[Senate Hearing 105-190]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 105-190


 
                    PRACTICES AND PROCEDURES OF THE
                        INTERNAL REVENUE SERVICE

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

                                HEARINGS

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                     SEPTEMBER 23, 24, AND 25, 1997

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance

                               _________

                      U.S. GOVERNMENT PRINTING OFFICE

 43-781--CC                 WASHINGTON : 1997


                          COMMITTEE ON FINANCE

                WILLIAM V. ROTH, JR., Delaware, Chairman

JOHN H. CHAFEE, Rhode Island         DANIEL PATRICK MOYNIHAN, New York
CHARLES E. GRASSLEY, Iowa            MAX BAUCUS, Montana
ORRIN G. HATCH, Utah                 JOHN D. ROCKEFELLER IV, West 
ALFONSE M. D'AMATO, New York         Virginia
FRANK H. MURKOWSKI, Alaska           JOHN BREAUX, Louisiana
DON NICKLES, Oklahoma                KENT CONRAD, North Dakota
PHIL GRAMM, Texas                    BOB GRAHAM, Florida
TRENT LOTT, Mississippi              CAROL MOSELEY-BRAUN, Illinois
JAMES M. JEFFORDS, Vermont           RICHARD H. BRYAN, Nevada
CONNIE MACK, Florida                 J. ROBERT KERREY, Nebraska

            Lindy L. Paull, Staff Director and Chief Counsel

      Mark A. Patterson, Minority Staff Director and Chief Counsel

                                  (ii)



                            C O N T E N T S

                              ----------                              

                           SEPTEMBER 23, 1997

                           Opening Statements

                                                                   Page
Roth, Hon. William V., Jr., a U.S. Senator from Delaware, 
  chairman, Committee on Finance.................................     1
Moynihan, Hon. Daniel Patrick, a U.S. Senator from New York......     4
Grassley, Hon. Charles E., a U.S. Senator from Iowa; member, The 
  National Commission on Restructuring the IRS...................     6
Kerrey, Hon. J. Robert, a U.S. Senator from Nebraska; co-
  chairman, The National Commission on Restructuring the IRS.....     8
Graham, Hon. Bob, a U.S. Senator from Florida....................    12
Conrad, Hon. Kent, a U.S. Senator from North Dakota..............    14
Gramm, Hon. Phil, a U.S. Senator from Texas......................    16
Bryan, Hon. Richard H., a U.S. Senator from Nevada...............    17
Nickles, Hon. Don, a U.S. Senator from Oklahoma..................    19
Lott, Hon. Trent, a U.S. Senator from Mississippi................    21
Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia.    22

                        Congressional Witnesses

Hoyer, Hon. Steny, a U.S. Representative from Maryland...........    10

                            Public Witnesses

Lane, Joseph F., enrolled agent, chairman, National Government 
  Relations Committee, the National Association of Enrolled 
  Agents, Gaithersburg, MD.......................................    23
Woehlke, James A., Director, tax policy, New York Society of 
  Certified Public Accountants, New York, NY.....................    29
Goldstein, Robert L., chairman, Relations with IRS Committee, New 
  York Society of Certified Public Accountants, New York, NY.....    29

                           SEPTEMBER 24, 1997

                           Opening Statements

Roth, Hon. William V., Jr., a U.S. Senator from Delaware, 
  chairman, Committee on Finance.................................    33
Murkowski, Hon. Frank H., a U.S. Senator from Alaska.............    34

                            Public Witnesses

Davis, Shelley, author of ``Unbridled Power'' and former 
  historian for the IRS, Manassas, VA............................    35
Schriebman, Robert, author of eight books on IRS practices and 
  procedures, adjunct professor of tax practice and procedure, 
  University of Southern California Graduate School of 
  Accounting, Rolling Hills Estates, CA..........................    38
Burnham, David, author of ``A Law Unto Itself: Power, Politics 
  and the IRS''; co-director, Transactional Records Access 
  Clearinghouse; associate research professor, Syracuse 
  University's Newhouse School of Public Communication, 
  Washington, DC.................................................    42
Hicks, Katherine Lund, Apple Valley, CA, accompanied by James 
  Hicks..........................................................    75
Savage, Thomas, Lewes, DE........................................    82
Ballweg, Monsignor Lawrence, New York, NY........................    85
Jacobs, Nancy, Bakersfield, CA...................................    87
Strauss, Bruce A., Florida.......................................   105
Larsen, Darren, California.......................................   108
Patnoe, David, Camario, CA.......................................   112
Lilly, Lawrence, G., St. Augustine, FL...........................   116
Long, Jennifer, current employee of the Internal Revenue Service.   120

                           SEPTEMBER 25, 1997

                           Opening Statements

Roth, Hon. William V., Jr., a U.S. Senator from Delaware, 
  chairman, Committee on Finance.................................   141

                        Administration Witnesses

Dolan, Hon. Michael P., Acting Commissioner of the Internal 
  Revenue Service, Washington, DC................................   198

                        Congressional Witnesses

Willis, Lynda D., Director of Tax Policy and Administration 
  Issues, U.S. General Accounting Office, Washington, DC.........   245

                            Public Witnesses

Witness No. 1....................................................   142
Witness No. 2....................................................   146
Witness No. 3....................................................   150
Witness No. 4....................................................   152
Witness No. 5....................................................   155
Witness No. 6....................................................   156

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Ballweg, Monsignor Lawrence:
    Testimony....................................................    85
    Prepared statement...........................................   255
Bryan, Hon. Richard H.:
    Opening statement............................................    17
Burnham, David:
    Testimony....................................................    42
    Prepared statement...........................................   256
Conrad, Hon. Kent:
    Opening statement............................................    14
Davis, Shelley:
    Testimony....................................................    35
    Prepared statement...........................................   259
Dolan, Hon. Michael P.:
    Testimony....................................................   198
    Prepared statement...........................................   261
    Letter to Senator Moynihan, dated September 30, 1997.........   280
    Responses to questions from Senator Nickles..................   282
Goldstein, Robert L.:
    Testimony....................................................    29
    Prepared statement...........................................   283
Graham, Hon. Bob:
    Opening statement............................................    12
Gramm, Hon. Phil:
    Opening statement............................................    16
Grassley, Hon. Charles E.:
    Opening statement............................................     6
    Prepared statements..........................................
      286, 288...................................................
Hatch, Hon. Orrin G.:
    Prepared statement...........................................   288
Hicks, Katherine Lund:
    Testimony....................................................    75
    Prepared statement...........................................   289
Hoyer, Hon. Steny:
    Testimony....................................................    10
    Prepared statement...........................................   294
Jacobs, Nancy:
    Testimony....................................................    87
    Prepared statement...........................................   296
Kerrey, Hon. J. Robert:
    Opening statement............................................     8
    Prepared statement...........................................   298
Lane, Joseph F.:
    Testimony....................................................    23
    Prepared statement...........................................   299
Larsen, Darren:
    Testimony....................................................   108
    Prepared statement...........................................   307
Lilly, Lawrence, G.:
    Testimony....................................................   116
    Prepared statement...........................................   309
Long, Jennifer:
    Testimony....................................................   120
    Prepared statement...........................................   311
Lott, Hon. Trent:
    Opening statement............................................    21
Mack, Hon. Connie:
    Prepared statement...........................................   312
Moynihan, Hon. Daniel Patrick
    Opening statement............................................     4
Murkowski, Hon. Frank H.:
    Opening statement............................................    34
Nickles, Hon. Don:
    Opening statement............................................    19
Patnoe, David:
    Testimony....................................................   112
    Prepared statement...........................................   313
Reid, Hon. Harry:
    Prepared statement...........................................   316
Rockefeller, Hon. John D., IV:
    Opening statement............................................    22
    Letters from Lawrence Summers................................   317
Roth, Hon. William V., Jr.:
    Opening statements...........................................
      1, 33, 141.................................................
    Prepared statement...........................................   323
    San Francisco IRS District, chart relating to................   325
Savage, Thomas:
    Testimony....................................................    82
    Prepared statement with attachments..........................   326
Schriebman, Robert:
    Testimony....................................................    38
    Prepared statement...........................................   330
Strauss, Bruce A.:
    Testimony....................................................   105
    Prepared statement...........................................   332
Willis, Lynda D.:
    Testimony....................................................   245
    Prepared statement with attachments..........................   334
Witness No. 1:
    Testimony....................................................   142
    Prepared statement...........................................   348
Witness No. 2:
    Testimony....................................................   146
    Prepared statement...........................................   350
Witness No. 3:
    Testimony....................................................   150
    Prepared statement...........................................   352
Witness No. 4:
    Testimony....................................................   152
    Prepared statement...........................................   353
Witness No. 5:
    Testimony....................................................   155
    Prepared statement...........................................   355
Witness No. 6:
    Testimony....................................................   156
    Prepared statement...........................................   355
Woehlke, James A.:
    Testimony....................................................    29
    Prepared statement...........................................   283


        PRACTICES AND PROCEDURES OF THE INTERNAL REVENUE SERVICE

                              ----------                              


                      TUESDAY, SEPTEMBER 23, 1997

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:00 a.m., 
in room SD-215, Dirksen Senate Office Building, Hon. William V. 
Roth, Jr. (chairman of the committee) presiding.
    Also present: Senators Grassley, Murkowski, Nickles, Gramm, 
Lott, Mack, Moynihan, Rockefeller, Breaux, Conrad, Graham, 
Moseley-Braun, Bryan, and Kerrey.

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order.
    This morning we begin the first of 3 days of oversight 
hearings into the tactics, management, and inner workings of 
the Internal Revenue Service.
    There is no other agency in this country that directly 
touches the lives of more Americans, nor is there any agency 
which strikes more fear into their hearts.
    The threat of an audit, the awesome power of the IRS looms 
like the Sword of Damocles over the heads of taxpayers. As 
Chairman of the Senate Finance Committee, I want to know why. I 
wanted to understand where this fear came from. I wanted to 
know if it was justified.
    Our committee's responsibility is to provide the oversight 
of this agency. This is a responsibility I take seriously. So 
in January of this year, with the support of my friend and 
colleague Senator Moynihan, I began an investigation into how 
this agency conducts business with the American people.
    Let me assure you, there is no political bias, no partisan 
motive behind our investigation and these hearings. As I said, 
they were initiated some eight months ago. What we have 
discovered indicates that problems within the IRS are not 
recent, they cover several administrations.
    Let me also say that the IRS is made up of many fine men 
and women, men and women of great character and integrity who 
perform a vital and difficult job for this country.
    In reflecting upon our investigation, I found this to be 
especially true. I note that without the help of many such IRS 
employees, our investigation would have been incomplete.
    There is no doubt that the powers of the Internal Revenue 
Service are extraordinary. The IRS can seize property, 
paychecks, and even the residences of the people it serves. 
Businesses can be padlocked, sometimes causing hundreds of 
employees who are also taxpayers to be put out of work.
    In some instances, the first time a taxpayer is aware of 
any enforcement action by the IRS is when his or her bank calls 
to notify that funds have been frozen. The IRS can take these 
actions in many cases without giving the taxpayer notice or 
opportunity to be heard.
    This is an awesome amount of power to place in the hands of 
any government agency. Is it appropriate? Perhaps. But with 
such power there must be an effective counterbalance of 
responsibility. Why? Because the greater the power, the more 
extensive the damage that can be done if that power is abused.
    Any agency with such power must be above reproach, 
especially as that enormous power allows it to pervade the most 
sensitive aspects of our citizens' private lives. Congress has 
granted such power to the IRS. As a consequence, Congress has a 
fundamental responsibility to see that the IRS operates with 
the highest degree of integrity, honor, and ethics. As the Good 
Book says, where much is given, much is required.
    Unfortunately, our investigation today has found that in 
many cases such high standards are not being upheld. Over the 
course of the next 3 days we are going to see a picture of a 
troubled agency, one that is losing the confidence of the 
American people, and one that all too frequently acts as if it 
were above the law. This is unacceptable.
    Even high-ranking employees of the agency have come 
forward, at some risk to themselves and their careers, to speak 
with us. As a consequence of such risk, some employees who will 
testify have requested confidentiality, and we have honored 
that request.
    We have also talked with many private citizens whose lives 
have been altered by IRS actions. These men and women have 
related their sometimes tragic experiences, not out of 
vindictiveness or mean-spiritedness, but out of deep concern 
and a fundamental belief that such a violation of their civil 
rights should not have taken place, not in America.
    We have listened to these men and women and we are holding 
these hearings because one thing is certain: we cannot fix the 
IRS without knowing what ails the IRS.
    What we seek is constructive criticism, criticism with the 
intent to improve, not destroy, to protect, not denigrate. This 
is not IRS-bashing, it is oversight. There will be no condoning 
of tax protestors or any others who would misinterpret our 
objective to legitimatize anti-government attitudes or 
behavior.
    These hearings are about good government, about correcting 
problems within government, problems that are acknowledged by 
those whose lives are dedicated to public service.
    Responsible oversight is the best way to ensure that not 
only is the government meeting the needs of the people, but is 
the surest way of letting the people know that they have 
influence over, and a strong voice in, their government. That 
is what these hearings are all about.
    Just as the IRS is quick to say that no honest taxpayer 
should fear an audit, no government agency should ever fear a 
Congressional investigation into its activities.
    While it is imperative that Americans pay their fair share 
of taxes in an effort to establish and maintain necessary 
government functions, it is equally imperative that the agency 
charged with the responsibility for this activity be fair, 
honest, open, and accountable. With this introduction, I 
believe it is important to outline how we went about conducting 
our investigation.
    Our objective from the beginning was to keep our 
methodology fair, yet still be able to get inside the agency to 
uncover the facts. In reviewing the treatment of taxpayers we 
took various cases to the IRS and reviewed every document that 
we could obtain.
    We interviewed the IRS employees involved in the particular 
cases. Over the next 3 days, we will hear about a number of 
these cases. We will hear from taxpayers, IRS employees. It is 
important to understand that these witnesses are typical of far 
greater numbers who have been moved to contact the committee. 
These individuals serve as a sampling that demonstrate the 
significance of problems and concerns with the agency. The 
facts will be startling.
    For instance, while the use of pseudonyms is forbidden by 
the Internal Revenue Manual, except for those in the law 
enforcement areas, criminal investigations, and inspection 
divisions, many revenue officers have been issued false 
identification credentials.
    While the IRS suggests that that is to protect agents from 
assault, I am concerned that it makes them unaccountable. Even 
members of the Metropolitan Police force here in the District 
of Columbia, despite substantial danger, wear their true names 
on their uniforms.
    In the next 3 days, you will hear about an audit called 
Blue Sky Assessments. These are tax assessments made against 
Americans that have no basis in fact or tax law. They can 
either be designed to hurt the taxpayer or simply raise the 
individual statistics of an IRS employee.
    You are going to hear a lot about statistics and quotas. We 
have learned that even at managerial levels the drive to 
achieve the appropriate statistic has caused problems in many 
areas of the country.
    While the use of quotas is specifically prohibited in 
rating the success of agents or officers in their jobs, it 
appears to be commonplace. I believe this is outrageous, a 
major problem that has become part of the agency's culture.
    Levies and seizures are also measurements of employee 
performance. In one case, we learned a revenue officer was 
counseled for not keeping his statistics up, so he seized 
several properties the next day. Some officers who are able to 
collect the full amount of taxes due are often rated lower than 
those who have seized property.
    Seizures may be done for status and promotions as much as 
for enforcement. Not only are levies and seizures measures of 
an employee's performance, but so is the number of cases 
referred to the Criminal Division.
    In other words, while there may be no basis in fact for a 
criminal referral, a taxpayer's life may well be turned upside 
down simply to keep an employee's or district's performance 
statistics up.
    Liens and levies may be filed against those whom the IRS 
knows have no liability for a particular tax. Parents, 
relatives, a company employee may have liens filed against 
their property or have a paycheck levied in order to get the 
real taxpayer to comply. This is called the whipsaw technique. 
This practice was explained to us, when we go after everybody, 
we know somebody will pay.
    Now, one of the most distressing things you will learn from 
this hearing is the preference to audit middle and lower income 
tax payers, as well as small mom and pop businesses. This is 
almost incredible to understand.
    Certainly it is not for the high revenue that these kinds 
of audits bring to the Treasury. So why are these Americans 
audited? Because it is easy. Most often, these are the 
taxpayers who cannot afford to pay back.
    Beyond learning about the fear taxpayers have concerning 
the IRS, I was very much concerned about how agency employees 
themselves feel. Many express fear of being retaliated against 
for speaking out against the kind of abuses I have mentioned 
here.
    We have heard in our investigation that the use of false 
allegations of wrongdoing against targeted employees takes 
place. In fact, just the number of times we heard the term 
targeting in relation to harassment of employees was stunning, 
and certainly if this treatment bothers the front-line 
employees of the IRS, it is devastating to the American 
taxpayer.
    Over the next 3 days we will hear more about these 
concerns, as Congress has given the IRS significant power in an 
effort to help the agency carry out its tremendous 
responsibility. It is also Congress' responsibility to ensure 
that such power is being used prudently, constructively, and 
with regard for the taxpayer employees of the agency.
    What we are learning suggests that there are problems and 
begs that Congress address three fundamental questions. First, 
does the IRS have too much power? Second, if Congress were to 
limit that power, what expectations do we have that the new 
limits will be more effective than the old? Third, how do we go 
about changing the culture of the IRS?
    What we seek to do is help the IRS get back to its mission 
statement. That statement reads, ``The purpose of the IRS is to 
collect the proper amount of tax revenue at the least cost, 
serve the public by continually improving the quality of our 
products and services, and performing in a manner warranting 
the highest degree of public confidence in our integrity, 
efficiency, and fairness.'' Well, this is our desire, to be 
certain the IRS is not only good for taxpayers, but that it is 
also good for government.
    It is now my pleasure to call on our very distinguished 
Ranking Member, Senator Moynihan.

