem is still there. The proportion of the 
income attributable to the innocent spouse is still going to be 
larger than what it was in the case applied to the original 
return.
    On top of that, in many cases refunds would have been 
issued, and there are tremendous complications if a refund 
check was issued to the couple as to who gets credit for the 
refund and in what proportion. We come to the situation that 
some kind of innocent spouse relief would still be needed. So 
even in the back-end proportionate liability, even though the 
problem isn't quite as serious as the front-end proportionate 
liability, you're still going to need an innocent spouse relief 
provision. Given that, that you would still need to have 
targeted equitable relief, it seems very unwise to introduce 
all the complexity to the system that would be involved in 
calculating the pro rata liability.
    Another type of proportionate liability relief that's been 
proposed was one allowing the taxpayers to allocate the 
liability between themselves, either at the time of the filing 
of the return or at the time a dispute arises. The latter is 
the American Institute of Certified Public Accountants' 
proposal, that you allocate at the time the dispute arises. 
And, indeed, some have proposed that you follow the terms of a 
divorce decree or a divorce settlement in allocating it.
    The problem here, again, is that you're introducing a 
situation that is complex, but more than complex, it's 
manipulable. It would permit in many situations taxpayers to 
divorce their income tax liability from the underlying assets 
that should be used to satisfy them, because, again, assets can 
be transferred between spouses without any economic detriment.
    And, again, we have found that in the situation, once an 
allocation is made, there's still the need for equitable 
relief, if an adjustment is made later on, when the original 
allocation was made at a time that the actual liability was 
unknown to the innocent spouse at least. So, again, you're in a 
situation where we would need the equitable relief, and 
therefore, it's very questionable that we want to upset the 
system, a system that works for almost everyone, simply to 
target those cases that cry for equity, when we can devise some 
relief for those limited number of cases.
    A final one, which I will mention only briefly, and it's 
also referred to in the GAO report on this subject, is to 
permit allocation by the terms of the divorce decree, and 
that--we share the view of the GAO that this should be 
discarded because it means the IRS becoming a party to protect 
its interests in about every divorce proceeding that occurs in 
the country. It seems to us fairly clear that that is not 
appropriate.
    Now that brings us to what can be done to improve the 
situation to avoid cases such as you, Madam Chairman, have 
described to us in the letter, such as the ones that were 
brought to light in a recent hearing of the Finance Committee, 
and probably the situations that are referred to in the sheaf 
of letters which you held up.
    And we think there are two approaches here. One is to take 
steps administratively, and we have undertaken to do much of 
that as far as we can, in cooperation with the Service, and I 
can assure you that the Commissioner is very anxious to move 
this. We are expediting the issuance of a new form to assist 
taxpayers in preparing their claims for relief under the 
innocent spouse provisions. They're going to be processed in 
one central location to ensure we get technical expertise of 
the IRS examiner, and that we get consistent treatment for all 
taxpayers; we don't have some rogue agents or collection 
officers going off on their own with particularly harsh and 
stringent application.
    We are reviewing all of our current training materials to 
ensure that they stress the responsibility of our employees in 
the IRS to identify situations where the innocent spouse 
provisions might apply, even if the taxpayer is not aware of 
the process. So where appropriate, the IRS will provide these 
taxpayers with assistance with a new form and help them prepare 
it.
    Telephone assisters will be trained in the innocent spouse 
provisions, will be available to answer questions through the 
IRS toll-free telephone system. There will be special training 
courses on the innocent spouse provisions to be given to both 
the collection and examination personnel in both their basic 
training as well as annual, continuing professional education 
and training.
    We intend to alert couples who file joint returns of the 
legal consequences of joint filing in the instructions in their 
tax packages, and we're going to revise our publications to 
make innocent spouses aware of the relief provisions available 
to them.
    And, finally, we're going to reach out at both the national 
and local levels to community organizations that serve abused 
or battered spouses to identify those who might qualify for 
relief under the innocent spouse provisions.
    Now, in addition to that, we are recommending to Congress 
certain statutory changes to both the innocent spouse rules 
themselves, and I think most importantly, to the procedures in 
which they may be invoked. We recommend legislation, some of 
which you have already incorporated in the IRS restructuring 
bill. The first one is the elimination of dollar thresholds 
that bar innocent spouse relief in some meritorious cases. 
We're going to give relief to innocent spouses regardless of 
the amount.
    We propose to liberalize the treatment of erroneous items 
of deduction and credit, to treat them the same way as 
omissions from gross income. Heretofore, there's been a more 
stringent test for deductions. It has to be established that 
they were grossly erroneous, and we're now putting that on the 
same basis as omissions from income. If there's simply an 
erroneous deduction and the other tests for equitable relief 
are met, we'd propose, and you have adopted in the IRS 
Restructuring Act, to give relief.
    Some others are not in the legislation. We've developed 
them since, and we would hope to get them added in the Senate 
proceedings, and I do not believe we are too late. We would 
extend the relief provisions applicable to taxpayers in the 
community property States. We want to make them comparable with 
those applicable in the common-law property States. Heretofore, 
because of the peculiar rules of community property, they have 
not been available on the same basis as in the common-law 
States.
    As I indicated, what I think is most important are two 
procedural proposals. We would significantly expand the 
taxpayers' procedural opportunities to claim substantive relief 
by making access to the Tax Court routinely available, and 
that, indeed, would suspend collection activity. I think most 
of the horror cases have come from Internal Revenue Service 
collection officers pressing for collection and hounding 
innocent taxpayers before they ever had a chance to present the 
factual situation. This access to the Tax Court, of course, 
would mean that there would have to be access to the higher 
levels of the Internal Revenue Service, and we will have 
available Internal Revenue Service personnel who are thoroughly 
versed and, indeed, will take an appropriate attitude toward 
providing relief through the application of the statutory 
provisions as they were intended to be applied. And as Mr. 
Coyne mentioned, we would recommend prohibiting collection of 
the joint liability from one spouse while the other spouse is 
contesting that in the Tax Court.
    I think one of the most important things we can do here is 
to make sure that the administration of these provisions by the 
IRS is fair, is appropriate, and doesn't take place in an 
atmosphere of pressure without a fair hearing and fair 
recognition of the situation of the innocent spouse. So we 
believe that this will prevent many, if not most, of the cases 
of abuse by collection officers that have so disturbed you as 
well as us.
    This is the program that we would like to move forward with 
expeditiously, working with you and with the members of the 
other body, and we would hope that we would see rapidly these 
changes enacted. The ones that we have talked about, 
incidentally, are not systemic changes. You all know that the 
Internal Revenue Service is in a very difficult situation today 
in trying to convert its systems to deal with the year 2000 
problem. The proposals which we are making will not affect the 
systems, but will make available this equitable relief, and it 
could be put into effect immediately.
    So I'd be very pleased to deal with any questions that any 
of you may have.
    [The prepared statement follows:]
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    Chairman Johnson of Connecticut. Thank you, Mr. Lubick. I 
appreciate the additional recommendations that you have made to 
the Senate, and I think they are helpful, but I am extremely 
disappointed in your testimony in regard to divorce decrees, 
especially when within the decree there is clearly an equitable 
allocation of responsibility, and the decree addresses 
specifically tax liability and allocates it to one partner, I 
absolutely don't see how the Government has the right to ignore 
that.
    Now I don't think it's too hard to look back at a decree 
and see if it was grossly manipulated. I think you're--what's 
the term I'm looking for?--you're just moving from the 
particular to the absurd to say that the Federal Government 
would have to become a party to every divorce action.
    Mr. Lubick. No, it couldn't.
    Chairman Johnson of Connecticut. It couldn't. Of course it 
couldn't.
    And in many divorce situations there really aren't tax 
liability issues, but where that has been clearly specified in 
divorce decree, it seems to be not a hardship on the IRS at 
this point in terms of the changes that confront it, and I, 
too, don't want to complicate its life until we get through the 
year 2000 changes. But it does not seem to me a hardship, and 
where a decision has been made and a judge has ruled this as 
fair, a fair distribution of responsibility among the partners, 
it positively defies logic that the IRS should then come in and 
say, ``I don't care what the judge says; I don't care what 
responsibilities either partner took on. We're going after both 
of you equally for the tax liability.''
    Where is the IRS's common sense in this opposition?
