[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
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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
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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.]
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