   OPENING STATEMENT OF HON. DANIEL PATRICK MOYNIHAN, A U.S. 
                     SENATOR FROM NEW YORK

    Senator Moynihan. Mr. Chairman, let me thank you and 
congratulate you on the hearings that we have now commenced. I 
have been a member of the Finance Committee for getting on to 
21 years, and I do not believe we have had an oversight 
hearing.
    Oversight is our responsibility, and we are carrying it 
out. There is surely room for improvement in the Internal 
Revenue Service, and where we so determine, we should move 
legislation in a fairly rapid order.
    But I think it is also important to point out that a great 
deal of the problems of the IRS come about because of 
legislation which we ourselves have passed. There are now 9,451 
pages in the Tax Code. In August, as not many of you will 
forget, we added 820. I mean, you could hurt yourself if you 
tried to lift it. That is a pattern we do not seem to be able 
to break out of in order to address this as well.
    I happened to have had the privilege for many years to know 
Erwin Griswold, who was dean of the Harvard Law School, 
Solicitor General, who wrote the book on American taxation.
    He tells how, as a young man in the Solicitor General's 
Office in the 1920's, he found himself being asked to do some 
work on tax matters. He said he thought of going to the 
Solicitor General, telling him I did not know anything about 
taxes, but I decided to go to the library instead.
    He would write to me, because he insisted right to the end 
of an old and distinguished age that he make out his own tax 
returns. He would tell me exactly how many hours it took. His 
last letter was April 12, 1994. It had taken him 98 hours to 
make out his relatively simple tax returns, and this was a man 
who knew as much about the subject as any man living.
    Well, all those IRS employees face the same problems Erwin 
Griswold faced, and they need our help as well as our 
oversight. I am happy to offer both. I think your theme of 
power and responsibility is exactly right, sir.
    Welcome, and let the games begin.
    The Chairman. Thank you very much, Senator Moynihan.
    There is no question but what the complexity of the tax 
laws make the job of administration and enforcement very 
complicated and difficult. At the same time, it must be 
administered in a way that is fair and civil to our American 
taxpayer.
    Because we do have two votes coming roughly, I think, at 
9:30, I thought we would call, next, upon our two colleagues 
who are going to speak, as well as Congressman Hoyer, because I 
know he has to go back. Then afterwards, we will call upon the 
members for their comments about these hearings.
    At this time, it is with a great deal of pleasure that I 
call upon Senator Grassley, who was chairman of the Taxpayer 
Rights Tax Force of the Commission on Restructuring the IRS. 
Next, we will call on Senator Kerrey, who of course was 
chairman of that important commission.
    Finally, as I said, it is pleasure to have here the Ranking 
Member of the House Appropriations Subcommittee on Treasury, 
Postal Service, and General Government.
    Gentlemen, I would ask that each of you restrict your 
remarks for 5 minutes, as we do have a very full schedule.
    Senator Grassley.

 OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR 
FROM IOWA; MEMBER, THE NATIONAL COMMISSION ON RESTRUCTURING THE 
                              IRS

    Senator Grassley. Mr. Chairman, the issue is one of 
balance. The Federal Government, of course, needs to collect 
all of its revenue which taxpayers are obliged to pay. But 
taxpayers have certain rights that should not be abused. All of 
us should support a proper balance between the two. Yet, over 
the years such a proper balance has been lacking.
    It is for this reason that some of us seem to be advocates 
for the taxpayers without being mindful of the importance of 
revenue collection functions of the IRS. Any serious objective 
observer should acknowledge the necessity of balance.
    But when evidence mounts of IRS abuses and mismanagement, 
it is time to look beneath the surface and search for a 
systemic, cultural problem. We did that and we found them. A 
``we'' versus ``they'' mentality seems to exist, and that is 
not a healthy situation.
    This is not an indictment of the dedicated front-line IRS 
employees. Typically they do an outstanding, yet thankless job 
for the public. It is not they who should be the targets. 
Rather, it is the management culture, mindless of the fact that 
they are servants of the people.
    If allowed to persist, such a mind-set often leads to 
arrogance, unresponsiveness, disregard of one's rights, and the 
very kinds of things that we have been hearing from our 
constituents.
    When the Congress attempts to investigate, we are often 
derailed. A cloak of secrecy goes up. It is more veiled than 
even the most elaborate secrecy arrangements at Langley.
    In the language of the Federal Government it is called 
6103. That is the section of the Tax Code that prevents 
disclosure of taxpayer information. Designed to protect 
taxpayer privacy, it does much more. It also protects the 
privacy of those who abuse the taxpayers' rights, who mislead 
Congress, and who might use collection quotas in tax 
enforcement despite their illegalities.
    Such abuses occur when independent oversight is lacking. 
Oversight has a rather antiseptic quality about it. Hence, the 
commission's recommendations for an independent board over the 
IRS. This board would set appropriate performance standards, 
would measure performance, then reward or discipline managers 
according to that performance.
    Oversight means more general openness. The commission found 
that the IRS is a very insular organization. As a result, we 
have put forward a first step to make the IRS more open to the 
public and to the press. If we are to be successful in changing 
the culture of the IRS, a key ingredient is openness. The 
chairman of the commission, Bob Kerrey, was absolutely right 
when he noted at one of our hearings a point about the media. 
He said the media and the press are one of the key ways in 
which Congress finds out what is going on.
    So the commission, to encourage more openness as well as 
more accountability, prescribed the following three remedies in 
S. 1096. The IRS must be more timely and responsive in FOIA 
requests. The IRS must not abuse its authority under 6103.
    The commission found that the IRS did abuse its authority 
in hiding from the press the fact that the agency had provided 
false information to the Congress. The IRS must maintain and 
preserve records. It has not. Many requests by the commission 
for documents and data were met with a statement that such data 
no longer existed.
    Addressing these three areas of openness may not be 
headline-grabbing, but in my experience, together with other 
measures, these will help bring more accountability to the IRS. 
The IRS should be held to the same high standards that the 
agency itself applies to the American taxpayer.
    The commission did not call for the easy solution that 
often comes out of commission, to provide just more money. The 
IRS, until 2 years ago, had seen continual increases in its 
budget for 40 years. Indeed, the commission uncovered that 
hundreds of millions of taxpayers' dollars had been wasted. 
Clearly, the problem at the IRS is mismanagement, not money.
    S. 1096 is designed to address many of these management 
failures. I urge the committee to look favorably upon it. 
Meanwhile, the commission did not conduct serious oversight 
investigations to root out IRS cultural pathology. This is 
where the commission's job ended and the job of this committee 
begins with this week's hearings.
    Understandably, these are controversial hearings. The IRS 
is not used to be overseen. Untoward motives are assigned to 
our oversight efforts, like partisanship, but that is a tired 
argument. I intend to be an active participant in these 
hearings.
    In the 1980's, I was hardly partisan when I clashed with 
the Republican administration over defense issues, the same 
with the chairman of this committee. I have been overseeing IRS 
abuses as far back as the Reagan and Bush Administrations.
    In addition, I launched my efforts to oversee the IRS. I 
was joined by my close friend, David Pryor, a Democrat, and a 
close friend of the President's. We chose to make our critiques 
responsible instead of partisan. I believe the record reflects 
that. The charge of partisanship has no credibility with 
respect to oversight efforts. It will be a fair airing of 
questionable practices by an agency abusing its trust.
    I have learned over the years, Mr. Chairman, that oversight 
of the IRS is a step-by-step process, a long-term commitment. 
We learned of the agency's quota system back in the 1980's and 
we outlawed it. Suddenly, we find there might be an unofficial 
back-door quota system still in place. It seems like you put 
out a brush fire here and it pops up someplace else.
    The moral of the story is, history teaches the need for 
constant vigilance over the IRS. So, Mr. Chairman, I commend 
you for your leadership in holding these much-needed hearings. 
I would also like to say publicly how much I appreciated 
working on the commission with Senator Kerrey. His guidance and 
leadership produced a solid, credible effort.
    So, Mr. Chairman, I thank you for starting us down this 
road.
    The Chairman. Thank you, Senator Grassley.
    [The prepared statement of Senator Grassley appears in the 
appendix.]
    The Chairman. Senator Kerrey?

OPENING STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR FROM 
NEBRASKA; CO-CHAIRMAN, THE NATIONAL COMMISSION ON RESTRUCTURING 
                            THE IRS

    Senator Kerrey. Thank you, Mr. Chairman. First of all, I 
want to congratulate both you and the Ranking Member for your 
balanced opening statements. I appreciate that very much. 
Holding these hearings is also very helpful. I would ask 
unanimous consent that my entire statement be a part of the 
record.
    The Chairman. Without objection.
    [The prepared statement of Senator Kerrey appears in the 
appendix.]
    Senator Kerrey. Mr. Chairman, this commission held 12 days 
of public hearings, we had hundreds of hours of testimony from 
taxpayers and tax experts, we had 300 private interviews with 
front-line employees. From my experience in oversight on both 
the Appropriations and on the Finance Committee, we had an 
unprecedented amount of access of the IRS.
    We found a number of things. First, the IRS is relatively 
efficient compared to other tax collection agencies worldwide, 
spending about half of 1 percent of total collections, which is 
substantially less than many other nations do.
    But there was a disconnect between that efficiency and the 
taxpayers' own view of this agency, and that is what we are 
dealing with here. It is very important to note that the 
dissatisfaction with the agency did not begin with our 
criticism of the agency, it began with the taxpayers' own 
evaluation of what the IRS was doing.
    In the area of services being performed, there is a 
breathtaking gap between what the IRS can do and what the 
private sector can do.
    Taxpayers do not compare the IRS with a tax collection 
agency in Australia or the Federal Republic of Germany, they 
compare it to what they can get with their ATM card. There is a 
tremendous difference between what the IRS can do and the 
private sector can do.
    Another big area that comes in for criticism is secrecy. 
Senator Moynihan has a new book coming out. I read the galleys 
over the weekend. It really is a first-rate historical 
examination of how secrecy has been built up inside of agencies 
after laws have been passed.
    Secrecy and power, it seems to me, Mr. Chairman, run hand-
in-glove. So this issue of secrecy that Senator Grassley has 
talked about was heard from consumers. The complexity of the 
Code is obviously something that we create. Then layer onto 
that the inability to apply technology. What started this 
commission in the first place was the wasting of some $4-$6 
billion of taxpayer money on a technology system that, in the 
end, did not work.
    So that was the first finding, that there was a disconnect 
between apparent efficiency compared to other tax collection 
agencies and what the consumers thought. Blame was evenly 
balanced between Congress and the Executive Branch.
    There was an awful lot of attention given to the fact that 
85 percent of the American taxpayers voluntarily comply, 15 
percent do not. But the 85 percent who voluntarily comply are 
unwilling to give the IRS more enforcement power when they 
appear to be exercising that power sometimes in a very 
arbitrary and capricious fashion, and in a way that is 
difficult for us to examine because of the survey issue I have 
mentioned.
    We recommended change in three big areas, Mr. Chairman, 
with S. 1096. First, we recommend the creation of an 
independent agency. Second, we recommend the creation of a 
complexity index against which we can measure our proposals 
dealing with tax proposals.
    Third, we recommended a series of things that Senator 
Grassley has already dealt with in the area of shifting power 
to the taxpayer by giving the taxpayer more access to the 
information and what is going on inside the IRS, in other 
words, by shifting from secrecy to openness.
    The common criticism that I have heard from opponents deals 
with the independent board in S. 1096. Those of us who sat on 
this committee and listened to the new commissioner of the 
Social Security Administration understand the value of having 
independence.
    The value of independence is, you can be more accountable 
to what the people are asking for rather than succumbing 
sometimes to just an ideological view. This independent board, 
has been called a take-over by American CEOs, giving corporate 
executives the opportunity to run the IRS. You will hear that 
over, and over, and over, Mr. Chairman and members of the 
committee.
    I want you to hear what our proposed law says. It says, 
``The composition of the board shall be 9 members, of whom 7 
will be individuals who are not full-time Federal officers or 
employees who are appointed by the President by and with the 
advice and consent of the Senate, and who should be considered 
special government employees, one shall be the Secretary of the 
Treasury and one shall be a representative of an organization 
that represents a substantial number of IRS employees who is 
appointed by the President.''
    Mr. Chairman, our legislation has the support of not only 
the National Taxpayer Union, but also the National Treasury 
Employees Union. It has the support of professionals that work 
with taxpayers to fill out their tax returns, it has the 
support of the most recent IRS Commissioner Peggy Richardson, 
and it has the support of two former Treasury Secretaries.
    We attempted to respond in a balanced way to critiques of 
our Board and our legislation. There may be ways to improve our 
legislation, but it is going to be difficult to improve the 
legislation unless, first of all, we get a chance to be heard 
in an accurate fashion rather than to be heard in a fashion 
that distorts the content.
    Again, I congratulate you and I thank you for holding these 
hearings. I appreciate very much again your balanced opening 
statement, as well as the opening statement of Senator 
Moynihan.
    The Chairman. Thank you very much, Senator Kerrey.
    Now it is my pleasure to call upon our good friend, 
Congressman Hoyer.