    Mr. Lubick. It seems to me, Madam Chairman, with all due 
respect, that to allow State courts to allocate tax liability 
which has otherwise arisen, and is not an innocent spouse 
situation--if it's an innocent spouse situation, I don't have 
any problem with that, where the one spouse was not aware of an 
omission that was concealed by the other spouse, but I think 
the present statute would cover that. But to say that liability 
that's already been established, and there are marital assets 
for it, the court could as well say, well, we will take these 
marital assets and have them paid in satisfaction of that 
liability. But if the court--and it seems to me the burden 
ought to be on the court to make sure, if there are assets 
there, that they are satisfied. I don't see how the IRS as a 
creditors--other creditors are protected in that situation. The 
court cannot change the----
    Chairman Johnson of Connecticut. Well, presumably, the IRS 
can go after the spouse who is liable. We're not saying that 
the IRS can't go after a taxpayer to make good on a liability 
to the public----
    Mr. Lubick. But, but----
    Chairman Johnson of Connecticut. All we're saying is that 
if in the allocation of the liabilities and assets, for 
instance, in a marriage situation it is agreed that the tax 
liability must be shouldered by one spouse, why wouldn't the 
public accept that? Why wouldn't it be in our public interest 
to accept that?
    Mr. Lubick. In every other situation, Madam Chairman--the 
Visa card liability, suppose there's a joint liability. The 
court--and usually in a divorce decree you have the parties 
negotiating a settlement, and then it routinely goes before the 
court, and if it's not contested----
    Chairman Johnson of Connecticut. Right, and the goal of the 
settlement--that's a perfectly good example of that, credit 
card liabilities--the goal of the settlement is to allocate in 
some fair manner both the assets and the liabilities. So if I 
am allocated the responsibility to repay $5,000 in credit card 
debt at 18 percent, and my spouse is allocated the 
responsibility to repay $5,000 in taxes, why later on should 
the Government be able to come at me for his $5,000, which he 
didn't repay, when I repaid my $5,000, and that was the deal? I 
paid this debt; he paid that debt. At a certain point people 
need to be able to settle their lives, and if they make that 
decision, and the court affirms that it's equitable, then the 
IRS's responsibility is to make sure that he who is liable for 
the $5,000 pays the $5,000, and you can attach wages; you can 
attach assets; you can do all kinds of things, but why should 
you have the right to come after the other spouse who paid 
their share of the joint liabilities?
    Mr. Lubick. Well, the bank in that situation, if it had the 
joint liability, if the bank were not paid, could go after both 
of them, too.
    Chairman Johnson of Connecticut. Okay, take another 
example. You split the liabilities down the middle. I have to 
pay half the credit card debt and half the taxpayer debt; I pay 
my halves, and my former spouse doesn't pay his half of the 
credit card, but I take my name off it, so I can control that. 
The legal document says he has to pay you the other half. At a 
certain point we have to provide closure to people going 
through divorce, and if their responsibilities are allocated, 
you can't always leave them exposed then to another set of laws 
that comes back and says, ``We don't care what the allocation 
was or how fair it was or who paid what. You're going to pay 
for this.''
    Now, for instance, according to what you're saying, these 
women--there's no way she could get out from under her 
savings--when, clearly, she paid the taxes on her salary; she 
saved from that salary. Her husband acknowledges he didn't pay 
his taxes, that he used it for cocaine instead, wants to assume 
the debt. And under all the changes that you have made, there 
is no way an IRS person, no matter how much sensitivity 
training they have received, could allocate that burden 
entirely to the husband, with savings sitting there that was 
set aside specifically so kids could go to college.
    We have to be able under the law to look at responsible 
behavior and irresponsible behavior, and one of the things I 
liked about that letter was that it was so clear, and there was 
acknowledgement.
    Now is there anything you have told me that would allow the 
IRS in that situation to say, fine, you've acknowledged it; now 
you're liable, and we're going to let your wife alone, and 
we're going to let her 401(k) alone?
    Mr. Lubick. Well, obviously, if the IRS came into it right 
then----
    Chairman Johnson of Connecticut. I'm talking about right 
then. They came into the taxpayer advocate; he acknowledged--
everybody said this is fine; he's going to take the debt, and 
then they saw her 401(k) savings.
    Mr. Lubick. If the IRS is a party to it, I would see no 
problem whatsoever, and I think there are procedures before the 
Internal Revenue Service that would permit agreements like 
this. Collection officers make agreements all the time, and if 
you involve the IRS, and the IRS is willing to----
    Chairman Johnson of Connecticut. So could the collection 
officer at that point have made the decision, I mean legally--
--
    Mr. Lubick. Yes, yes.
    Chairman Johnson of Connecticut [continuing]. That the IRS 
funds were off-limits----
    Mr. Lubick. Sure.
    Chairman Johnson of Connecticut [continuing]. And that the 
husband had the liability.
    Mr. Lubick. The IRS can do that.
    Chairman Johnson of Connecticut. How do we give better 
guidance to the IRS officer that that's what they are to do?
    Mr. Lubick. Well, I'm sure we could find a way because I 
have had these situations----
    Chairman Johnson of Connecticut. Because really this person 
was forced into bankruptcy because of the right of the IRS 
officer, and nothing you're doing would change that IRS 
officer's, in a sense, burden of responsibility to act in a way 
that was fair and equitable.
    Mr. Lubick. But if at the point that you're arriving at the 
agreement, and both parties recognize we have a liability to 
the IRS and we have a certain amount of assets, you can work 
that out with the Internal Revenue Service, and----
    Chairman Johnson of Connecticut. I don't see any way, 
though, that anything that you're recommending that would 
change the IRS's view that two divorced people, one of whom was 
a cocaine addict, have this liability, and so I'm going to 
allocate it all to you because you, lady, the good guy who 
worked hard and paid your taxes and saved for your kids' 
education, clearly were doing the right thing. I don't think 
under the current law the IRS officer could in good faith make 
such a one-sided decision, and you think they could?
    Mr. Lubick. I think, if I understand you correctly, what 
you're talking about is the situation where you have a----
    Chairman Johnson of Connecticut. You have a clear excuse--
--
    Mr. Lubick. You have a letter.
    Chairman Johnson of Connecticut [continuing]. Clear 
recognition on the other side.
    Mr. Lubick. You have a creditor who has a liability that's 
recognized, and it's a liability of both parties. The parties 
are going to divorce. They're going to----
    Chairman Johnson of Connecticut. But this letter was served 
after the fact, as I gathered.
    Mr. Lubick. Well, that's the problem. It doesn't seem to 
me, under the law in the United States, with respect to any 
creditor, whether it's the IRS or a bank or any other creditor, 
as to whom there is liability of both parties, that a court, in 
the absence of that party, can change that liability.
    Chairman Johnson of Connecticut. Switching from the court 
for a minute, because I think that is a different issue, and I 
think we have a right to give guidance to the IRS on that 
issue. But severing that for a moment, my question to you was: 
Can you foresee under any circumstances--first of all, there is 
no change that you're recommending that would free the IRS 
agent, in light of those 401(k) savings, to completely, in a 
sense, free the woman from this case, and have the settlement 
entirely with the husband at maybe $100 a month for 10 years?
    Mr. Lubick. Well, if the IRS participates in a settlement 
arrangement like that, the IRS can do that; the collection 
officers have that authority. They can----
    Chairman Johnson of Connecticut. So the collection officers 
could agree to such a settlement?
    Mr. Lubick. Yes.
    Chairman Johnson of Connecticut. Okay. One last question, 
and then let me go on, because I know other people have 
questions. The taxpayer advocates, when they were testifying 
before us and talking with us, they recommended that taxpayers 
who filed a joint return be allowed to subsequently change 
their filing status to married, filing separately, in cases 
where one spouse would be unfairly saddled with a joint tax 
liability. Now if you--this seems to me very logical, because 
while I understand what you're saying about paperwork and 
allocation and all that stuff, there are other situations in 
which you can go back and view your tax obligations 
retroactively differently. And if you allowed a certain period 
of time when married, filing jointly, could be changed to 
married, filing separately, it's a relatively narrow window, 
and the allocation issues, while serious, are not impossible 
and they're not a lot different than goes on in the settlement 
process anyway. Why couldn't we use that mechanism suggested by 
the taxpayer advocate of allowing retroactive married, filing 
separately, as a way of resolving this between the two people 
and the IRS?