   STATEMENT OF HON. STENY HOYER, A U.S. REPRESENTATIVE FROM 
                            MARYLAND

    Congressman Hoyer. Mr. Chairman, Senator Moynihan, members 
of the committee, thank you very much for giving me this 
opportunity. I have spent about 13, 14 years as a member of the 
Appropriations Committee overseeing IRS, and I am very pleased 
to have this opportunity to be here.
    I want to congratulate Senators Grassley and Kerrey for 
their work on the restructuring commission. I think an 
overwhelming majority of the work is very positive and I agree 
with it and hope to support most of that report.
    Mr. Chairman and Senator Moynihan, and the 102,000 men and 
women of the IRS who are responsible for collecting 97 percent 
of the Nation's revenue have, as Senator Kerrey has pointed 
out, one of the most difficult jobs in government. They collect 
the funds that pay to defend our freedom, educate our children, 
and take care of the old.
    At the same time Congress has flattened their funding and 
cut enforcement, we have also implemented new parts of their 
mission. The trend is asking the IRS to broaden its mission.
    Recently, for example, the Congress instructed the IRS to 
help in the important work of recovering child support 
payments, an important objective but added work.
    Against this backdrop, the commission wisely recommended 
``Congress provide the IRS certainty in its operational budget 
in the near future,'' and called for ``greater stability with 
funding levels.''
    As the commission has pointed out, Congress' failure to 
pursue consistent policies, as Senator Moynihan, and you, Mr. 
Chairman, have pointed out, have undermined the IRS in the 
performance of its functions.
    The vast majority of taxpayers in our country pay their 
taxes on time, voluntarily. Nevertheless, the IRS only collects 
about 84 to 85 percent of the taxes that are due.
    There is currently a balance due of $216 billion. When some 
do not pay their fair share, this increases the deficit and 
raises the burden on all of the rest of us. From the point of 
view of fairness alone, it is necessary for the IRS to carry 
out its enforcement.
    Nevertheless, in any large organization, however necessary 
enforcement is, the power that goes with that enforcement may 
be abused. Senator, you talked about power and responsibility, 
that being the focus of this hearing. Absolutely correct, in my 
opinion.
    Two years ago, of course, Congress revisited the problem of 
IRS abuses with the passage of the Omnibus Taxpayer Bill of 
Rights. In its report, A Vision for the New IRS, the IRS 
Commission on Restructuring found that this law ``had an 
important effect on changing the culture of the IRS.'' Mr. 
Chairman, you mentioned that. The commission has found that, in 
fact, the culture is changing.
    The commission went on to find ``very few examples of IRS 
personnel abusing power.'' None of us deny that it occurs, all 
of us believe we ought to eliminate it. But the good news that 
the commission found was that it is the exception. Even one 
instance, of course, is one too many.
    IRS management has followed up on cases aggressively to 
determine what went wrong and to take appropriate action. But I 
believe that even appropriate action, after the fact, Mr. 
Chairman, as you, I am sure appreciate, cannot erase the pain 
that some taxpayers have experienced. I am encouraged, 
therefore, that the IRS is following up with a service-wide 
program to stop this kind of abuse before it happens.
    This program includes centralizing and including training 
on the provisions of both the first and second Taxpayer Bill of 
Rights, creating taxpayer surveys that rate employees' 
treatment of taxpayer, and other efforts.
    Treasury and IRS has reaffirmed their commitment to the 
original Taxpayer Bill of Rights. A joint Treasury/IRS National 
Performance Revenue Task Force is currently conducting a 90-day 
study of customer service. I am sure it will be spurred on by 
this committee's actions, Mr. Chairman.
    Ultimately, however, I believe that a solution to the 
problem of taxpayer abuse cannot be separated from the larger 
task of building the IRS of the future. Senators Grassley and 
Kerrey have spoken of that.
    The Treasury Department, the IRS, the Employees Union and 
the Commission on Restructuring have identified a common set of 
concerns. To build the IRS of the 21st century, they have 
identified the need for renewed focus on oversight, leadership, 
flexibility, improved budgeting and tax simplification. The IRS 
has been rightly criticized in recent years for its failure to 
manage well. Particular focus has been directed at attempts to 
modernize the information systems.
    For the first time in the 15 years, Mr. Chairman, that I 
have been reviewing the IRS budgets, the Secretary of Treasury 
and the Deputy, for the first time, are giving personal 
attention to IRS management issues. This new focus is clearly 
making a difference.
    I am encouraged that Secretary Rubin has identified a 
candidate in addition to that to head the IRS who has a non-
traditional background in management and information 
technology, Charles Risotti. The Senate will be considering him 
soon.
    Mr. Chairman, I will leave the balance of my statement, but 
let me conclude by saying this. It is important to point a 
spotlight on areas of abuse in the collection activities. Our 
constituents rightly expect us to protect us from abusive and 
legal actions.
    This objective is particularly important when such actions 
are done in the name of law enforcement. At the same time, we 
must do so in a way that does not undermine those who are 
performing crucial law enforcement missions.
    Mr. Chairman, you and I know there are scam artists, 
criminals, who are trying to place an additional burden on 
their fellow Americans by not contributing their fair share. 
Law enforcement is never easy. It is always subject to abuse.
    It is important that those of us in public life oversee and 
ensure that the abuses are eliminated or, at the very least, 
kept to the absolute minimum. I congratulate you, Mr. Chairman, 
Senator Moynihan, and others for pursuing this worthy 
objective.
    The Chairman. Thank you very much for appearing here today. 
We look forward to working with you in the future.
    [The prepared statement of Congressman Hoyer appears in the 
appendix.]
    The Chairman. Now, we are coming towards the end of the 
first vote, so I will recess the committee to enable us to go 
down and make two votes. I ask the members to come back as 
quickly as possible, because I am going to reopen the hearing 
to permit members to make their opening statements.
    Senator Kerrey. Mr. Chairman, may I with respect ask 
whether or not you intend to ask me, Senator Grassley, or 
Congressman Hoyer questions?
    The Chairman. No.
    Senator Kerrey. No questions?
    The Chairman. No questions today. We have such a full 
schedule.
    Senator Kerrey. I see.
    The Chairman. The committee is in recess.
    [Whereupon, at 9:46 a.m., the hearing was recessed and 
reconvened at 10:22 a.m.]
    The Chairman. The committee will please be in order.
    We will now turn to our fellow members of the committee for 
any opening statement that they make care to make. I would ask 
that they be limited strictly to 5 minutes since we have 
already lost a great deal of time because of the vote, and 
have, as I said, a full schedule.
    I would also point out that we go down the list under the 
early bird rule. The next person I have that is here is Senator 
Graham.

   OPENING STATEMENT OF HON. BOB GRAHAM, A U.S. SENATOR FROM 
                            FLORIDA

    Senator Graham. Thank you, Mr. Chairman. I would like to 
express my appreciation to yourself and Senator Moynihan for 
holding these hearings today. I would like to start by placing 
a call. This is a call to the 800 number of the IRS, in order 
to give us a laboratory test of how long it takes to get a 
response to a citizen's message.
    Senator Gramm. Hold it up to the mike so we can hear it.
    Senator Graham. Mr. Chairman, this is obviously a critical 
agency. We have now reached the computer response. We are not 
interested in information on the new tax legislation. We know 
too much about that already. [Laughter.]
    Senator Graham. This is a critical agency. It is critical 
that it be competent, fair, respectful of people, capable of 
carrying out its function. It is also true that many aspects of 
the Federal Government are anonymous, unknown to the American 
people.
    The activities of the IRS are often too well known to the 
American people and form the basis of the American people's 
assessment of how government, in general, operates, that which 
they have contact with, that which they cannot see.
    Unfortunately, what the citizens of my State and the Nation 
are saying, is that they are having too many adverse impacts 
with the IRS.
    What is your name, sir? Mr. McDowell, first, I want to 
thank you for having answered the phone in less than two 
minutes. I would like to get back in touch with you, if you 
could hold for a moment, and discuss some specific issues. 
Could you hold? Good. Thank you. [Laughter.]
    Senator Graham. What I would like to talk to Mr. McDowell 
about are some of the concerns that have been expressed by my 
constituents, including the difficulty of getting someone on 
the telephone.
    One lady from Ft. Meyers who says she is 69 years old said 
that frequently it had taken her up to 30 minutes in order to 
reach someone on the telephone. Another gentleman from Orlando 
said that he has been waiting for 6 months to get a response to 
a question, and that he has called the 800 number and has 
encountered not a human being, but frustration. Those are some 
of many examples of the response of citizens to their attempts 
to make contact with this critical Federal agency.
    As we proceed with these hearings, Mr. Chairman, I think 
that it is important that we do a physician's quality 
assessment of this agency in order to diagnose, what are the 
components of its pathology. We will no doubt encounter, as the 
commission chaired by Senator Kerrey did, a number of those, 
but I would suggest, too, it might be particularly appropriate 
for our concentration.
    One, is the human dimension, whether it is a large 
insurance company or Disney. Those firms which depend upon 
their ability to relate effectively with the public make a 
major commitment to the human beings within their organization 
who are that contact with the public. I am concerned that the 
IRS has not made that sufficient commitment in terms of the 
standards of training, support, and leadership for its people.
    I am struck with the fact that the IRS is not unique in 
this circumstance. I have had the opportunity to have extensive 
dealings with the Immigration and Naturalization Service, and 
many of the same concerns that we have and will hear about the 
IRS are also said about that large Federal agency.
    So we may, in the course of this set of hearings on the 
IRS, develop some concepts that would have broader application 
in the Federal service.
    The second area is our primary responsibility, and that is 
the complexity of the Tax Code. Senator Moynihan has already 
dramatically illustrated the fact that we added another 
approximately 10 percent to the complexity of the Tax Code, at 
least in terms of pages, by the action that we took just a few 
weeks ago.
    I would hope that, as a result of these hearings, the 
impact of that complexity on citizens' response would be fully 
understood, and again that we would develop some concepts as to 
how we might move towards the path of greater simplification.
    It struck me as ironic that, whereas in 1996 one of the key 
discussions of the Presidential election, including Senator 
Dole's proposal for a 15 across-the-board reduction in tax 
rates, were completely ignored in 1997 when the Budget 
Agreement was struck and the tax reductions developed. Nobody 
talked about using tax reductions as an opportunity for 
simplification. They became the source of a fairly massive 
degree of additional complexity.
    So Mr. Chairman, I commend you and Senator Moynihan for 
undertaking these hearings, and look forward to the diagnosis 
and effective prescriptions that the hearings will bring to our 
attention, and that we will then have the responsibility to 
implement.
    Now, back to my phone call.
    The Chairman. Thank you, Senator Graham. This is the first 
time I have seen anyone conduct business during a hearing, but 
I congratulate you for your effective use of time.
    I think, Senator Conrad, you are next in line.

  OPENING STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM 
                          NORTH DAKOTA

    Senator Conrad. Mr. Chairman, I am not going to call 
anybody. I am probably the only person here who was a tax 
administrator. I was the tax commissioner for my State before I 
was elected to the United States Senate. So I think I have an 
appreciation for----
    Senator Moynihan. That has got to be sort of a record, 
people rewarding a tax commissioner. [Laughter.]
    Senator Conrad. Well, both Senators from North Dakota are 
former tax commissioners, so that is a dual record. We were 
elected to the U.S. Senate, I think, because we gave good 
service to people. We were fair, we collected the taxes that 
were owed, but we gave very good service and we did not have to 
abuse people in order to collect taxes that were due.
    Mr. Chairman and Senator Moynihan, I think most people 
understand that, as a society, we have an obligation to pay 
what is owed and due. That is how we support the common 
defense, that is how we educate our young people, that is how 
we support our elderly, that is how we build the roads, 
bridges, and airports that allow us to function as a society. 
So we have to collect the revenue that is necessary to pay the 
bills. Frankly, over the last 5 years we have seen quite a 
remarkable turnaround for the Federal Government.
    The Federal Government was in a circumstance five years ago 
in which it could not pay its bills, was not even coming close. 
It was running record deficits. But because of actions that 
were taken, we are now on the doorstep of balancing the unified 
budget in this country, and that has led to an economic 
resurgence. I say this, because I think it is important to put 
into perspective what we are doing here today. Clearly, we must 
have a revenue agency, whether it is the Internal Revenue 
Service or some other such agency. We have to collect the money 
necessary to pay the bills.
    On the other hand, nobody can tolerate abusive behavior. I 
think we also need to put that into perspective, because the 
vast majority of men and women that work for our revenue 
service do not abuse anyone. They go about their jobs quietly 
and in a dedicated way, and perform very well.
    I had, when I was tax commissioner, many exchanges with the 
Internal Revenue Service and I found a high degree of 
professionalism, a high degree of commitment, many people who 
had dedicated their working lives because they believed what 
they were doing was in the public interest.
    So I do not want to be a part, and I do not think anybody 
here wants to be a part, of some trashing of people who do not 
deserve it. But this is a very large organization and there are 
people who have made mistakes, and they are serious mistakes, 
and that cannot be tolerated.
    It is totally unacceptable that IRS staff abuse others, 
that they threaten them, and that they use coercive tactics. 
That is not acceptable and that should not be permitted. Those 
who are responsible for it ought to be punished. We should make 
that clear.
    But, Mr. Chairman, I think we should also make clear there 
are some here with an agenda that is beyond fixing something 
that is broken, or at least in part is broken. There are some 
who come here with a political agenda, and I also find that 
troubling.
    I note in a Washington Post story that there are some who 
have been sending out fund raising letters with statements 
like, ``We want to end the IRS's reign of terror.'' Well, I do 
not think the IRS is engaged in a reign of terror. There have 
been abuses, certainly. Are those abuses unacceptable? 
Absolutely. I think to assert that the IRS has been engaged in 
a reign of terror is pretty loaded language.
    Another fund-raising letter that went out from a colleague 
had the ``People vs. IRS Survey'' and said, ``Armed with your 
responses and demands, GOP leaders can call for televised 
Senate hearings on the IRS.''
    A former IRS commissioner, Lawrence Gibbs, IRS commissioner 
under President Reagan, as a matter of fact, is concerned about 
any attempt to make a partisan issue out of this agency.
    He said, and I think this is something for us to keep in 
mind, ``Using highly partisan language to attack the IRS is 
very irresponsible and can lead to undermining the public's 
trust in the tax system, which is dangerous.'' Again, that is 
the former commissioner under President Reagan.
    So I think in conducting these hearings that it is very 
important that we keep things in perspective. Where there are 
abuses, they ought to be stopped. People who use coercive 
tactics and who have violated the law ought to be punished.
    But we also need to keep in mind we need a revenue agency 
in the United States to do the very difficult work of 
collecting those revenues that we as a Congress said people are 
responsible to pay. We have done that because those revenues 
support our National defense, they educate our young people, 
they assist our elderly.
    In saying that, Mr. Chairman, I think we all need to move 
forward in a constructive way, identify what is wrong, figure 
out ways to fix it, and implement those changes. I very much 
appreciate the way the Chairman and Ranking Member began this 
hearing. I think you have sounded just the right note.
    The Chairman. Well, thank you, Senator Conrad.
    Again, let me emphasize, when we began these investigations 
8 months ago, their purpose was to develop constructive 
criticism, constructive criticism that would result in reform 
to benefit the American public, as well as the employees of the 
agency itself. That is the way these investigations have been 
conducted. These hearings are not intended in any way to be 
partisan or political, they are in the interest of good 
government and that, I shall insist upon.
    I think we will turn, at the suggestion of Senator 
Moynihan, to Senator Gramm.

OPENING STATEMENT OF HON. PHIL GRAMM, A U.S. SENATOR FROM TEXAS

    Senator Gramm. Mr. Chairman, let me join everybody else in 
thanking you and Senator Moynihan for holding these hearings. I 
think it is important that we take a long, hard, close look at 
the IRS and how it works.
    I do not think our dear colleague from North Dakota has to 
worry about anybody undermining the credibility of the IRS. I 
think if you look at what the witnesses are going to say here 
over the next 3 days, the IRS has done a very good job of doing 
that for itself.
    I want to make three points in my opening statement. Number 
one, I do not have any sympathy for people who are trying to 
cheat on their taxes. I think the IRS not only has a license, 
but a mandate, to go after people who are engaged in fraud and 
who are cheating other taxpayers by not paying their taxes.
    I hope that nobody gets confused here as to what we are 
concerned about. I want the IRS to use the full power of the 
law to make people pay the taxes they owe and to pursue people 
who are cheating.
    Second, I think we are all concerned about stories that we 
hear every day from our constituents about how they are being 
abused, about how heavy-handed the IRS is, and how it uses 
tactics that we would view, and I think the average American 
would view, as inappropriate.
    Now, one of the things I always try to do is to take such 
comments with a grain of salt, because I do not always know 
what the facts are. I have never been one of these people that 
automatically assumes the government is wrong because somebody 
says they are engaged in bad behavior, but provides no proof.
    But I have followed enough cases in my State through the 
whole process to reach the conclusion that, while the vast 
majority of the people at IRS with a very difficult job are 
doing a good job at it, there are people who use the power to 
intimidate that obviously working for the IRS gives them the 
ability to do. We are all afraid of the IRS; I think every 
American is.
    I think it is important to have some system, to have checks 
and balances, to oversee and hold people accountable for what 
they do. Now, how to do that, how to get the balance between 
going after people who are cheating and not abusing people who 
are simply trying to comply with a very complicated law, where 
most of us, even those of us who may have had at some time some 
expertise in these areas, find it impossible to do our own 
taxes? It is a very delicate balance. I came to the hearing 
because I wanted to discover how to do it, not because I wanted 
to tell anybody.
    Finally, I would note the obvious point that today 
government is spending about 31 cents out of every dollar 
earned by every American. Next year we are going to have the 
highest tax burden in American history. If we do not change 
Medicare and Social Security, at an absolute minimum, within 25 
years the payroll tax is going to be 30 percent, not 15 
percent.
    The average working family where husband and wife work, is 
in the 28-percent Federal tax bracket. So 25 years from now, 
with the status quo, at a minimum, the tax rate of the average 
working blue collar family is going to be 56 percent. Obviously 
it is going to be very, very difficult to collect those taxes.
    So I think while we are looking at the IRS and while we are 
looking at its abuses, part of the long-term reform is tax 
simplification where it is easier for people who want to 
comply, to comply.
    But I think part of the reform is to look off in the future 
25 years and say, is that the America we want? Do we really 
want to have an agency that is trying to take 56 cents out of 
every dollar earned by average working Americans? I think the 
answer to that is no. We need to begin to try to make those 
changes over the next 25 years to keep that from happening.
    So, Mr. Chairman, this is a very difficult subject. It is 
clearly a subject that deserves intense Congressional scrutiny. 
I know what I would like to see us do. That is, use our 
resources to go after people who are violating the law and be 
sure we are respectful of people who are simply trying to 
comply with a difficult law, but trying to tell the difference 
between those two cases is very, very difficult.
    Obviously, it is very difficult for a person at the IRS to 
know the difference between the two. Clearly, change in the 
code of conduct is due, and that is something that we ought to 
be leaders in trying to produce. So, for all of these reasons 
in a very difficult subject, I am very grateful for these 
hearings, and I thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Gramm.
    Now I would call on Senator Bryan.

OPENING STATEMENT OF HON. RICHARD H. BRYAN, A U.S. SENATOR FROM 
                             NEVADA

    Senator Bryan. Thank you very much, Mr. Chairman.
    No citizen should have to endure what Monsignor Ballweg, 
Ms. Jacobs, Ms. Lund, and Mr. Savage, who will testify 
tomorrow, encountered in their experiences with the IRS. There 
is no excuse for this kind of conduct, attitude, or treatment 
of law-abiding citizens who are attempting to comply with their 
legal obligation to pay their taxes.
    Having said that, the tax collector has never enjoyed great 
public favor. From King Solomon's time, the tax collector has 
been despised and reviled, so it comes as no surprise that the 
IRS is an easy target for criticism and a convenient whipping 
boy.
    As pollster Frank Lance points out in his widely 
distributed memo to Republican members of Congress, in the 
language of the 21st century, nothing guarantees more applause 
and support than the call to abolish the Internal Revenue 
Service. I expect Mr. Lance is probably right about generating 
applause, but that does not make it the right thing to do.
    Unfortunately, someone needs to collect taxes. Federal tax 
collection is a task of monumental proportions. Last year, the 
IRS collected $1.4 trillion in taxes. It processed 209 million 
returns, including 119 million individual income tax returns. 
It disbursed $110 billion in refunds, and handled 105 million 
requests for information.
    By any standard, this is a very difficult job. I believe 
that the great majority of the 102,000 employees of the IRS are 
neighbors, our fellow citizens, who do their best to meet the 
demands of this often unpleasant task in the best manner that 
they can.
    None of this is to suggest the kind of egregious conduct by 
the IRS that we will hear about this week is or can be 
justified, nevertheless, the IRS has made numerous improvements 
which have made the always unpleasant task of paying taxes a 
much less difficult ordeal for millions of Americans.
    More than 19 million Americans filed their individual 
returns electronically in 1997, an option that results in 
faster, more efficient service and with greater accuracy. For 
the 4.7 million of those electronic filers that used Telefile, 
the annual ordeal of paying Federal income taxes amounted to 
only a simple, 10-minute toll-free phone call to the IRS.
    While these successes do not excuse the serious problems 
the IRS needs to deal with in other areas, they do reflect a 
continuing effort to improve the culture of the IRS and to 
attempt to make it more taxpayer friendly.
    The hearings before this committee this week will prove 
titillating, shocking, and to a large extent will accurately 
point out some very serious problems within the IRS.
    Undoubtedly there are IRS personnel who behave badly, who 
abuse their position, who are vindictive and abuse the 
taxpayer. These employees ought to be identified and 
immediately terminated. There is much we can do to improve the 
management and operation of the IRS.
    Senators Kerrey and Grassley led an important bipartisan 
commission to examine the problems in the IRS. While there is 
disagreement over some of the specific recommendations, the 
commission report is an important starting point for what could 
be a substantial reform of the IRS.
    Many of the problems with the IRS, of course, as has been 
pointed out by a number of my colleagues, lies right here in 
the Congress. In many ways, the Congress has charged the IRS 
with an impossible task. The ever-increasing complexity of the 
Tax Code places enormous burdens on both taxpayer and IRS 
employees, both of whom oftentimes are trying to do the right 
thing.
    This year's tax bill, of course, is no exception. The bill, 
which most of us supported, creates entire new mazes of 
confusing requirements that taxpayers will need to work their 
way through. Many of the provisions are effective starting this 
tax year, which means IRS personnel will need to have forms, 
guidance, and appropriate training in place by the end of this 
year.
    Already we are told that we need to pass technical 
corrections, which will then need to be incorporated into IRS 
procedures.
    The hearings before the committee this week will provide 
more fodder for the IRS's critics, and I fear that some may use 
these hearings to pursue partisan advantage in future political 
contest.
    Reckless, inflammatory criticism of the IRS may be good 
political sport, but it can incite violence among tax 
protestors. Nevadans were shocked in December of 1995 by a 
botched attempt by so-called tax protestors to bomb the IRS 
office in Reno, Nevada. Despite the unpopularity of their 
duties, IRS employees are public servants who should not be 
forced to work in hostile circumstances and should not be 
expected to work under circumstances and conditions that 
threaten their health and safety.
    We do need to reform the IRS, get its computer system 
working better, institute better management practices, and 
terminate those in service who abuse their positions.
    I am confident, Mr. Chairman, that you intend to use these 
hearings as a basis to pursue real reforms of the IRS, and I 
pledge to work with you as we undertake the business of 
reforming the IRS.
    The Chairman. Thank you, Senator Bryan.
    Senator Nickles?

  OPENING STATEMENT OF HON. DON NICKLES, A U.S. SENATOR FROM 
                            OKLAHOMA

    Senator Nickles. Mr. Chairman, thank you very much. I want 
to compliment you and Senator Moynihan for these hearings, and 
also compliment Senator Grassley and Senator Kerrey for the 
work that they have done in trying to reshape and rehabilitate 
the IRS.
    Mr. Chairman, it needs to be done. The Tax Code is far too 
complicated, in many cases far too complex, and in many cases 
not fair. This committee has an opportunity, I think, to 
highlight some of the problems we have with the Code, maybe 
some problems in enforcement of the Code, and some injustices 
as well.
    We have, as Senator Bryan mentioned, over 100,000 IRS 
agents. That is a lot. I would certainly concur with Senator 
Gramm's statement that most are very, very honorable and do an 
outstanding job. They are, indeed, public servants.
    But clearly there have been some real abuses, and those 
need to be stopped and they need to be stopped now. The IRS has 
unbelievable authority to wreck lives, ruin businesses. They 
can cause anxiety.
    There is not a phone call that can probably give people 
more anxiety, than the IRS wants to audit you, or they want to 
talk to you about your return. Automatically that sends chills 
down the spines of taxpayers, taxpayers, in most cases who have 
been very honest.
    In some cases, maybe they are not honest and it is 
certainly justified. But we will hear some cases of abuses and 
those abuses need to be stopped.
    Mr. Chairman, I believe we also need to make sure the IRS 
is not being used for political purposes. It bothers me when I 
read news accounts that organizations aligned philosophically 
the opposite of the current administration have been audited. I 
think we need to review that.
    We need to find out and we need to make double-darn sure 
that is not happening for political purposes. But when you hear 
reports of audits of conservative groups and you do not hear it 
from opposite-minded groups, that bothers me.
    Mr. Chairman, just look at the Code. The Internal Revenue 
Code, Senator Moynihan mentioned, I think, is 9,400 pages. We 
recently added several hundred pages. This is the IRS code. The 
Bible, to compare it, is quite a bit smaller. Senator Gramm was 
studying it, and I would encourage him to continue studying it. 
The Bible has something like 8,045 words. The IRS Code has over 
5.5 million words of law and regulations. There is no 
comparison.
    I might mention, there is a lot more wisdom and value in 
this book than there are in these books. We have added to the 
complexity. In the last tax bill that we passed, and I think 
most of us have said that it was a pretty good tax bill, we 
added 285 new sections to the Tax Code, we amended 824. So we 
made it even more complicated, more complex.
    In my opinion, the tax code needs a significant overhaul. 
We need to really reduce this to something that most people can 
understand, and hopefully replace it with a fair, flat, and 
simple Tax Code.
    Mr. Chairman, when you have something like 5.5 million 
words of rules and regulations, when you have 17,000 pages of 
rules and regulations, we have got a real problem. So we have 
102,000 agents trying to enforce the law. We have 480 different 
forms.
    Right now, the IRS sends out 8 billion pages of forms and 
instructions every year. 8 billion. That is phenomenal. Last 
year, the number of information forms exceeded a billion. That 
is a lot of 1099s that somebody is supposedly trying to keep 
track of. The number of corrections that were sent out are 
estimated to be over 10 million per year. The number of 
corrections. The number of penalty notices sent out in 1994 
were 33 million.
    In 1993, there were 8.5 million times that the IRS gave the 
wrong answer to taxpayers who were seeking some information. In 
1987, the GAO said that 47 percent of the calls to the IRS 
resulted in inaccurate information. Congress recently spent $4 
billion to upgrade IRS's computer capabilities. It has been a 
dismal failure.
    Now, Senator Bryan mentioned the electronic filing. That 
has been a success. So, we have had some decent improvements in 
their technology. But, as Senator Kerrey mentioned in his 
opening statement, I think the IRS is way behind the 8 ball as 
far as keeping up with modern technology. The EZ-1040 that 
everybody is supposed to be able to understand and do so 
quickly and simply has 31 pages of instructions.
    So, Mr. Chairman, I think this committee has a big 
challenge before us. I think we need to eliminate the abuses. 
We need to be sure the IRS is in check, that it is doing its 
job, that it is not abusing its power. I think we have a real 
challenge and responsibility to see if we cannot simplify this 
very complex and inequitable system. I thank you for your 
efforts.
    Senator Moynihan. Mr. Chairman, could I just take a moment?
    The Chairman. Senator Moynihan.
    Senator Moynihan. I would just remind all of our committee 
members that you and I have asked the Joint Committee on 
Taxation to examine politically motivated audits, and we will 
have a report later this year.
    Senator Nickles. I appreciate that.
    Senator Moynihan. If there are, they had better stop, and 
fast.
    Senator Nickles. Thank you, sir.
    The Chairman. Next on the list is Senator Lott.