    Mr. Lubick. I think the problem is that allowing the 
parties subsequently to change their returns would allow them--
would open the door to very collusive transactions. As I said, 
assets could be transferred freely between spouses, and----
    Chairman Johnson of Connecticut. I understand that.
    Mr. Lubick. If in the interim the assets get separated from 
the tax liability, you have a situation where the only party 
losing is the Government. It's a way of avoiding taxes. The 
parties simply shift the tax liability through the separate 
returns non compos tunc ex post facto.
    Chairman Johnson of Connecticut. I'll leave it to other 
people now, but, you know, I hear what you're saying about 
that, about manipulation. On the other hand, there are cases--
and that letter kind of gave one, I mean, assuming it's as 
simple as that letter, and I understand that behind it could be 
very complicated. But where one person acted responsibly and 
actually paid taxes on all her wages, and if they have the 
right to file jointly, she would go back, record her income, 
record her taxes paid, and so on. And he would have to do the 
same. Now, presumably, there is some recollection and some 
record of his income, and, clearly, a record of no taxes 
withheld.
    So it just seems to me that there are ways to simplify 
this, and we've got to do better than the recommendations that 
you've proposed. That's where my thinking is now.
    Mr. Lubick. Well, we would provide that innocent spouse 
relief extends not only to understatement on the return, but 
also to underpayments. I don't know whether in the case you're 
talking about it would be--that she wouldn't know that he 
hadn't paid the taxes that----
    Chairman Johnson of Connecticut. Well, that was the 
implication; we don't know that, right?
    Mr. Lubick. Yes. Yes, I think so. So, therefore, I think 
what we had proposed for the innocent spouse relief would 
include understatements. I don't know exactly on all of the 
facts, but I think there's a possibility that our proposal 
might cover that situation.
    Chairman Johnson of Connecticut. Thank you. Sometimes it's 
a blessing not to be a tax lawyer. [Laughter.]
    Although, on the other hand, you can make some mistakes, 
and I appreciate that.
    Mr. Lubick. It's quite normally a blessing not to be one, I 
can assure you.
    Chairman Johnson of Connecticut. Mr. Coyne?
    Mr. Coyne. I have no questions.
    Chairman Johnson of Connecticut. Mr. Portman?
    Mr. Portman. Thank you, Madam Chair, and for bringing this 
issue to the attention of the Congress a couple of years ago, 
I'm glad we finally got the report from Treasury, a little late 
in terms of the train leaving the station here in the House, 
but we are lucky that it takes 30 days to make instant coffee 
in the Senate. [Laughter.]
    Because it's still hanging out over there, and hopefully, 
we can make some of these changes. I think Chairman Johnson has 
made a couple of good points that we ought to look at again.
    I just want to review the bidding a little bit. Bill Coyne 
and I look at this in terms of the Commission, and this 
subcommittee added some things to it. We actually ended up with 
five or six pretty good provisions, I think, and I want to just 
go over those quickly to make sure you support them all.
    As a starting point, eliminating the understatement 
thresholds, I think you just said that's fine.
    Mr. Lubick. Yes, sir.
    Mr. Portman. And GAO has told us that's going to add about 
40,000 additional spouses a year, roughly. Do you agree with 
that, more or less? So it will more than double the number of 
innocent spouse cases probably?
    Mr. Lubick. Eliminating the threshold--I'm not sure. Do you 
have the numbers [speaking with staff]?
    Mr. Portman. GAO has that in its report. I saw it. I would 
guess you agree with that number?
    Mr. Lubick. These are potentials, not necessarily actual 
cases, I believe.
    Mr. Portman. Okay. That's your projection, though; is that 
correct? We'll talk to GAO later.
    The grossly erroneous standard, that was something that we 
took out and made that merely ``erroneous,'' and it sounds like 
you agree with that.
    Mr. Lubick. Yes. We do. We do. We agree with you.
    Mr. Portman. Okay.
    The Tax Court jurisdiction, it sounds like you agree with 
that.
    Mr. Lubick. We do.
    Mr. Portman. Right now you have to pay the deficiency, and 
you have to go file a case in the district court, I guess, and 
get back your money you've already paid. And we're saying the 
Tax Court has jurisdiction. That's in the legislation. You 
agree with that?
    Mr. Lubick. Right.
    Mr. Portman. Could you expand on that a little bit?
    Mr. Lubick. It's not a deficiency, Mr. Portman; it's the 
liability, and then you sue for a refund of it----
    Mr. Portman. A refund of what----
    Mr. Lubick. We would stay the collection action and allow 
you to----
    Mr. Portman. Okay. So you're saying you agree we should 
have accessibility to the Tax Court.
    Mr. Lubick. Full accessibility----
    Mr. Portman. And during that time period there should be a 
suspension?
    Mr. Lubick. A suspension, yes, sir, unless there's some 
jeopardy or somebody's about to run off to South America with 
large assets.
    Mr. Portman. Canada would be okay, but----
    Mr. Lubick. Pardon me?
    Mr. Portman. No, no. I could see us legislating on this.
    Suspending collection actions can mean a lot of different 
things. Are you suggesting that we authorize the Advocate, as 
we do with some of the other cases to be able to make that 
decision or how would you do the suspensions? With injured 
spouse or other hardship cases, we authorize the Advocate to 
suspend collection actions. Is that how you would contemplate 
doing it?
    Mr. Lubick. I understand it's automatic upon the 
application.
    Mr. Portman. So long as the innocent spouse criteria are 
met, it's automatic?
    Mr. Lubick. No. That would defeat the whole situation. The 
purpose is to determine----
    Mr. Portman. So as long as someone has applied----
    Mr. Lubick. As long as the innocent----
    Mr. Portman [continuing]. For the relief, that person would 
be----
    Mr. Lubick. As long as the claimed innocent spouse applied 
for the relief----
    Mr. Portman. Okay.
    Mr. Lubick [continuing]. Then that triggers it until it can 
be determined.
    Mr. Portman. Okay, it can be determined by the Tax Court?
    Mr. Lubick. Correct.
    Mr. Portman. Okay. So that's a little different, I think, 
than our legislation, and we would need to, as I understand it, 
change the legislation slightly in that regard, but it's the 
same idea.
    The things the IRS is already doing I think are very 
helpful--the separate form; that's in our legislation. I think 
the IRS has the authority to do that, and they're moving ahead 
with it, as I understand it.
    Mr. Lubick. Yes, we are.
    Mr. Portman. Additional information is being provided. I 
understand instructions are being provided.
    Mr. Lubick. Yes, sir.
    Mr. Portman. That's in the legislation. That's being done. 
It sounds like that's already not only agreed to by Treasury, 
but you're moving ahead with that at the IRS.
    There are two final ones. One would be the community-
property States issue, and I don't know if we looked at that 
before, but that seems to me something that makes a lot of 
sense that we would want to add.
    The final one gets into something where I think you have 
expressed different views on it in the past. I want to make 
sure that we're on the same page, and that's this notion of 
relief being provided an apportioned or pro rata basis. Right 
now, if you are an innocent spouse and you're responsible for 
some of--let's say 5 percent--of the so-called omission, under 
the current standard you can't get relief, or at least it's not 
clear that you can get relief. We need to clarify that 
standard. So we've codified that in our legislation.
    That codification would say that, indeed, you can get pro 
rata relief. If you're responsible for 5 percent of it, then 
you, would be on the hook for that 5 percent, but not for the 
additional 95 percent. Do you agree with that?
    Mr. Lubick. We think that's a proper interpretation of 
present law actually because the statute now gives you relief 
with respect to omissions from gross income as to which you 
didn't have knowledge, and it would be inequitable to hold the 
innocent spouse liable, and the same as to deductions. It seems 
to me the relief is given on an item-by-item basis, if the 
criteria are met. So we don't have any problem with that. We 
think there was a court decision to that effect which was 
correctly decided, and we think----
    Mr. Portman. Okay, that's not in your Treasury report? 
That's not in the President's budget? It's not there because 
you think it's unnecessary to codify it?
    Mr. Lubick. I think that's correct.
    Mr. Portman. Okay.
    Mr. Lubick. But we have no objection to it.