   OPENING STATEMENT OF HON. TRENT LOTT, A U.S. SENATOR FROM 
                          MISSISSIPPI

    Senator Lott. Thank you, Mr. Chairman. I will be brief so 
that you can go to your panels that you have lined up. I ask 
consent that my entire statement be placed in the record.
    The Chairman. Without objection.
    [The prepared statement of Senator Lott appears in the 
appendix.]
    Senator Lott. I want to also join others in commending you, 
Mr. Chairman, and the Ranking Member for having these hearings. 
I have maintained for years, including this year, and will 
continue to push for it in the future, that as a matter of fact 
Congress should have a lot more of this type of hearing.
    We should have investigative and oversight hearings into 
how the laws are working, how are the agencies' bureaus and 
departments functioning, not from the standpoint of trying to 
be punitive, but trying to find out how the laws are working so 
we can do a better job in changing them and making them better 
for the American people.
    So I think we are performing our duty here in having this 
oversight hearing, trying to find out, what are the abuses at 
the Internal Revenue Service. No agency should be above the 
law, no agency should take matters into its own hands, 
regardless of whether it is convenient or not.
    So we need to check into these allegations that we have 
heard about intimidation and pressure and threats. Because of 
these hearings, I have been receiving calls from around the 
country, including my own State.
    Just yesterday I had one from a former IRS revenue officer, 
now a CPA. He pointed out a particular case where he said, 
``there was no doubt in my mind that the goal was not to find a 
way to get the taxes paid that were owed, the purpose was to 
put the business out of business.''
    I have had other calls that really alarmed me along those 
lines. I think that the purpose here should be to have a good, 
strong bipartisan hearing. I know that is the intent, and that 
is the way it will be. I hope it will not be the last step, but 
only the first step.
    The next step would be leading us to the necessary changes, 
perhaps, in the law that will change the culture that maybe has 
developed over a period of years in this agency, and I hope 
that it can be the first of this type of hearing, that maybe we 
will look at other agencies by other committees.
    So I think we have a worthy goal here, to find out what has 
been happening, where there are abuses, if any, what the 
problems are, and see what we could maybe do then in terms of 
legitimate, needed reform. I look forward to the hearings both 
today, on Wednesday and Thursday.
    I am trying to cooperate by, in fact, the Senate not coming 
in until noon on Wednesday and Thursday so that we can have our 
full attention devoted to these very important hearings. I 
thank you, Mr. Chairman and Senator Moynihan.
    The Chairman. Thank you, Senator Lott, for those words. Now 
I would call upon Senator Rockefeller.

   OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, A U.S. 
                   SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman. I will be 
very brief.
    I would join in what has been said, at least around this 
hall, in that I hope that these are bipartisan, I hope that 
they are fair. I note in the witness list that the General 
Accounting Office comes on panel number 6, which probably will 
take place at about 2:30 or 3:00, and they would be the only 
ones who would be trying to look at this in perspective.
    Some of us have been Governors. Senator Graham has been a 
Governor, Senator Bryan has been a Governor, I have been a 
Governor. It is very interesting, when you get to the problem 
of bureaucracies, even at the State level, and the behavior 
within.
    As Senator Nickles has said, and others, most people--and 
Senator Conrad, I am told, said that before I came in, and I 
know Senator Bryan said it--are trying to do the right thing in 
the most unpopular job in the history of the world, I think, 
being an IRS agent.
    Unfortunately, not all Americans do pay the taxes which 
they owe and which is part of the cost of a democracy, to have 
your shores protected, your homes relatively safer.
    The only way that can be achieved is to work through 
something called enforcement, and enforcement I think is what 
we are going to see has some flaws in it, because there are 
always cases where people go out and they do things the wrong 
way. Those people should be terminated and those people should 
be shown in these hearings to be what we mean when we say we 
are trying to straighten out the system.
    I think it is also interesting that, over the last 5 years, 
there have been 3,200 cases of assaults or threats on IRS 
agents, and those folks are humans, too, the good ones, and 
then whoever the bad ones are, they have the right to do their 
jobs with some sense of security, except if they do them 
wrongly, in which case they should be fired.
    I know that Secretary Rubin has done a whole series of 
things to try and correct this situation, and criticism of the 
IRS has an effect on our ability to enforce our tax laws, as 
has been noted by even President Reagan's IRS director. The IRS 
always has been an agency to criticize. So I hope we are going 
to get the whole picture. I have in my book letters from a 
variety of Senate and House leaders who have turned the issue, 
it seems to me, into a fundraising issue.
    Each of the letters that they send out say some of the 
things that have been said here this morning, or will be said 
here this morning. Then they said, by the way, please send in 
$25, $50, or $100 to whichever national committee or to 
whichever Senate campaign committee is trying to raise money by 
IRS bashing. I find that distressing.
    In other words, is this a real issue that we are trying to 
do something about or is this an issue that we are trying to 
make political capital off it? If it is the latter, I find that 
distinctly unuseful. If it is the former, I find it thoroughly 
worthwhile.
    The two large volumes of the Tax Code and the regulations 
that Senator Nickles had in front of him are, in fact, caused 
by us. We are the ones in the Congress who caused those to 
appear. It would be in that spirit then that what we are 
talking about here is not just the abuses, which is important 
and necessary for us to hear, but also, how can we fix it. That 
is the kind of thing which tends to engage my attention, and I 
am confident it would be the same with my colleagues.
    I thank the Chairman.
    The Chairman. Let me say once again that the purpose of the 
investigation and these hearings is not a partisan one. The 
purpose is good government, not partisan purposes.
    Our focus is on whether the average taxpayer is being dealt 
with fairly by the IRS and the internal operation of the IRS, 
irrespective of what party may be in control of the Executive 
Branch. A number of our cases go back 17 years, so it covers 
several different administrations. This is an internal 
examination, as I say.
    Let me set the record straight. Any fund-raising efforts 
are in no way connected with this investigation that we 
commenced some 8 months ago.
    I think we are now to the point where we can turn to the 
first panel. The members of these associations, which I call 
the ``view from the trenches,'' represent the public in all 
types of tax matters, as well as disputes with the IRS. In the 
case of enrolled agents, these are men and women who are 
licensed to represent taxpayers before the IRS, with many of 
their members being formerly with the IRS.
    The panelists are Mr. Joe Lane, who represents the National 
Association of Enrolled Agents, representing the New York State 
Society of Certified Public Accountants; we have Mr. Robert L. 
Goldstein, chairman, and James A. Woehlke, Director of Tax 
Policy--if they would come forward.
    Now, it is our practice in these oversight hearings to 
swear the witnesses, so I would ask each of you to stand and 
raise your right hand.
    [Whereupon, the three witnesses were duly sworn.]
    The Chairman. Do you so swear, Mr. Lane?
    Mr. Lane. I do.
    The Chairman. Mr. Goldstein?
    Mr. Goldstein. I do.
    The Chairman. Mr. Woehlke?
    Mr. Woehlke. I do.
    The Chairman. Please be seated.
    Senator Moynihan. You realize you are in a lot of trouble 
now.
    Mr. Woehlke. Yes, indeed.
    The Chairman. We will start with Mr. Lane. I would ask that 
your testimony be limited to 10 minutes in each case, but your 
full statement, of course, will be included as if read.
    Mr. Lane?

STATEMENT OF JOSEPH F. LANE, ENROLLED AGENT, CHAIRMAN, NATIONAL 
  GOVERNMENT RELATIONS COMMITTEE, THE NATIONAL ASSOCIATION OF 
               ENROLLED AGENTS, GAITHERSBURG, MD

    Mr. Lane. Thank you, Mr. Chairman, Mr. Moynihan.
    It is a pleasure to be invited to appear before the Senate 
Finance Committee today to discuss these matters. We understand 
the focus of the hearings is to look into IRS practices and 
procedures.
    Enrolled agents are uniquely positioned to provide some 
valuable insight to you, since our members deal with thousands 
of IRS employees every day in representing taxpayers. I was 
heartened to hear the opening comments about the bipartisan 
nature of these hearings. There has been a tremendous amount of 
media hype in connection with this hearing, and we were a 
little bit concerned about it ourselves.
    We spoke to both the Majority side and the Minority side, 
and were assured by both parties that the intention of these 
hearings was to be a balanced approach to looking at the IRS, 
with the attempt to arrive at some constructive suggestions for 
change that would improve the tax administration system.
    Mr. Rockefeller, I would be happy to assure you, we are 
here strictly to offer unbiased viewpoints. I think GAO has a 
view, but I think the rest of us also have viewpoints that are 
on an even keel.
    I think probably the best way to demonstrate the bipartisan 
nature of this Commission would be to recommend out of this 
committee the Kerrey-Grassley bill. That was a year-long effort 
in the National Commission on Restructuring to arrive at 
informed viewpoints on how best to change the tax 
administration system this country has and to assure that we 
have taxpayer rights protected and we have an organization that 
is responsive to taxpayer input, and at the same time creates 
an effective work force that is able to collect the taxes this 
country needs to survive on. So the best way to ensure that you 
have bipartisanship, I think, is to enact that legislation, and 
we would urge that that be done.
    We would like to start today by talking about some of the 
things IRS is doing right. I think the Service should be 
commended for the fact that it has embraced the majority of 
these recommendations that the Commission has given them, and 
they have announced that they intend to enact administratively 
whatever they are capable of doing from the commission.
    I think that that probably has not been an easy pill to 
swallow for the IRS, but they have stepped up to the plate and 
done it. I think that is indicative of an agency that is 
willing to accept constructive criticism and change.
    We also salute the selection of Bob Barr, the new Assistant 
Commissioner for Electronic Tax Administration. He is an 
outsider from the industry. He served previously as the vice 
president of the Intuit Software Company, and I think that the 
IRS is responding by going out and trying to recruit expertise 
they do not have in-house to market electronic filing, and that 
is a good development and I hope to see more of that continue.
    We also applaud some of the initiatives the local field 
components of the IRS are doing. They are trying to bring in 
more practitioner input, and we praise those districts that are 
involved in that area.
    We also think the IRS national office is making a concerted 
effort to have better communications with the practitioner 
community, and that always improves relationships when problems 
can be discussed in an open manner and flushed out.
    One of the biggest concerns we have today about the IRS is 
the status of employee morale in the Service. Our voluntary 
compliance system depends on both sides of the table being 
staffed by competent people. On the practitioner's side, we 
have a procedure for making sure our people are up to snuff and 
are competent and able to handle things, and we train them.
    One of the concerns we have on the IRS side is this 
constant din of criticism and public attention and media 
barrages that we see that has the effect of making morale in 
that organization decline.
    So we are concerned about that morale and we would like to 
see some additional focus on GAO looking into what they could 
do to instill some additional feelings of worth among some of 
these people in the Service, because if you have unhappy tax 
administrators you inevitably have unhappy taxpayers, because 
they have to deal with these people on a regular basis. That 
human element that Senator Gramm talked about is an extremely 
important element in any law enforcement capacity.
    We have some specific issues that we would like to address 
with the committee today in the area of taxpayer rights, and 
particularly in procedures with collection and exam. Then we 
would like to go on and offer some additional suggestions for 
your consideration.
    One, we believe the American Bar Association has drafted 
some legislation they will be submitting which bars the IRS 
from using statistically-generated average expenses in making 
collection case determinations. We support that legislation and 
we would like to see the Service consider the unique facts and 
circumstances of every taxpayer's case on a case-by-case basis.
    We believe that the use of these expense statistics has 
increased the number of bankruptcies substantially in the last 
year. We had a 25-percent increase in bankruptcies in 1996, 
during a period of economic improvement throughout the country.
    We think that a big component of that bankruptcy increase 
had to do with the collection division in October of 1995 
implementing this procedure of using Bureau of Labor Statistics 
standard expenses allowances instead of allowing taxpayer to 
take the expenses they are actually incurring when they are 
making collection determinations. So we would like to see that 
investigated and we would like to see Congress act on that.
    The other problem we always have is the perennial one of 
inconsistent enforcement policies around the Nation. We have 33 
IRS districts and we frequently run into issues where the 
national office promulgates a policy or procedure, then we see 
deviation from the procedures. We need to see more attention 
paid to that, and that is particularly in the collection area.
    The other issue we have problems with is the new procedure 
recently where the IRS has started to ask taxpayers for statute 
extension requests on collection cases, even though there might 
be nine and a half years of the 10 years left on the statute. 
That is an inappropriate use of the statute extension 
provisions. We think that the Congress ought to take a look at 
whether they ought to have a right to have a statute extension 
at all in collection.
    Just in 1990, you extended their statutory period of 
collection from 6 years to 10, and now we have a situation 
where we have a taxpayer, by example in the testimony we gave 
you today, someone goes out and files a tax return, owes the 
money, and calls the IRS, tries to set up a payment agreement.
    If the payment agreement that they could afford to pay each 
month is insufficient to full-pay the tax within the 10-year 
period, the IRS is asking for a 5-year extension today. We do 
not think Congress ever intended the IRS to go into the 
mortgage business or have a lifelong relationship with these 
people. Ten years ought to be sufficient. We do not think we 
want to see 15- and 20-year installment agreements with the 
IRS, and we urge Congress to take a look at that whole area.
    The collection appeals process we think ought to be beefed 
up and allowed to be a true appellate review of the judgment 
and conduct of the revenue officers involved. Right now, it is 
strictly a procedural review and it does not have much of an 
impact. I think the lack of use by practitioners and taxpayers 
alike indicate that they view that as really not a legitimate 
forum.
    In exam, we have the current exam program letter that 
evaluates districts based on yield per hour. I think one of the 
things you are going to focus on in this hearing is the 
inappropriate use of enforcement statistics.
    If you look at how much money per hour is generated by 
revenue agents, then the first casualty you have in an 
environment with a quota system, like a traffic cop, is 
taxpayer rights. You should not have an environment where you 
evaluate people based on how much money you rake in per hour. 
We think that ought to be addressed by the Congress.
    The other issue we are concerned about is the inappropriate 
use of the financial status audits, or the economic reality 
audits. We had a lot of publicity about this last year, a lot 
of hearings about it. The IRS issued a national directive 
saying they would only use this approach when there was an 
indication somehow in the case file that there was unreported 
income. We still see and get complaints from members and 
taxpayers alike that this procedure is being implemented when 
it is inappropriate.
    I think one of the suggestions we would like to see to head 
this off is that the IRS ought to be required, whenever they 
send an audit notice to a taxpayer, to include with that audit 
notice all of the IRP data, the Information Returns Program 
data, that the IRS has on that taxpayer in the file. The reason 
for that, is it avoids the ``gotcha'' game in the audit 
process.
    If taxpayer and practitioners alike, in preparation for 
going in for the audit, know that the IRS has been reported 
some income such as a dividend or miscellaneous compensation 
that was paid but it is not reflected on a tax return, they can 
prepare to argue either it is correct and was inadvertently 
omitted, or it was an erroneous filing to begin with. That is 
one of the issues we always run into as a justification for 
using this economic reality approach.
    Another area we think the committee ought to look at in the 
hearings you are doing, is the market segment specialization 
program. This program is probably the best thing IRS has done 
in the last 25 years in identifying pockets of non-compliance 
in specific industries and focusing their efforts, going out 
and getting other State agencies and other Federal agencies 
together, bringing all the people to the table that are 
affected by it, and doing something about it.
    Probably the best success story you can look at is out in 
the Central California district in Fresno, where they have 
focused on farm labor contractors. They have just accomplished 
a tremendous result as a result of the implementation of this 
approach, and I would suggest you hold a field hearing out 
there, if you have the time.
    I extend an invitation to come out to California. Everybody 
in Washington likes to get an invite to come out to the coast, 
I know. Come out and see what they are doing out there. They 
are doing some terrific stuff and they ought to be commended 
for that.
    With respect to exam quality review, one of the concerns we 
have about employee morale and the lack of IRS's ability to 
recruit quality people, is the quality of the work that is done 
at the initial stage in the audit process is declining.
    One of the things that is interesting to us and I think is 
something else you ought to look at, is the Pacific Northwest 
district has just announced a test study which they are going 
to implement using a district conference staff. That is a 
positive development.
    We would like to see, additionally, the committee consider 
protecting taxpayers' rights of confidentiality by enacting 
legislation that gives the taxpayer the right to protect from 
IRS summons the counsel and advice they have gotten from their 
tax advisers.
    We would like to see all commercial tax return preparers 
registered. We have a ludicrous situation in this country today 
where the tax preparers that have made the most commitment to 
their profession, the enrolled agents, the attorneys and the 
CPAs, are the most regulated, and the ones that have no 
commitment to a professional organization, have not agreed to a 
code of professional conduct, have no code of ethics to adhere 
to, and could open up a card-table shop on January 1, and 
disappear on the 16th of April, are completely unregulated.
    I think the most basic taxpayer right in this country ought 
to be that if you pay for advice on taxes to make sure you 
comply with the law, you ought to be confident you are dealing 
with a competent person.
    Today, we regulate barbers more than we regulate commercial 
return preparers, and you can recover from a bad haircut in 3 
weeks.
    The other thing we have got to do is provide full credit 
for Social Security and self employment taxes that are paid in 
on delinquent tax returns. Taxpayers are not getting full 
credit for their Social Security, even though the IRS is 
collecting the taxes. That ought to be reversed.
    The other thing we would like to see the committee do is 
decide that, as a general principle of tax administration, you 
will never have a situation where the penalties are allowed to 
exceed 100 percent of the tax due for a particular tax period. 
We would also like to see tax penalties not used for revenue 
raising.
    Senator Nickles gave an excellent demonstration before with 
the Bible and the Code. That is because the good Lord, in his 
wisdom, inspired four evangelists to write the Bible and not 
535 members of Congress. We would have the same situation if we 
had 535 evangelists, I am sure. We would have a 5 million word 
Bible, and it would be just as difficult to figure out.
    One of the things you have to review is the whole penalty 
structure in the Code. There are too many penalties for too 
many infractions and you cannot expect anybody to understand 
them.
    The other thing we would like to see changed, is there were 
some recent changes in some court cases that developed where we 
saw elderly people make an estimated payment of $7,000 when it 
should have been $700. The person had Alzheimer's.
    The court reviewed the case and said, we would like to be 
able to give this person a refund, but the daughter did not 
discover this until three or 4 years later. Therefore, the 
statute barred them from getting a refund. That law should be 
changed. There should be reasonable cause that allows a refund 
beyond the 3-year period.
    The other thing we did in our testimony before the 
Commission last year was to offer a suggestion that perhaps one 
of the ways of approaching the problems we are dealing with in 
tax administration was to divide the IRS into two separate 
agencies, one for taxpayer service, and the other for tax law 
enforcement.
    The Commission did not choose to follow that 
recommendation, but we would suggest to you that it might be an 
appropriate thing to discuss with the Commissioner-designate 
during the confirmation hearings to see if they could 
accomplish virtually the same thing within the umbrella of the 
organization, to set aside and provide a network and an 
organization within the IRS to provide for employment and 
promotion opportunities for people to move up in the 
organization, when they have a customer service attitude.
    The IRS says 85 percent of taxpayers are in compliance. 
Eighty-five percent of their efforts ought to go towards taking 
care of those people in terms of focusing on making sure if 
someone calls in and wants a question answered, it gets 
answered in a courteous manner and they get the information 
they need as expeditiously as possible.
    One of the problems you deal with in law enforcement is, 
the same personality that makes a good cop makes a lousy 
waiter, and vice versa. So you need to have more emphasis on 
customer service in that organization and a little less on 
enforcement.
    We have outlined the specifics in the example. Senator 
Gramm made reference to the INS having the same problem. Thank 
you.
    The Chairman. Your time has expired and we must move on.
    [The prepared statement of Mr. Lane appears in the 
appendix.]
    The Chairman. Mr. Goldstein?
    Mr. Goldstein. I will let Mr. Woehlke start.
    The Chairman. I would point out it will be 10 minutes for 
the two of you, so I would ask that you keep within that time 
limit.
    Senator Moynihan. New Yorkers are notoriously fast talkers.
    Mr. Woehlke. We can probably accommodate that, Senator, 
yes.
    The Chairman. Please proceed.

 STATEMENT OF JAMES A. WOEHLKE, DIRECTOR, TAX POLICY, NEW YORK 
     SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS, NEW YORK, NY

    Mr. Woehlke. Good morning, Mr. Chairman, Senator Moynihan, 
members of the committee.
    I am James Woehlke, CPA, director of tax policy for the New 
York State Society of CPAs, and I am here with Robert Goldstein 
today, the chairperson of our Relations with the IRS Committee.
    Our society is privileged to testify before you today about 
our day-to-day work with personnel at the IRS. But before we 
begin we must say that we have tremendous respect for the IRS 
in its gargantuan task of administering our Nation's tax 
system. We are supportive of the mission of the IRS and are not 
among those, unrealistically, we believe, calling for 
abolition.
    Also, some of the media reports about this week's hearings 
indicated your witnesses would portray an IRS run amok. We are 
unable to corroborate that particular message. Quite frankly, 
the IRS has over 100,000 decent, dedicated employees who carry 
out their responsibilities without guile and to the best of 
their ability. It is both unfair and inaccurate to portray the 
entire agency as running amok.
    This is not to say, however, that the IRS has no internal 
problems and challenges to face. Recent accounts for the $4 
billion tax system modernization boondoggle and the IRS's 
complete inability to understand the degree of intrusiveness 
inherent in its financial status approach to auditing indicate 
that there is a disconnect between the inside and outside IRS 
views of what its appropriate function is. Our testimony before 
the National Commission to Restructure the IRS distilled a 
number of what we called root causes at the heart of the IRS's 
problems.
    Mr. Goldstein will touch on several of those today because 
they are helpful to understanding the problems and challenges 
practitioners face in their day-to-day interactions with the 
IRS. The root causes we will be touching on are structural 
dysfunction, the IRS's self-image, and the IRS's siege 
mentality.
    We went into much greater detail regarding these and other 
root causes in our testimony before the National Commission. 
Time today, of course, will not permit that to be related in 
detail, and we therefore respectfully request that you admit 
that testimony, along with today's testimony, into the 
hearing's official record.
    [The information appears in the appendix.]
    Mr. Woehlke. Let me now turn the microphone over to Mr. 
Goldstein.
    The Chairman. Mr. Goldstein.

STATEMENT OF ROBERT L. GOLDSTEIN, CHAIRMAN, RELATIONS WITH IRS 
 COMMITTEE, NEW YORK SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS, 
                          NEW YORK, NY

    Mr. Goldstein. Good morning, Mr. Chairman, Senator 
Moynihan, and members of the committee. I am privileged to 
testify before you today.
    In my practice I deal with the men and women of the IRS on 
almost a daily basis. In my experience and that of those of the 
colleagues I represent, we have found that the vast majority of 
IRS employees are dedicated public servants who try to do the 
best job they have with the tools available to them.
    In our region we have found the executives and staff of the 
service to be open to liaison meetings and, within limits, 
responsive to taxpayer and practitioner concerns. These liaison 
meetings and joint IRS practitioner forums have allowed the 
practitioner and service personnel to share their concerns, 
understand the problems of the other, and try to work through 
these problems before they reach the point of confrontation.
    There are, however, problems which need to be addressed. 
That is why we are here today. I dare say that the majority of 
IRS personnel would also agree that these issues need to be 
addressed.
    The decentralized management structure of the IRS has made 
coordination of some important functions, including employee 
training, tax administration, and education difficult to 
achieve.
    We believe one case illustrates the gap between national 
level policy-setters and regional management. Regionally 
produced IRS pronouncements, including market segmentation 
specialization program papers and market segment understandings 
have been issued with strident commentary regarding worker 
classification, while at the same time new training methods and 
legislation on a national level are implemented expressing 
conciliatory and taxpayer friendly approaches to the worker 
classification issue.
    Regarding the IRS's self-image, we noted that a number of 
IRS employees testifying before the National Commission 
referred to the IRS as one of law enforcement. We cannot 
disagree more with this perception.
    We recognize that there is an important element of law 
enforcement in the role of the Service. But to view that as its 
primary function creates a level of insularity and heavy-
handedness which often makes it impossible to achieve its core 
customer service objectives.
    The mere existence of the Problems Resolution Program 
illustrates this point. The primary role of the taxpayer 
advocate is to resolve taxpayer issues which have floundered in 
the normal process.
    The Problems Resolution Program has been extremely 
successful and praised by practitioners and taxpayer alike, and 
offers an example of how different attitudes by IRS personnel, 
taxpayers, and their representatives emerge when the customer 
service model is used.
    The very success of this program points to the failure of 
the normal process because it means the IRS is succeeding the 
second time around.
    An example of the enforcement mentality that we address or 
that we have problems with exists with the increasing use of 
bypass actions, wherein an IRS examiner contacts the taxpayer, 
in spite of the fact that that taxpayer has an appointed 
representative pursuant to a power of attorney.
    In a recent survey by the AICPA, over a third of the agents 
whom the responding CPAs came into contact with insisted upon 
interviewing taxpayers directly, even after the first Taxpayer 
Bill of Rights should have eliminated this practice. We 
recognize as practitioners that there are times when bypass 
procedures are appropriate. But these are drastic actions and 
require strict supervision. A one-third failure rate is 
inappropriate.
    The IRS misconception regarding the primacy of its law 
enforcement role leads to our third root cause, the IRS's siege 
mentality. It is overly insular in nature. In our written 
submission we quote at some length the Deputy Secretary in the 
Department of Finance and Management of the Service as testify 
before the National Commission that the IRS is a law 
enforcement agency at heart. We disagree with that. We believe 
it is a customer service agency at heart, and has a tangential 
law enforcement element.
    We would be remiss in any discussion of problems with the 
IRS if we did not address tax law complexity. Taxpayers 
primarily use professionals to prepare their tax returns and 
represent them before the IRS, in the event that such 
representation is required, because of the complexity of the 
tax law.
    Over the past 11 years, we have had 8 years with tax law 
changes, significantly increasing the complexity of our tax 
system. The law that you gentlemen have just passed ranks near 
the top of the complexity scale.
    The professional staff of the Congress should consult with 
practitioner organizations on a regular basis in connection 
with writing new tax legislation. In this way, they can better 
understand the compliance effect of the law that you pass. This 
becomes clearer to the members of your staff.
    The examination and collection issues which we are going to 
discuss may appear mechanical, however, they are symptomatic of 
systemic problems that we see in the field. For example, we are 
aware of an S corporation audit that took in excess of 24 
months and resulted in a minimal adjustment.
    Another S corporation took in excess of 18 months from the 
date of the initial audit to the 30-day letter. An individual 
audit covering a period of 2 years endured for more than 20 
months and has just been taken into the Problems Resolution 
Program.
    IRS personnel who participate in the FlexiPlace program 
wherein certain personnel work at home for part of the work 
week, cannot be reached by telephone when they are at home. A 
modern voice mail system should be installed and such personnel 
working at home should be required to monitor that system.
    We do have some suggestions. We believe that the interim 
extensions for partnerships, trusts, and individuals should be 
eliminated. They serve no useful purpose. They do not increase 
the government's cash flow, they cost the IRS time and money, 
and are a thorn in the side of extending taxpayers and 
practitioners.
    We endorse the report of the National Committee for 
Restructuring. We think they did a very fine job. However, we 
definitely do not agree that the independent board they suggest 
should hire and fire the commissioner or set the IRS budget.
    The Chairman. Mr. Goldstein, your time is up. I do have to 
announce, our time is up as well. The Democrats have objected 
to any committee continuing hearings at this time.
    Senator Moynihan. It is a rule that can be invoked.
    The Chairman. So we will have to continue this later. I 
would like to recess and see if we cannot work that out, so I 
would urge everybody to stay here for the moment.
    Senator Moynihan. Mr. Chairman, at the risk of censure by 
the whole body, I am going to extend long enough to thank these 
witnesses. They have been very helpful. They have both endorsed 
the Kerrey-Grassley Commission report. The idea that we ought 
to consult with persons such as the CPAs and enrolled agents on 
questions of complexity before we pass another tax bill is a 
good idea.
    The Chairman. No question about that, that complexity is a 
serious problem.
    Senator Gramm. Mr. Chairman.
    The Chairman. Yes, Senator Gramm.
    Senator Gramm. Mr. Chairman, could we, before we adjourn, 
since this order has come over from an objection on the Senate 
floor, could we finish this round? It very seldom happens to 
me, but I have had an idea. [Laughter.]
    Senator Gramm. I would like to have an opportunity to ask 
some questions and make a comment. Could we at least finish 
this round before we shut down?
    The Chairman. I think the answer to continuing has to be in 
the negative. I regret that.
    Senator Mack. Do we know who objected? Can we raise a 
question here as to who objected, and what was the purpose?
    Senator Moynihan. It was Senator Daschle, but you will not 
get anywhere asking us why.
    Senator Mack. It is an unfortunate situation. I think that 
this morning the tone was created that this was going to be a 
bipartisan effort.
    Senator Moynihan. Oh, it has nothing to do with this 
committee. Nothing to do with this committee.
    The Chairman. The objection is to all committees meeting 
during the session of the Senate. I would like to continue, but 
I think we would probably lose our Democratic members. I am 
insistent upon this continuing as a bipartisan effort, so let 
us see if we cannot work it out.
    I would point out, tomorrow there will be no Senate 
business in the morning. We will start at 9:00 and we will be 
able to continue at least until 2:00, and hopefully later.
    I apologize to our witnesses who were to testify today.
    Senator Moynihan. We thank our witnesses, too.
    The Chairman. Yes. But some are also here who have not had 
a chance to speak. So I just want to make it very clear, we 
appreciate your being here. Your testimony is important and we 
desire to secure it in full. I would ask that you stay around 
temporarily.
    The committee is in recess.
    [Whereupon, at 11:34 a.m. the hearing was recessed until 
Wednesday, September 24, 1997 at 9:00 a.m.]