    Mr. Portman. Okay. I wondered if there was some 
disagreement there. The Chair has raised a couple of other 
issues. Let me raise just one other, and that's this notion of 
not eliminating the current knowledge standard, but doing 
something to clarify the standard. It sounds like, from what 
you've said today, you're not in favor of eliminating the 
standard, but I think it was AICPA in a hearing recently came 
up with some suggestions, where there might be some factors 
that either could be codified or IRS could lay out through 
administrative action and regulations, to determine what 
knowledge means. Do you have a view on that?
    Mr. Lubick. I haven't thought much about it, but to 
whatever extent we can make clear what the criteria are, we 
certainly are in favor of doing that. There certainly can't be 
any objection to----
    Mr. Portman. To trying to codify something?
    Mr. Lubick [continuing]. Indicating situations that would 
be illustrative of justifying relief.
    Mr. Portman. Okay. I think that's about it in terms of 
additions. I see my time is up. I have some other questions. 
Maybe we'll get back to them later. Thank you, Madam Chair.
    Chairman Johnson of Connecticut. Mrs. Thurman?
    Mrs. Thurman. Mr. Lubick, I want to go back to some of the 
questions that the chairman was talking about. I really can 
appreciate this marriage issue or at least the divorce decree. 
In listening to the responses, I can see where the liability--
thank God I'm not going through a divorce; I think I've learned 
a few things here today. But I guess the issue here is, for 
some of these folks--because when they do go through a divorce, 
they break up their assets or their liabilities, and they try 
to--some will come to agreement, and then, all of a sudden, the 
woman or the man, depending on who gets this liability, ends up 
in the situation of saying, whoa, wait a minute. And I can 
appreciate what you're saying, though. I have to tell you that 
there is a liability, and reading through the report, both the 
GAO and yourselves have mentioned how difficult this could be, 
and the 1.2 million divorces, and being involved in all of 
that.
    But I guess it's the same issue that we go back to over and 
over again, and that's kind of the friendliness of this. I 
certainly think that if I had to go talk to the ABA or to my 
Florida lawyers, I would suggest to them, or to the accountants 
or whoever, you guys need to make this very clear that this 
liability is not washed just because of this decree. I think 
that is a part of their education responsibility to their 
profession.
    But on the other side, if you do have a situation--and I'll 
use this because it most of the time goes this way: The wife 
gets the house, and this might be where she goes then, because 
interest rates are low, and things are wonderful; goes in, 
refinances it, gets the money, puts it in the bank to get a 
college education because she can't count on the husband or the 
father to take care of those situations, and then, all of a 
sudden, she gets hit with this.
    What can we do--maybe it doesn't have to be done 
legislatively as much as it has to be just within our system. 
How do we make sure that we have gone to the fullest extent of 
making the other person who in this decree is liable for these 
liabilities? Is there something we can do?
    Mr. Lubick. I would suggest that, if I were a judge or if I 
were a party who knew I had a secondary liability on this 
obligation, I would try to set up some third-party arrangement, 
a trust arrangement, or an agency arrangement, or an escrow 
arrangement. If we're talking about the assets that the parties 
have and they're carving them up, and the assets have to meet 
the obligations, it seems to me a procedure can easily be set 
up to make sure that those liabilities are discharged. There 
are all kinds of security arrangements that the spouse who 
assumes the obligation can give in the remaining properties, 
particularly if it's real property, to secure the performance 
of those obligations. There are legal techniques that can be 
done.
    Now, obviously, every person going to divorce court doesn't 
have a lawyer necessarily who's aware of all this, but the 
judges ought to know it, for crying outloud----
    Mrs. Thurman. Okay, well, then maybe there's a question for 
you. Are we doing something from the IRS? We've talked an awful 
lot about giving information out to the taxpayers and to 
businesses and to different organizations and groups, so that 
they feel friendlier toward the IRS. Are we doing an 
educational system with those that would be in this situation 
or potentially are making these decisions?
    Mr. Lubick. I think the problem here, at least in the case 
that engendered this discussion, was that the divorce occurred 
prior to the IRS coming into the picture, which makes it a 
little difficult for the----
    Mrs. Thurman. However, though, if--not really, because----
    Mr. Lubick. But you're right.
    Mrs. Thurman. Personally, you're not involved with it, but 
if the judge is making a determination on liabilities in that 
divorce, then they are; the judge is involved. What I'm 
wondering is--is this a situation that we should go to our 
State courts or divorce attorneys, or is it continuing 
education? There has got to be a way for them to get into this.
    Mr. Lubick. I think there's some good points there. First 
of all, we indicated that we are going to expand the materials, 
the educational materials, that are furnished to taxpayers, so 
that at the time of making out the returns--I don't know if the 
innocent spouse is going to read the instructions----
    Mrs. Thurman. Right.
    Mr. Lubick [continuing]. To the form. That may not be 
realistic.
    Mrs. Thurman. Sure.
    Mr. Lubick. But we are certainly focusing--as we indicated, 
one of our proposals administratively is to focus outreach on 
both the national and local levels to community organizations 
that served abused or battered spouses, and we----
    Mrs. Thurman. Don't agree to it. I mean, it would be real 
easy; just don't agree to it.
    Mr. Lubick. Well, I think that's right. You are in a 
consensual situation between two parties, and you're trying to 
modify the rights of a third party who wasn't a party to the 
proceeding. That's where I got stuck with Ms. Johnson----
    Mrs. Thurman. Before my time runs out, though, let me ask 
you this: Knowing that this decree is in effect, and when you 
have a situation like this come up, what can the IRS do, or 
what are they doing, or do you think they're doing, to try to 
fulfill that decree? I mean, to make sure that the liability is 
placed on the person that it's supposed to be.
    Mr. Lubick. I think you've put your finger on what I think 
is the most disturbing part of this whole problem, which is 
that--and I think it's produced the most dramatic of the 
examples; that there have been some particular agents who are 
hard-nosed and unsympathetic and----
    Mrs. Thurman. And done nothing to go after the other 
person?
    Mr. Lubick. Right, and there are illustrations of that. I 
think that is precisely the situation that the Commissioner has 
undertaken to turn around, because his theme, as you have 
heard, is customer service and training the IRS agents to be 
sensitive to people and to provide taxpayer advocate assistance 
in all of these cases. A lot of it is personal relations, 
interpersonal relations, and how you handle it. There is no 
question but what, if we didn't have a lot of these examples 
where you have insensitive officers pursuing collection, the 
situation would not have been so exacerbated. And I think while 
revenue agents aren't normally repositories of the milk of 
human kindness in superabundance--[Laughter]--I think there has 
to be--there are ways of doing things and other ways of doing 
things, and the training of the tax administrators to respect 
taxpayer rights, which has been emphasized so much from this 
committee and others in the Congress. And the appointment of 
Commissioner Rossotti I think is going to lead to a kinder, 
gentler Internal Revenue Service, if you will.
    Mrs. Thurman. Well, I know I can only speak for myself, 
but, hopefully, that we think there is a way to do this right.
    Chairman Johnson of Connecticut. Mr. Weller.
    Mr. Weller. Thank you, Madam Chairman. And Mr. Secretary, 
good to see you today.
    Mr. Lubick. Good to see you, sir.
    Mr. Weller. I want to again thank the Chair for her 
leadership on this issue and for continuing to focus attention 
on an issue which is pretty meaningful back home with the folks 
that I represent. I often think, in terms of innocent spouses, 
of victims who have contacted my congressional office seeking 
help; usually about half a dozen a year have contacted our 
office. In talking with colleagues, maybe multiply that, it 
starts adding up of those who have been victims. The 
unfortunate thing is they've gone through the tragedy of 
breakup of a marriage and a divorce, and in many cases the 
innocent spouse is not only the victim, or haven't experienced 
that tragedy, but their former husband may be--usually is a 
deadbeat dad, if he's a deadbeat taxpayer, and the IRS, the tax 
collector, shows up at her door because they can find her, but 
they can't find him.
    One of the most obvious problems I find in just looking at 
the issue in general is that the IRS looks for the most 
available spouse. I'm just trying to get a better understanding 
of what the IRS--what Treasury is proposing to do to address 
that particular problem of just going after the first available 
spouse that they can find and sticking her with the bill.
    Mr. Lubick. Well, that's a question of tax administration, 
and I think you're right; generally, the tendency of a 
collector, a bill collector, is to find some assets that he can 
seize. It seems to me, again, through our instructions to 
agents and our basic training of agents, which we have 
indicated we are sensitizing them to the problems of innocent 
spouses, and I'm hopeful that this training will take and that 
they will have regard for the image of the organization they 
represent, the Internal Revenue Service. They should be proud 
to be officers of the Internal Revenue Service, and it should 
conduct itself in a very honorable fashion.
    If we have eliminated, as the Commissioner has promised, 
the notion of just quotas, getting in as many dollars as you 
can, without regard to the sensitivities of the human beings 
you're dealing with, if that has gone by the boards, as I 
believe it has, then I think you're going to see a change in 
attitude and a change in culture that, while it's something 
intangible, I think it will result in better treatment. There 
are always going to be cases where people will differ as to 
what should be done, but I think in the cases where the 
chairman has indicated, the liability is essentially that of 
one of the contracting parties, every effort should clearly be 
made to follow that----
    Mr. Weller. But, Secretary Lubick, I think what I'm--one of 
the points or, actually, issues I'd like to see is, in the 
case, before you go out and find the first person you can find 
in the couple, usually the unlucky mom who has the kids and is 
struggling to make ends meet, and her husband is not paying 
child support, and now the tax collector's at the door--what 
efforts are you taking to review the case before you put this 
poor, innocent spouse through the mental anguish of an 
additional--you know, the tax collector being at the door? 
She's already gone through the case. Usually, in many cases, at 
least those I've experienced, where child support's not being 
collected, and she's already gone through the tragedy of a 
divorce, and then the tax collector shows up at the door and 
puts her through the mental anguish of saying he also wants a 
lot of money in back taxes. What precautions is the agency 
making to ensure that this particular innocent spouse is 
actually liable----
    Mr. Lubick. That's something----
    Mr. Weller [continuing]. For the tax burden?
    Mr. Lubick. I don't have personal knowledge of what the 
Commissioner has attempted to do in that area, but I will 
assure you of this: I will suggest to the Commissioner--I will 
take back the statement that you've made and the question that 
you've made and say that they ought to, if they're going after 
one member of a marital community, understand what the 
situation is between the two of them, and clearly suggest that 
their primary effort ought to be directed to the appropriate 
party, determined after a review of the entire matrimonial 
situation.
    Mr. Weller. Because my experience is this is very--I mean, 
the tax collector at the door is a pretty traumatic experience 
for anyone, let alone someone who's struggling with other 
issues. I was just wondering--some have suggested proportional 
liability as one of the solutions. I was wondering, can you 
make some sort of preliminary determination, which you're 
referring to, but also in the notification of this particular 
outstanding--or person, this innocent spouse, who's being 
contacted by the IRS; can you somehow outline what the 
liability is in the case of her former husband owing taxes?
    Mr. Lubick. Well, we have already introduced a number of 
educational and administrative remedies to make sure that, if 
you're really dealing with the innocent spouse, using the 
technical term that we've been referring to in these hearings, 
one that's entitled to relief, to make sure that that person 
knows what her or his results are, to make sure that that 
potential innocent spouse is advised of her or his rights, and 
to make sure that action is not taken. We are trying to review 
the training materials to ensure that the agents have 
responsibility to identify situations where the innocent spouse 
provisions might apply, even where the taxpayer doesn't know 
about the process. So in those situations, we are taking as 
strong measures as we possibly can to get our officers in the 
field alerting the taxpayers and making sure that we try to 
uncover these cases before the axe falls on their neck.
    Mr. Weller. Well, I look forward to hearing the 
Commissioner's response to that request. Because, like I say, 
in the cases I've experienced with contacts with my office, the 
emotional trauma that this innocent spouse is going through is 
pretty demanding on her situation, and I think it's very 
important that the IRS, before they contact her, second-guess 
themselves, and also ensure that she actually is liable before 
they put her through the emotional trauma of trying to defend 
herself for someone else's tax liability.
    So thank you, Madam Chair. I see my time has expired.
    Chairman Johnson of Connecticut. Thank you, Mr. Weller.
    Mr. Lubick, in answer to my earlier question, you said that 
the IRS could let the woman who had worked hard and saved off 
the hook; the IRS had the power to do that. Would that decision 
be contingent on the other party paying off the tax liability?
    Mr. Lubick. It's a bargaining situation. It's a contractual 
situation. I've been in those situations myself, representing 
people, involving several parties, and where agreements were--
--
    Chairman Johnson of Connecticut. But, practically, is it 
ever so that an IRS agent will let one party with assets 
completely off the hook and hold the other party liable, and 
would free that person from any obligation before the other 
party had actually paid their liability?
    Mr. Lubick. I think when the officers consider these 
agreements, they get financial statements of both parties. If 
the primary party, primarily responsible party, has the assets, 
then that, I think, could very well be part of the settlement. 
Now if you're talking about the situation where----
    Chairman Johnson of Connecticut. But if the primarily 
responsible party doesn't have the assets----
    Mr. Lubick. You're talking about where the primarily 
responsible----
    Chairman Johnson of Connecticut [continuing]. And has to 
pay over a long period of time, it's very unlikely the IRS is 
going to free the not responsible party who has assets?
    Mr. Lubick. I think it depends on the comparative financial 
situation, but, again, as I indicate, there are also security 
arrangements that can be made----
    Chairman Johnson of Connecticut. I very much appreciate not 
only Mr. Rossotti's attitude, but the IRS's effort over the 
last two years, which has been substantial, to change its 
attitude, to think more straight, to be more direct with the 
Congress and the American taxpayer, to recognize problems that 
have happened in the past. But I don't think we make any 
progress when we don't provide a structure of law that is 
concerned with justice as well as collection, and the problem 
has been that the IRS's primary concern is collection. There's 
a point at which justice matters. That is throughout our law.
    I have to tell you that I am very concerned with the fact 
that we have no protection, in a sense, for a just settlement 
with the responsible spouse. I don't see any problem with the 
ABA's proposal that the allocation of tax items and the 
separation of a tax liability or assessment would occur only in 
two instances: upon an election by one spouse following an 
assessment of unpaid tax or upon the assertion of deficiency of 
tax. You could even narrow this more to focus only on 
situations of divorce.
    But, you know, you look at how they're going to deal with 
allocations, and the spouse seeking to separate the liability 
would have to provide the information needed; the other party 
could challenge it. In most of these cases, these people are 
not at a point in life where they have a very complex tax 
return, and the kinds of recommendations the ABA is making is 
that failure to report earned income, deficiencies would be 
based upon failure to report income. That income would be 
assessed solely against the party that earned the income. That 
doesn't take a rocket scientist to see that that's fair.
    Now maybe the other party, in this case, this woman who 
clearly paid taxes on her wages, had the withholding and the 
medicare and the social security, and then her husband, who 
wasn't reporting his income, why is it so hard for the 
Government to say, ``You're right; that's his income. He has 
now reported it. He is liable for the taxes, and you, Lady, are 
legally free to go, and we will deal with him.''?
    It just seems to me that the IRS's obsession with 
collection, which I respect--after all, we all depend on the 
taxes getting collected to pay for the roads and bridges and 
the children in their schools, but at a certain point justice 
matters, and that's what we're talking about here. None of the 
procedural recommendations that you've made, as important as 
they are--and they're nice--none of them go to the heart of 
this matter that says, where one spouse has fulfilled their 
full obligations as a wage-earning, tax-paying American, they 
can get complete relief, and we, the rest of the public, will 
struggle with their nonperforming spouse, and if the 
nonperforming spouse in the end doesn't pay all their taxes, we 
will attach him; we'll keep that 10-year liability in case he 
wins the lottery, but we're not going to penalize the person 
who did right, worked hard, and paid their taxes. You're not 
reaching that bottom line, I have to tell you.
    When the taxpayer advocates make this recommendation, it's 
because they're negotiating these kinds of agreements. They're 
the guys out in the front line in your kinder and gentler IRS, 
and I'm convinced we're going to have a kinder and gentler IRS, 
but the kinder and gentler tax advocates have to have some 
structure of law that allows them to accept what they perceived 
as a just settlement, not only the maximum collectible 
settlement. And now they only have maximum collectibles.