        PRACTICES AND PROCEDURES OF THE INTERNAL REVENUE SERVICE

                              ----------                              


                     WEDNESDAY, SEPTEMBER 24, 1997

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to recess, at 9:00 a.m., 
in room SD-215, Dirksen Senate Office Building, Hon. William V. 
Roth, Jr. (chairman of the committee) presiding.
    Also present: Senators Grassley, Hatch, D'Amato, Murkowski, 
Nickles, Gramm, Lott, Moynihan, Baucus, Rockefeller, Breaux, 
Conrad, Graham, Moseley-Braun, and Kerrey.

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order.
    Since we were cut short yesterday we will submit questions 
in writing to both the Enrolled Agents and New York State 
Society of CPAs, and their responses will be included as part 
of the hearing record.
    So I would ask our members to provide the Finance Committee 
staff with their written questions by the close of business 
today. Of course, I do apologize to our witnesses for this 
change.
    [The questions and responses appear in the appendix.]
    The Chairman. This morning I would like to welcome three 
distinguished authors, each of which is an expert in the area 
of the workings of the Internal Revenue Service.
    Ms. Shelley Davis has had the distinction of being the 
first and last IRS historian. She is the author of a book 
entitled ``Unbridled Power.''
    Mr. Robert Schriebman is a practicing tax attorney who has 
written eight books on IRS practices and procedures, and he is 
also an adjunct professor at the University of Southern 
California Graduate School of Accounting.
    Finally, we have Mr. David Burnham, who is an associate 
research professor at Syracuse University, and has written 
several books including ``A Law Unto Itself: Power, Politics 
and the IRS.'' He is the former New York Times investigative 
reporter who wrote the Serpico police corruption series that 
led to the formation of the NAT commission.
    I would ask these three witnesses to please come forward.
    Senator Murkowski. Mr. Chairman?
    The Chairman. Yes.
    Senator Murkowski. I wonder if I may make a very short 
observation at this time. Yesterday the hearing was cut short 
and I would just like to add one short horror story to the list 
and commend you for holding this hearing.
    The Chairman. All right. We will get back to the witnesses 
in just a minute. In the meantime, Senator Murkowski.

 OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, A U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. I thank you very much, Mr. Chairman.
    I would like to share with you an Associated Press story of 
September 22, and I will read it as follows. It is just one 
page. ``Hundreds of Alaskans have received notices from the 
Internal Revenue Service that their permanent fund dividends 
were being seized because of tiny back tax debts, some as small 
as 4 cents.''
    The IRS says the problem was a computer glitch, one that 
involved some 800 of my Alaskan constituents, who got the 
notices allegedly by mistake. ``We are extremely sorry,'' the 
IRS spokesperson said.
    ''I thought it was a practical joke that one of my friends 
was playing,'' said Dan Coyne, owner of the Sourdough Sporting 
Goods in Wasilla when he received the notice Monday of his 4-
cent debt seizure. But the notice looked official enough, and 
soon Coyne got mad. Can you imagine how much money this costs 
the taxpayers?
    He tried to call the IRS office, but could not get past the 
readings and the hold music. He called the State Department of 
Revenue, he called his Congressman, and he called me. ``I was 
up in arms,'' he said. The tax collectors had never told him he 
owed this 4 cents. ``Well, it was all a mistake,'' said Kraft 
at the IRS. ``A technical glitch was traced to an IRS computer 
in Ogden, Utah.'' No offense, Senator Hatch.
    ``The IRS normally does not levy permanent fund checks for 
any amount less than $25,'' Kraft said. ``In some cases, these 
pennies were not even owed in the first place.''
    But Willie Bannon, a potato farmer in Sutton, received a 
notice saying he and his wife owed the government 7 cents. 
After 20 minutes on the telephone, and then on hold, Bannon 
finally received an IRS representative. ``And she wanted to 
argue with me that it was not 7 cents,'' Bannon said. 
``Surely,'' the representative told him, ``if the IRS was 
levying his check he must owe more.''
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Murkowski.
    I would say to each of our witnesses, we are indeed very 
pleased to have you here. I would ask that each of you in your 
opening statements limit it to 10 minutes. Your full statement 
will be included as if read.
    It is our practice to have witnesses in these hearings to 
be sworn, so would you please rise and raise your right hand.
    [Whereupon, the three witnesses were duly sworn.]
    The Chairman. Ms. Davis?
    Ms. Davis. I do.
    The Chairman. Mr. Schriebman?
    Mr. Schriebman. Yes, I do.
    The Chairman. Mr. Burnham?
    Mr. Burnham. Yes, sir.
    The Chairman. Thank you, and please be seated.
    Ms. Davis, it is our pleasure to hear from you.

 STATEMENT OF SHELLEY DAVIS, AUTHOR OF ``UNBRIDLED POWER'' AND 
           FORMER HISTORIAN FOR THE IRS, MANASSAS, VA

    Ms. Davis. Well, thank you, Mr. Chairman, and Senator 
Moynihan. I am glad to be here. I very much appreciate this 
opportunity.
    I am going to start out by just telling you I read with 
great interest, as I am sure all of you did, an article in the 
Washington Post last Saturday announcing these hearings. But if 
this article is to be believed, these hearings are a partisan 
effort by Republican members of Congress to blacken the 
reputation of the IRS.
    Even an unnamed Democratic Congressional staff member said 
in that article that much of what you hear over the next 3 days 
will be ``for show,'' that hiding the identities of IRS 
employees who will testify before you is nothing but a ploy to 
generate media attention.
    But I tell you, nothing could be further from the truth. I 
sit before you today in the open as a former employee of the 
IRS, because I have nothing to hide. My career is over.
    But I have much to share with you about the IRS. I would 
like you to refer to my written testimony for a summary of my 
experiences with the arrogant and dangerous culture of the IRS; 
about how I discovered that the IRS does keep list of American 
citizens for no reason other than that their political 
activities might have offended someone at the IRS; about how 
the IRS believes that anyone who offers even legitimate 
criticism of the tax collector is a tax protestor; about how 
the IRS shreds its paper trail, which means that there is no 
history, no evidence, and ultimately no accountability. So, I 
urge you to read my written testimony.
    But today I am going to speak to you from the heart. This 
is not a partisan witch hunt. To help you believe that, I will 
tell you up front that I am a lifelong Democrat. I do not come 
to you today with any kind of partisan agenda. I come to you 
today as a citizen who witnessed things that should never 
happen in our government that I saw during my more than 7 years 
as the first, last, and only official historian for the IRS.
    As their former historian, I can sit here and tell you that 
abuse of taxpayers, abuse of authority, and abuse of power by 
the IRS happens on both sides of the political fence. There is 
evidence that both the Democratic and Republican 
administrations in the past have tried to use the IRS to 
further their political agendas. There is absolutely nothing in 
the current law to prevent this from happening.
    There is also nothing to prevent the IRS from doing it on 
their own in an attempt to perhaps please or appease whatever 
party happens to be in power. It is important to remember that 
the IRS itself is not a particularly partisan agency, it has 
only one political appointee and that is the commissioner.
    But it is an agency composed of career bureaucrats, 
bureaucrats who have spent their careers learning how to spin 
IRS arrogance and abuse into an impenetrable defensive shield, 
who have learned how to hide behind the privacy laws that are 
meant to protect taxpayers to protect only themselves.
    The bottom line, is that the IRS is the best secret-keeping 
agency in our government today. They are better than the CIA, 
better than the FBI. I mean, think about it. You and the 
American people do not have a clue about how the IRS goes about 
doing its job, and that is just the way they want it.
    Nobody is more masterful at this spin than the current 
acting commissioner, Michael Dolan, who I worked with the IRS. 
Mr. Dolan actually succeeded in getting the media to air his 
patently absurd allegation that IRS computers should be blamed 
for many of the horror stories that you hear about. I am sorry, 
but can computers seize the entire inventory and shut down a 
business because they were insulted?
    Can computers magically materialize early in the morning on 
your doorstep, as they did to taxpayer Shirley Barron? Not long 
after, her husband gave up on his fight with the IRS and took 
his own life. Can a computer accept a bribe from a Federal 
agent, setting in motion an armed invasion of an American 
corporation? No, computers cannot do these things, people do 
these things.
    But by blaming those darn computers, Mr. Dolan deflects 
attention from the real perpetrators, the IRS employees who 
allow these actions to go forward, from the agents who 
participated to the executives in Washington, DC who did 
nothing to stop this abuse and nothing to discipline the 
perpetrators.
    These hearings are about people, living, breathing 
entities, not computers. I mean, goodness knows, Congress has 
held enough hearings about IRS computers. It is time that the 
people have their say, people who have been harmed by their 
government, by people who are paid with their tax dollars, by 
an agency that seems to think it is all right if just a few 
taxpayers fall through the cracks.
    I would like to turn, quickly, to something a bit more 
personal. Also in that same Washington Post article Mr. Dolan 
denied that the IRS punishes employees who speak out. I tell 
you today, Mr. Dolan is lying. The IRS punished and retaliated 
against me when I gathered up all my courage and went forward 
with allegations that the IRS was breaking the law.
    But what I want to do today is, rather than telling you my 
story myself, I am going to read you a few excerpts from some 
correspondence that my father, a retired professor of 
economics, has had recently with the Democratic National 
Committee.
    Earlier this year he received a solicitation from the DNC 
for money to help the Democrats, and he wrote back. He said, 
``As a lifelong liberal Democrat, my decision not to give 
financial support to the DNC at this time was not made 
lightly.'' He talks about campaign finance reform, which I will 
not bore you with here today.
    Then he says the second reason that he has decided not to 
give money any further is more personal. He says, ``This is the 
treatment my daughter received from the Clinton Administration, 
whose election in 1992 she, like me, greeted with high hopes 
and rejoicing. Soon after taking her position as historian for 
the IRS she discovered that through both neglect and design the 
agency, in violation of Federal law, was destroying records 
pertaining to decisions and actions of the IRS throughout the 
20th century. She sought continuously to bring these acts to 
the attention of the commissioner in the hopes that the 
practices would be stopped.
    What a once in a lifetime political opportunity this 
administration let slip through its fingers. Here was an 
agency, much feared and hated by the American public in 
violation of Federal law, which a new, fresh administration 
could set right.
    Unfortunately, this did not happen. Instead, the 
commissioner, Ms. Richardson, acting through her deputy 
assistant commissioner to whom my daughter was assigned, 
reprimanded her and launched an internal investigation against 
her.
    With President Clinton's commissioner unwilling to support 
her, my daughter felt she had no choice but in good conscience 
to resign. Thus, for the sake of principle and a deeply-rooted 
belief in the worth and dignity of public service, her 16 years 
as an honorable Federal employee came to end.''
    Then he says, ``I have been a Democrat for all my life 
because I always believed that the Democratic Party was about 
justice and fairness. This does not seem to be true when it 
comes to matters like this. I see no reason whatsoever for the 
Democratic Party or a Democratic President to be defending 
illegal practices of the IRS. This is a matter of simple 
justice.''
    I can just say, I hope that anonymous Democratic staffer is 
listening today. Everything that you see and hear here over the 
next 2 days will be a matter of simple justice, not partisan 
politics.
    One final point on what happened to me. When I originally 
took my allegations of the legal document destruction I went to 
the IRS Inspection Service, which is supposed to be the 
internal watchdog for the IRS.
    I took them to IRS Special Agent Steve Rashe. Agent Rashe 
promised me, looked me in the eye and told me he would look 
into my allegations, I took him at his work. But later I 
discovered that it was Agent Rashe himself that was 
masterminding the internal investigation of me on completely 
false and trumped up charges.
    So then I went to the Treasury Department Inspector General 
to complain that the IRS was retaliating against me, and also 
to raise the issue that to have the very same agent to whom I 
had entrusted with my information about illegal activities at 
the IRS turn around and begin to investigate me was a conflict 
of interest.
    Well, guess what the Treasury Department IG said. The 
Treasury Department Inspector General investigated my 
allegation by going to the IRS. They never came to me and they 
never asked me anything. They went to the IRS.
    They went directly to Special Agent Steven Rashe and asked, 
well, is this a conflict of interest? Agent Rashe and the IRS 
Inspection Service shook their heads and said, no, this is not 
a conflict of interest. Of course, not. That was the end of the 
Treasury Department investigation of my allegation of 
retaliation.
    This is how the IRS and the Treasury Department 
investigates internal allegations of wrongdoing. America, we 
have got a problem.
    So to Mr. Dolan and to you I say that, yes, the IRS does 
retaliate against its own employees who speak out. Special 
Agent Rashe is still hard at work, probably leading the charge 
to silence any other potential whistle-blowers inside the IRS.
    Now, what you will see here over the next few days is not a 
show and it is not a media circus. What you will see are some 
incredibly brave Federal employees who do not want to end up 
where I am, unemployed, pensionless, and bitter. Seven years 
ago, another Congressional committee sat and heard testimony 
from IRS employees about ethical misconduct that reached to the 
highest levels of the IRS.
    Very quickly, the key points of that investigation 7 years 
ago were that there has been a serious failure on the part of 
the IRS to manage employee integrity; wrongdoing by IRS 
managers is often ignored entirely or ineptly investigated; a 
pervasive fear exists among IRS employees that reported 
misconduct or cooperated in an investigation will result in 
retaliation against them. A mind-set exists within IRS that 
seeks to preserve the agency's public image above all else.
    Does any of this sound familiar? In 1989 I sat in the 
audience and I listened. I never imagined that I would be 
sitting here, testifying to you 7 years later. But 7 years ago, 
after listening to three days of very damaging and damning 
testimony about IRS ethical conduct, Congress went home and did 
nothing.
    If you do that again, in another 7 years, if not before, we 
will be back here again. You have an opportunity to make a 
difference. Please do not let it slip through your fingers or 
get caught in diatribes of partisan politics.
    I will end very quickly here with a plea to the American 
people who might be watching these hearings. I hope the people 
of this great country of ours will take a moment to call you, 
to write you, to send an e-mail and tell you how they feel 
about what they are hearing today, because that is the way for 
the message to get through. If the message comes through loud 
and clear, perhaps this will be the last time we have to listen 
to the anguish of wronged taxpayers.
    I thank you very much.
    The Chairman. Thank you, Ms. Davis.
    [Applause.]
    The Chairman. The committee will please be in order.
    Mr. Schriebman?