    I really think you've got to work with us in the next few 
weeks over a far more aggressive approach as to how we deal 
with the legally-divided liabilities in divorce decrees, and 
under what circumstances do we allow a retroactive separation 
of tax liability? How do we allow ourselves the right of a 
certain time, when we can see things have gone afoul, to go 
back and file separately? And give the taxpayers the primary 
responsibility to justify all that and to allocate all that. As 
I say, I can't believe in many of these cases these are 
terribly complicated tax returns. I mean, they're not usually 
that really big money, but, anyway, there certainly would be 
some that were very good money.
    Mr. Lubick. Well, you know, we're going to work with you as 
much as we can. I----
    Chairman Johnson of Connecticut. I hope you'll go home and 
think about----
    Mr. Lubick. I will.
    Chairwoman Johnson of Connecticut [continuing]. Justice, 
not just collections.
    Mr. Lubick. We will not only think about justice, Madam 
Chairman, but also some mercy.
    Chairman Johnson of Connecticut. Thank you. Mandated mercy. 
Thank you. [Laughter.]
    We'll move on to the GAO. It's a pleasure to welcome back 
Lynda Willis, the Director of Tax Policy and Administration 
Issues; accompanied by Ralph Block, the Assistant Director of 
Tax Policy and Administrative Issues, and Jonda Van Pelt, 
Senior Evaluator of Tax Policy and Administrative Issues.
    Welcome. It's always a pleasure to have you before our 
committee.

    STATEMENT OF LYNDA D. WILLIS, DIRECTOR, TAX POLICY AND 
 ADMINISTRATION ISSUES; ACCOMPANIED BY RALPH BLOCK, ASSISTANT 
 DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, AND JONDA VAN 
  PELT, SENIOR EVALUATOR, TAX POLICY AND ADMINISTRATION ISSUES

    Ms. Willis. Good afternoon. Madam Chairman, with your 
permission, I'll submit my entire written statement for the 
record, and I will give you a brief summary of my statement 
that touches on points that weren't covered at length in Mr. 
Lubick's statement. As you're aware, our reports have a lot in 
common.
    We're pleased to be here today to discuss the innocent 
spouse provisions of the Internal Revenue Code. Like the 
Department of Treasury, we were mandated to report to the 
Congress on issues related to joint and several liability, as 
well as the application of the innocent spouse provisions. My 
comments today are based on our report. Our report has 
findings, and in several cases recommendations, similar to 
those in the Treasury report. My testimony today makes the 
following points:
    First, under current law, only about 1 percent of the 
couples who filed joint returns in 1992 had additional tax 
assessments that potentially met the dollar threshold for 
innocent spouse relief.
    Second, the limited information available indicated that 
IRS received few requests for innocent spouse relief and denied 
most of these.
    Third, the current provisions in the law may not ensure 
that all deserving taxpayers receive equivalent treatment.
    And, fourth, several options exist for administering 
proportionate liability.
    I'd like to discuss each of these points in a little more 
detail, but, first, I'd like to give you two examples 
illustrating the types of cases that we found when we examined 
the application of the innocent spouse provisions.
    In the first case, a taxpayer learned of an assessment of 
over $3,000 against a 1985 joint return when IRS levied her 
wages in 1992. The assessment was generated primarily by her 
ex-husband's disallowed moving and business expenses, although 
he also had some unreported income. The taxpayer submitted 
documentation demonstrating that the unreported income was 
generated by her husband and received relief for about $200. 
According to an IRS official, she could not substantiate her 
husband's disallowed expenses and was held liable for the 
remainder of the tax.
    In the second case, a taxpayer's ex-husband, a wanted 
fugitive, had not paid the tax reported for two tax years. The 
taxpayer remarried, and IRS placed liens against her new 
husband's property. IRS denied innocent spouse relief, in part, 
because the liability was for taxes reported on the joint 
return, rather than taxes assessed after the return was filed; 
that is, there was an underpayment of tax rather than an 
understatement of tax. IRS did accept an offer in compromise 
for both years, and for a third year, where the ex-husband had 
failed to report income.
    Madam Chairman, we do not know how typical these cases are 
or even how many requests for innocent spouse requests are 
made. Because IRS did not have data on the number of innocent 
spouse requests filed, we developed an estimate of the 
potential universe by analyzing data related to the 1.2 million 
joint returns which were assessed additional taxes under IRS's 
1992 audit and under-reporter programs. That was the latest 
data that was available to us at the time that we did the 
report.
    Of these 1.2 million returns, about 587,000 had additional 
tax assessments exceeding $500, which is the minimum dollar 
threshold required for innocent spouse relief. I'd like to 
point out that our estimate of 587,000 represents the maximum 
number of couples potentially eligible for innocent spouse 
relief. Fewer would actually qualify.
    For instance, some couples were probably assessed 
additional taxes as a result of overstated deductions, credits, 
or bases which have higher dollar thresholds. Further, some of 
the couples may not have qualified for innocent spouse 
protection because they both knew there was a substantial tax 
understatement.
    Since divorced taxpayers seek innocent spouse relief most 
frequently, we also estimated the number of taxpayers who could 
potentially be eligible for relief and may have divorced during 
the three years since the 1992 joint returns were filed. Using 
a 2 percent per year divorce rate from the Department of 
Census, we estimated that 35,000 divorced couples had 
additional tax assessments of over $500.
    Madam Chairman, although innocent spouse relief is clearly 
established in law and regulation, we observed that little 
information about the criteria for granting it or how to apply 
for it was available from IRS. The innocent spouse relief 
provisions are described in several IRS publications, but these 
publications do not provide any guidance on how to request 
relief. Furthermore, these publications are developed to help 
taxpayers prepare their returns, which is far in advance of the 
time that taxpayers might need information on innocent spouse 
relief. The publications most directly related to the 
enforcement and collection procedures are totally silent about 
innocent spouse relief.
    Some IRS staff are as confused as taxpayers about how to 
request relief. The various IRS units we contacted took 
different approaches to providing relief. For example, two 
district offices granted relief using offers in compromise 
based on doubt as to liability, while staff at one service 
center routinely denied such requests as inappropriate.
    In addition, the current provisions may not ensure the 
taxpayers receive equitable relief. For example, the dollar 
thresholds represent an eligibility criteria for relief based 
on income or the size of the liability. These criteria appear 
to be more related to an ability to pay or degree of hardship 
than to the innocence of the taxpayer. The logic behind the 
income thresholds for deductions, credits, and bases is 
particularly cloudy because the potential innocent spouse's 
income is based on the tax year ending before the notice of 
deficiency, which may be several years after the tax year of 
the joint return, and must include the income of any new 
spouse.
    Finally, the dollar thresholds prevent taxpayers with 
smaller liabilities from obtaining relief since the minimum 
understatement in all cases must be more than $500. We 
estimated that if the dollar thresholds were eliminated, the 
maximum number of couples filing tax year 1992 returns 
potentially eligible for relief would have been about 1.2 
million.
    Treasury's February report indicates that IRS is currently 
undertaking a number of actions to improve the administration 
of the current innocent spouse provisions. Several of these 
actions were recommended in our report, including a new form 
which will be processed in a central location to assist 
taxpayers in preparing claims for innocent spouse relief, 
changes to IRS forms and publications, and efforts to ensure 
that employees are properly trained to assist taxpayers. We 
believe these and other proposed administrative actions, if 
implemented effectively, should make more taxpayers aware of 
their rights under the innocent spouse provisions and provide 
for more consistent application of the provisions by IRS 
employees.
    Treasury's report also made three statutory recommendations 
related to problems discussed in our report. One dealt with 
making it easier to qualify for innocent spouse relief by 
changing statutory standards to help additional taxpayers, 
including those with smaller liabilities. These changes would 
include lowering or eliminating the income thresholds, allowing 
relief to cover underpayment as well as understatement of tax 
and eliminating the no basis in fact or law requirement for 
erroneously-claimed deduction credit or bases. While we did not 
recommend any of these changes, our report did point out 
similar problems with these provisions.
    In summary, Madam Chairman, we found that the existing 
innocent spouse provisions are complex, difficult to 
understand, and pose a serious challenge for IRS and taxpayers. 
In addition, they result in the inequitable treatment of 
taxpayers. There are both administrative and statutory options 
for improving the innocent spouse provisions. On the 
administrative level, we have made recommendations for 
improvements that we believe should be undertaken regardless of 
whether there are changes made to the statute. On the statutory 
level, repeal of the qualifying thresholds and the inclusion of 
erroneous deductions and underpayment as well as understatement 
of tax could make the provisions less complex and more 
equitable.
    Finally, there is the issue of replacing the joint and 
several liability standard with a proportionate liability 
standard. There are several alternatives for doing this which 
are discussed in our report. Each of these represents tradeoffs 
between establishing individual taxpayer liability and the 
amount of paperwork and administrative burden created for 
taxpayers and IRS.
    Madam Chairman, that concludes my statement. I'd be happy 
to answer any questions you may have.
    [The prepared statement follows:]


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    Chairman Johnson of Connecticut. Thank you.
    I notice in your testimony you do not support recognition 
of divorce decrees. Why do you think this would be so difficult 
or inappropriate?
    Ms. Willis. Well, Madam Chairman, I think some of the 
reasons that Mr. Lubick pointed out are very real concerns to 
us: the fact that taxpayers could manipulate the division of 
assets versus liabilities to the disadvantage of the 
Government; the fact that it does place the Government in a 
different position than other creditors around the issue of the 
economic debts of that----
    Chairman Johnson of Connecticut. May I just interrupt 
there? Do you think that doesn't go on now?
    Ms. Willis. Oh, I'm sure to some extent----
    Chairman Johnson of Connecticut. In divorce decrees, tax 
consequences aren't considered?
    Ms. Willis. Oh, absolutely. I'm just suggesting that 
binding IRS to divorce decrees would offer additional 
opportunities to manipulate tax liabilities, and I think there 
are two things that weren't discussed from an administrative 
perspective that might limit the effectiveness of divorce 
decrees in protecting innocent spouses. One is, if you notice 
in the first example that I gave you, that this was a 1985 tax 
return and that the person did not find out about the 
additional liability until 1992. So at the time the divorce 
decree was finalized, this was not a known liability. So it 
would not have been something that potentially would have even 
been contemplated----
    Chairman Johnson of Connecticut. Right, I understand that, 
and many divorce decrees would be silent on this issue.
    Ms. Willis. Yes.
    Chairman Johnson of Connecticut. But where the divorce 
decree is not silent and specifically allocates, why--
especially when it was discovered later on, so clearly it 
probably wasn't part of the divorce decree decisionmaking 
process any more than tax consequences are always taken into 
account when any distribution of property is taking place or 
any change in investments and ownership issues. So why wouldn't 
we give a divorce decree that has a specific decision in it in 
regard to taxes standing? Why wouldn't we protect that taxpayer 
against now having to pay a liability that was offset by other 
liabilities assumed at the time? I don't see that that provides 
a big incentive to get involved in taxes and divorce decrees--
when there's already incentive for tax considerations to be 
considered in divorce decrees.
    Ms. Willis. When the joint return is filed, that couple is 
viewed as a single economic unit that incurs not only the tax 
liabilities of that return but of future returns, in addition 
to any other debt, liabilities, et cetera, as a unit, and the 
divorce decrees right now do not have the ability to separate 
for creditors the liability for individual components of the 
debt. Could you do that? You could, but in doing that, the 
Congress would be taking the tax debt and allowing it to be 
allocated to individual parties in a way that is not done for 
other types of debt within the decree.
    I think you would also have to wonder whether you still 
wouldn't need innocent spouse relief in cases where potentially 
one spouse or the other was taken advantage of in the divorce 
decree. So I think that, rather than having the divorce decrees 
come into account, we need better provisions for dealing with 
situations like the one that you laid out, where there is an 
innocent spouse involved.
    Chairman Johnson of Connecticut. Would it be a problem to 
give the divorce decree some weight? Not 100 percent weight, 
but that it would be one of the things that the IRS would have 
to take into consideration?
    Ms. Willis. The divorce decree could be considered. Right 
now when IRS looks at collecting the debt, they look at the 
economic situation of the individual parties. They can offer 
hardship.
    Chairman Johnson of Connecticut. Well, see, they do look at 
the individual economic situations of the two parties. If they 
can't find one party, they look at the economic situation of 
the one party. That's unfair. If they look at both parties and 
one's got a lower income but could pay over a longer period of 
time, and was specifically allocated this responsibility, that 
should carry some weight. I can see that maybe you wouldn't 
want it to be absolute because you might want to be able to 
look back and say, no, clearly, they had this in mind and this 
was a--I mean, we can't accept that. But it does seem to me 
that it ought to carry some significant weight.
    Ms. Willis. And in the case of the letter that you read 
from the woman from California, I'm a little puzzled as to why 
IRS didn't offer an installment agreement to the party who was 
willing to assume responsibility for the debt.
    Chairman Johnson of Connecticut. Right. I think what I see 
in that is this person just saw that money there; they wanted 
to get it settled, and the installment situation should be 
worked out between her and--I mean, I don't know why, but the 
fact is that we will never be able to protect people against 
other people who aren't doing their jobs with sensitivity and 
fairness. That's why the law has to do a little more than we're 
proposing at this time to put in a sense of fairness.
    You read through some of these other letters, too. I mean, 
they're appalling. It's simply appalling. So to say that we 
have a new head of the IRS and we're going to be good guys now, 
and to say that the kind of changes that we've made, all of 
which are useful--and I agree, you can't do one thing; you have 
to do a number of things, but why can't--why shouldn't standing 
for a divorce decree be one of the things we do? Maybe not 100 
percent standing, but maybe it would have standing unless there 
is written explanation from the IRS as to why this is clearly 
not appropriate, or it would have standing unless challenged by 
the spouse who had to pay it as to why it was clearly not 
appropriate. I'm not using the right language, but somebody 
knows what it is. Why is it that we can't--and I was very 
interested in your presentation and found it very helpful about 
the proportional liability standard issue. Why can't we combine 
some of that with the ABA's approach, that under certain 
circumstances that one could trigger this separation, this 
review, of your tax returns and try to get a more honest 
evaluation of where the tax liability lay? That doesn't seem to 
me all that hard.
    Ms. Willis. There is no reason why you couldn't give the 
Secretary of the Treasury the ability to adopt regulations that 
would allow for the enforcement of these types of criteria and 
considerations. I think one of the things that we'd be most 
concerned about is that they be developed in a way that is 
truly effective.
    I mean, for example, in a divorce decree, if a woman wishes 
to get out and simply agrees to whatever half the taxes are, 
based on what she knows today, and it turns out down the road 
that she owes $300,000 extra because of an unknown tax 
liability that just came out of an audit process, that divorce 
decree is not going to protect that party. So I think we have 
to make sure that we have the ability to protect parties in 
that case as well. But certainly there could be more put into 
the regulations in terms of what could be considered, how 
liability could be proportioned, things that could be taken 
into account.
    I think there's also things that need to be done in terms 
of IRS trying to find both spouses. Picking the low-hanging 
fruit by going after the spouse most easily found is definitely 
an issue. It's an issue with most collection agencies, not just 
IRS. So making sure that there are steps taken, that IRS makes 
a good-faith effort to bind both spouses and pursues the assets 
of both spouses is something that probably needs to be 
emphasized.
    One of the troubling things is the amount of time it takes 
before many of these people find out they have a tax liability, 
expecially when only one spouse received the notices--and IRS 
is taking some steps in that regard by sending notices out to 
both parties. But I think that's another area where IRS needs 
to make sure earlier in the process that both parties to the 
joint return are aware of what's happening in terms of changes 
to the tax assessment.
    But I also think that to statutorily address many of the 
cases that came up before Senate Finance--and I'm sure cases 
you've seen--you have to deal with the issue of underpayment 
versus understatement, because that appears to be causing a 
great deal of anguish and misunderstanding, and IRS can do 
nothing about underpayment. Underpayment is not covered by the 
innocent spouse provisions in the code. The provisions only 
cover understatement of tax. So that would be another way where 
you could get into more of these hardship cases.
    Chairman Johnson of Connecticut. Thank you very much.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman.
    Your report indicates that the IRS does not now track how 
often the innocent spouse relief is requested, granted, or 
denied, but it appears that relief is usually denied. Should 
the IRS track claims for innocent spouse relief, and if you 
think they should, why?
    Ms. Willis. Mr. Coyne, we think IRS should track claims for 
innocent spouse relief for a number of reasons. First is to 
have a sense of how big the problem is, how many requests they 
have for innocent spouse relief, but also in terms of 
understanding what is driving the request for relief and 
whether there is more that IRS could do from an outreach or a 
taxpayer education perspective to prevent these situations from 
happening and identify for themselves and for the Congress 
systemic issues that need to be resolved to prevent these types 
of circumstances in the first place.
    Many of the things that we're talking about are of just 
basic administrative kinds of things. Because the program 
applies to few taxpayers, it's an exception-based program; it 
hasn't gotten much attention.
    Mr. Coyne. How does the IRS's Taxpayer Advocate Office 
handle innocent spouse situations? Were you able to find that 
out?
    Ms. Willis. Well, we looked at cases that came into the 
Problem Resolution Office, which is this part of the Taxpayer 
Advocate's Office, and they basically process them through like 
they do other problem cases in terms of working with the line 
staff to determine whether innocent spouse relief is actually 
warranted, et cetera. In fact, the Problem Resolution Office 
and the Offers in Compromise Program were the two places we 
found most of the requests that we found.
    Mr. Coyne. Does the Advocate's Office ever grant relief on 
equitable grounds, as was spoken about earlier, or do they ever 
reverse a denial of relief by the Collection Division?
    Ms. Willis. I am not aware of any circumstance or any cases 
where that has taken place.
    Mr. Coyne. You didn't run across that at all?
    Ms. Willis. No.
    Mr. Coyne. All right, thank you.
    Chairman Johnson of Connecticut. Mr. Portman?
    Mr. Portman. We're going to have all those new TAO's coming 
out now, legislation. So maybe they can be used in that regard.
    Quickly, just following up on Mr. Coyne's questions, the 
work that you did I think was very helpful, and you know 
probably more about how the IRS actually handles this, and 
could handle it, than any organization. So maybe you can help 
us a little in terms of what's practical.
    With regard to the form itself, how are they going to 
centrally process and administer it, so that it's getting out 
to everybody and so that there's equitable treatment of 
taxpayers? You mentioned that some of these end up--in response 
to Mr. Coyne's question--with the taxpayer advocate; others end 
up in other offices like offers in compromise or other areas. 
Are you confident that they are going to be able to do what 
they are indicating they'd like to do, which is to have a form 
that is provided to people in an equitable manner?
    Ms. Willis. I think it's doable. I think what they are 
proposing is doable. Most of the recommendations that were in 
the Treasury report and the things that came up in Treasury's 
testimony are fairly recent actions that are being undertaken, 
and we don't have a lot of detail about exactly how they're 
going to do this yet. I think one of the questions about 
central processing gets back to the question of how many 
requests for relief they have and where they're going to be 
processed, by whom, et cetera. I understand that IRS is working 
on that, but certainly processing claims in a central location 
would allow IRS to bring together an aggregate level of 
expertise to be able to review these requests and also to 
identify some systemic problems, that could be hopefully 
resolved once and for all.
    Mr. Portman. It would be helpful if you could give us some 
specific advice, not necessarily today, but maybe in writing, 
on how to centralize that. The concern that we would have I 
think would be that there would be one entity within the IRS, 
along the lines of the Commissioner's new notions of 
reorganization, that would actually be able to fairly and 
equitably resolve these matters as quickly as possible, give 
taxpayers a response, and do so in a way that applies the same 
criteria by the same people, or at least people with the same 
background and training and sensitivity. So that you wouldn't 
have disparate treatment, which we see in so many areas. From 
what your report tells me, right now it's spread out among 
various areas; there's a danger of that happening.
    Ms. Willis. Yes.
    Mr. Portman. The other thing I think that is important is 
the extent to which you think Treasury's regulations need to be 
enforced by us in some way, report language or otherwise, so 
that the IRS actually follows through on them. Do you see a 
disconnect there? Are you comfortable that the Treasury ideas 
that are expressed in the budget, and so on, are going to be 
mandated in such a way that they actually happen at the level 
of the IRS?
    Ms. Willis. I think the current----
    Mr. Portman. Is that the current view?
    Ms. Willis. I think the current commitment is there.
    Mr. Portman. Okay.
    Ms. Willis. But I think, obviously, as with any program 
that's put in place by individual Commissioners, it can also be 
changed at any time. As far as the regulations go, what we 
found when we did our work is that the IRS regulations haven't 
been changed since the 1984 provisions were changed. So the 
regulations right now are quite a bit out of date.
    Mr. Portman. And those regulations are regulations some of 
which we codify in the legislation; is that correct? And so 
your suggestion, it sounds to me--what I'm inferring from what 
you're saying is we ought to consider codifying some of those, 
including the requirement for a form, so that that's something 
that the IRS not only does in a way that's consistent with what 
we all think should be done, but is followed through on.
    Ms. Willis. Codifying would better assure that.
    Mr. Portman. Okay. I think you can help us a lot in terms 
of these issues: centralization, fairness, equity in terms of 
how stuff is processed and dealt with, but also in terms of 
this notion that the Chair has on divorce decrees. I'm not at 
all expert on this, and I don't understand the issue well 
enough. I'm going to try to figure out more about it, but there 
may be a way, from what the Chair has been saying, that the IRS 
could be encouraged to respect those decrees, unless there is 
some unreasonableness or some other reason. In other words, 
have almost a presumption of correctness. That would be helpful 
to me, to hear your views on that, again, today, if you have 
them, or in writing.
    That's all I have, Madam Chair.
    I don't know if you want to respond to that now.
    Ms. Willis. Not right now. Thank you.
    Chairman Johnson of Connecticut. Let me just ask you a 
couple of things. I would assume from your comments on 
proportionality, proportional liability, that you would agree 
that front-end proportionate liability would be a big problem, 
whereas back-end, arising out of a claim for innocent spouse 
relief would not be such a problem?
    Ms. Willis. It would certainly reduce the amount of 
paperwork both for IRS and taxpayers, and the cost involved. We 
looked at what it would cost to process the additional tax 
returns, if you had people file separately, and you're looking 
at close to $200 million. Even if you're just looking at having 
them put separate items on the line, you're still looking at 
close to $20 million. So if you do it only when you have a 
claim for relief, you reduce the number of taxpayers and the 
amount of cases that IRS has to work with.
    Chairman Johnson of Connecticut. Can you make any 
generalization about the size and the complexity of the returns 
in which there's an innocent spouse claim? Am I right in kind 
of thinking, when you look at the average age of divorce, and 
for the most part it's not at the time of life where you have 
saved a lot of assets--there's the home; there's the car; 
there's debts----
    Ms. Willis. You're going to have a lot of those returns 
that are fairly simple, straightforward kinds of returns. We 
looked at being able to trace the income that's on a return, 
and found that for 77 percent of the income on joint returns 
you could identify which spouse the income should be assigned 
to. It is more difficult with deductions, credits, et cetera, 
but a lot of people have very straightforward, basic returns, 
so it would not be as difficult to make these decisions.
    Chairman Johnson of Connecticut. Was that taken into 
account with your estimate of $20 million, the minimum that it 
costs at the IRS?
    Ms. Willis. That was basically just the returns processing 
cost, right.
    Chairman Johnson of Connecticut. And do you have any 
specific comment on the ABA's proposal?
    Ms. Willis. No, it's basically back-end.
    Chairman Johnson of Connecticut. Yes, it is.
    And then, lastly, income understatement versus deduction 
understatement, how different are the dilemmas they pose for 
the IRS? And should we be looking at some things in one area 
that we may not be capable of providing in the other area?
    Ms. Willis. Well, income understatement tends to be easier 
to allot to a particular taxpayer. As I said, you can generally 
trace it. Whereas, the deductions may not be. Plus, the 
standard right now for deductions is that there may be no basis 
in fact around them, which is a difficult standard for people 
to meet, as opposed to just plain erroneous. So, I mean, I 
think basically the Department's recommendation that you treat 
all of those the same with no differing thresholds would 
certainly make relief available to more taxpayers and be more 
easily administered.
    Chairman Johnson of Connecticut. Thank you very much.
    Ms. Willis. Thank you.
    Chairman Johnson of Connecticut. We appreciate your 
testifying and we look forward to working with you on this. 
Thank you.
    [Whereupon, at 3:41 p.m., the hearing adjourned subject to 
the call of the Chair.]
    [Submissions for the record follow:]



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