 STATEMENT OF ROBERT SCHRIEBMAN, AUTHOR OF EIGHT BOOKS ON IRS 
PRACTICES AND PROCEDURES, ADJUNCT PROFESSOR OF TAX PRACTICE AND 
PROCEDURE, UNIVERSITY OF SOUTHERN CALIFORNIA GRADUATE SCHOOL OF 
             ACCOUNTING, ROLLING HILLS ESTATES, CA

    Mr. Schriebman. Mr. Chairman, Senator Moynihan, Senators, 
thank you for the opportunity to allow me to express my views 
on the current state of the Internal Revenue Service.
    I am going to take a different tack here. I am a practicing 
tax attorney in the city of Rolling Hills Estates, which is a 
suburb of Los Angeles. I have been doing this for about 20 
years, and my practice is limited exclusively to handling 
matters of tax litigation, tax collections, and tax audits. I 
represent people in all walks of life and in all tax brackets.
    I am in the trenches every day, eye to eye with the IRS, 
with auditors, and tax collectors. I am the author of several 
books on IRS practice and procedure. I have written the first 
practitioners' manuals on IRS collection defense and California 
collection defense procedures.
    If I can just correct for the record, I am a retired 
professor at USC. After a while, Mr. Chairman, those students 
get a little smarter than their professors, and I think maybe 
it is time to leave.
    You know, Senators, most IRS tax collectors, they are 
called revenue officers, and they are distinguished from the 
tax auditors who audit you. They are decent people, they are 
overworked people, and they have a heck of an unpopular job. 
But I believe that they do their utmost to follow the law in 
the provisions of their internal manual known as the IRS 
Manual.
    Unfortunately they do not keep current on changes within 
the IRS, and very often their internal libraries are seriously 
outdated.
    Recently revenue officers have told me that the IRS is 
adopting a ``get tough'' attitude toward tax collections. Now, 
the first Taxpayer Bill of Rights that was passed in 1989 did 
away with the formal keeping of internal statistics on tax 
collections, but it still appears that the only way to really 
make a name for yourself within the collection division is by 
the number of seizures under your belt.
    I brought with me today quite a horror story. It is in the 
record. It is in my formal opening remarks. I have other things 
to say that I think are equally as important as the horror 
story.
    I want to point out to you some things that you might not 
be aware of regarding how the IRS works. I want to make it 
clear that I am talking about dealing with the IRS on a day-to-
day basis, working with taxpayers who have problems.
    The IRS has fixed standards relating to allowable living 
expenses in order to grant taxpayers an installment payment 
arrangement. You might be surprised to know that a taxpayer has 
absolutely no right under the Code, even under the first 
Taxpayer Bill of Rights, no right at all, to an installment 
payment arrangement.
    The allowable living expense standards that the IRS sets 
out for people are really unrealistic. They do not take into 
consideration financial commitments made by people prior to 
their becoming delinquent in their taxes.
    These same unrealistic IRS standards apply to the cost of 
owning and operating a car and other essential living expenses, 
such as food, clothing, personal maintenance. A taxpayer is not 
allowed educational expenses for a child's private school, or 
religious school education, or college education. A taxpayer is 
not allowed, under these standards, to support his or her place 
of worship.
    These unrealistic expense standards have driven many 
taxpayers into unnecessary bankruptcy. Now, in bankruptcy they 
have something called an automatic stay. You get into 
bankruptcy, that stops the IRS cold. It is the only guaranteed 
way of really stopping the IRS cold.
    However, what is happening here is you have productive 
taxpayers, solvent taxpayers, who would otherwise not be in 
bankruptcy but for these unrealistic expense standards.
    Now, this causes not only myself by my colleagues around 
the country quite a disturbing concern, and it appears that the 
bottom line is that the IRS would rather force a taxpayer into 
bankruptcy than to accept a fair monthly installment payment 
arrangement or a settlement that is technically known as an 
offering in compromise.
    The IRS can take a taxpayer's home by just the signature of 
the district director alone. The irony of that rule is that it 
was part of the first Taxpayer Bill of Rights.
    There is no court hearing, there is no notice, there is no 
opportunity to litigate the merits of the IRS's claim. The IRS 
can close down a business, as Ms. Davis said, and take away a 
taxpayer's livelihood by merely filing a few papers in Federal 
court. The judge simply signs the seizure order. That is all 
there is to it. The taxpayer gets absolutely no notice, 
absolutely no opportunity to contest the legality of the 
assessment that the IRS claims is owed.
    In so doing the IRS can commit perjury in these 
declarations and they can get away with it. What is sad, is 
this type of criminal conduct seems to be condoned by the tax 
collector supervisors. To me this violates not only the 4th and 
5th amendments of our constitution, but one's basic civil 
rights as well. In other words, it is just plain not fair.
    In order to obtain a court order to close down a business 
all that is needed is a formal application and a sworn 
declaration that the revenue officer followed a few specific 
procedures set forth by the U.S. Supreme Court in the case 
known as GM Leasing, Inc. vs. United States. It is all very 
secretive. The taxpayer is never given notice of these 
proceedings and is never afforded an opportunity to contest the 
merits of the IRS's claim.
    The revenue officer simply obtains the seizure order 
represented by the U.S. Attorney, the judge signs the order, 
and then the taxpayer is served with the order and must 
immediately vacate his business premises.
    The taxpayer's only recourse is a long and costly tax 
refund procedure which most likely will wind up in court. In 
the meantime, the IRS sells the assets of the business and the 
taxpayer's business is gone.
    Some IRS auditors and tax collectors have taken the 
position that the Congressional directives that you have set 
forth in the Internal Revenue Code are simply guidelines, that 
they are free to accept or reject at will.
    If IRS employees do not follow the law and if they commit 
perjury before Federal judges, their conduct is often condoned 
by their superiors, including those at the highest level.
    With increasing frequency I find that I have to go over the 
revenue officer's head to the manager, and over the manager's 
head to the branch chief. It is getting increasingly more 
difficult to distinguish arrogance from bully tactics and over-
zealousness. I do believe that revenue officers are being 
pushed by their superiors to undertake more seizures in order 
to achieve promotion within the system.
    The examples that I have given you today reflect a lack of 
accountability within the system, to the taxpayer, to the 
American people, and reflect an institutional arrogance.
    This is especially true in exceptional situations where a 
rogue or renegade tax collector throws aside the Code, throws 
aside the Internal Revenue Manual in order to achieve self-
promotion and recognition by his or her superiors.
    Now, I have a few suggestions for improvement of IRS and 
for improvement of taxpayer rights. If you will look at the 
letters IRS, they stand for Internal Revenue Service, Service, 
Service. We are not getting the kind of service as we should 
for our money these days.
    Taxpayer abuse is not going to stop by just putting in new 
high-tech computer systems. While electronic technology is very 
important and it is necessary, we have to keep in mind that 
these are just machines and machines can further widen the 
distance and alienate the American people from their 
government.
    Creating a new Board of Governors who will sit in their 
insulated ivory towers is not the answer either, a wheel within 
a wheel, a bureaucracy within a bureaucracy. We need something 
responsive to people's problems now, when they are in the 
field, when they have them.
    So what I suggest, Mr. Chairman, is to put some real teeth 
into the Taxpayer Bill of Rights. Of primary importance, Mr. 
Chairman, the IRS should not be allowed to take any property of 
any kind from a taxpayer without notice and an opportunity for 
that taxpayer to be heard.
    The IRS should pay damages, not only when its agents 
violate the written provisions of the Internal Revenue Code. 
That is the way things are now. But they should also pay 
damages for violating internal procedures of their own manuals. 
They should also pay punitive damages if they violate 
taxpayers' rights.
    A taxpayer should be allowed a change of IRS auditor or a 
collector for reasonable cause. Right now, it is impossible. If 
you are not getting along with your collector or your auditor, 
you feel there are problems, a personality conflict, you are 
going to have a hard time to make a change. It is just not 
going to happen. They are not going to allow it.
    What is needed is an external check and balance system 
where a taxpayer can afford to be heard without first having to 
pay what the IRS says is owed. Collection activity must 
immediately stop until the issue is heard and ruled upon, a 
forum where the burden of proof is shifted to the IRS, instead 
of the way things are now where taxpayers are presumed guilty 
until proven innocent.
    May I respectfully suggest the institution of an 
independent administrative system of review of IRS collection 
and audit activities before they are allowed to be implemented. 
Taxpayers should be allowed to appeal IRS action to an 
administrative law judge and, if necessary, appeal that judge's 
decision to an Administrative Appeals Board. If that is too 
expensive, let us use the Tax Court. If that is too expensive, 
let us get some practitioners out there who will act as 
arbitrators.
    In conclusion, let me say that not all people who owe the 
IRS deserve a kinder and gentler hand. Some of these people 
need a fist. Some do not take their obligations seriously, but 
most people do.
    What we want is a level playing field. We want some 
respect, that is all. That is the bottom line, respect for our 
laws, our courts, and our constitution.
    Thank you for the opportunity to address the Senate.
    The Chairman. Thank you, Mr. Schriebman.
    [The prepared statement of Mr. Schriebman appears in the 
appendix.]
    The Chairman. Mr. Burnham?

  STATEMENT OF DAVID BURNHAM, AUTHOR OF ``A LAW UNTO ITSELF: 
   POWER, POLITICS AND THE IRS''; CO-DIRECTOR, TRANSACTIONAL 
  RECORDS ACCESS CLEARINGHOUSE; ASSOCIATE RESEARCH PROFESSOR, 
SYRACUSE UNIVERSITY'S NEWHOUSE SCHOOL OF PUBLIC COMMUNICATION, 
                         WASHINGTON, DC

    Mr. Burnham. Mr. Chairman and members of the committee, 
thank you very much.
    I would like to begin by commending this committee for 
having this hearing. At the same time, I would like to pick up 
on Senator Moynihan's remarks yesterday that this is the first 
time that the Senate Finance Committee has had an oversight 
hearing in the 21 years that he was with it.
    I believe, actually, it is the first time that the Senate 
Finance Committee has ever had a full hearing on oversight. I 
think, if you think about that and you think about the impact 
of this agency on the American people, that this is not a great 
moment in the Senate's history. I think it is a really serious 
problem.
    The record clearly demonstrates that the lack of effective 
oversight of the Internal Revenue Service by Congress, the 
courts, news organizations, tax practitioners, and other 
concerned individuals has done, I think, grievous harm to the 
American people for many years.
    While it is now a worn cliche, it nevertheless remains a 
basic truth: the price of liberty is eternal vigilance; you 
have to keep looking at large, powerful institutions all the 
time.
    Because we, all of us, have failed to hold the IRS 
accountable, I believe the agency has often operated in an 
abusive, sloppy, unresponsive, improperly political, and 
occasionally corrupt ways.
    The IRS's continuing problems are dangerous to the Nation 
for two reasons. First, a badly managed agency does not collect 
as much as might be expected of the relatively small but still 
significant portion of Federal taxes that are owed by non-
complying taxpayers.
    The second cost is harder to measure, but probably much 
more important. A badly managed agency is unfair. Substantial 
numbers of individual citizens are radically subject to 
wrongful actions. Such treatment contributes to a corrosive 
public cynicism that undermines public confidence in the 
government in a dangerous way. We are now seeing some of this 
around the country, this cynicism.
    My belief that strong oversight can have a positive impact 
on government is not theoretical. It is based on my direct 
experience. As a reporter who has investigated large, powerful 
bureaucracies like the New York City Police Department, the 
National Security Agency, the FBI, and the IRS for the last 30 
years, I have seen clear and certain examples where public 
exposure of serious government problems have led to genuine 
improvements in government operations. This can be done.
    The IRS, of course, is the subject of the committee's 
hearings, not the New York City Police Department. More than 10 
years ago, I began an investigative book and published it 
called ``A Law Unto Itself: Power, Politics and the IRS.'' I 
found quota systems, I found horror stories. I found all of the 
stuff that you are going to be seeing in the next day or two. 
It was all there.
    The book is unique, I do not think anyone has written like 
it, and was praised by many people, including Fred Goldberg, 
the IRS commissioner at the time. He surprised me by telling a 
national audience that my critique of the agency had got it 
right.
    Perhaps one reason Commissioner Goldberg did not condemn my 
book, is I did not heap blame on the Bush Administration. My 
research, in fact, and this is a point that Shelley made, has 
found that the IRS has suffered mishaps and misadventures under 
almost every President, Republican and Democrat, going back at 
least to Herbert Hoover.
    In the documents that I looked through I found examples. 
Herbert Hoover. He was irritated at the criticism of his 
budget-cutting policies by the Navy League, a conservative 
group that wanted to have the Federal spending continue on the 
Navy. So Herbert Hoover got the FBI and the IRS to investigate 
the Navy League. They tried to find out who the contributors 
were, they went after them.
    Franklin Delano Roosevelt regularly used the IRS as a 
political hit squad. He ordered the agency to mobilize its 
enforcement powers against former Treasury Secretary Mellon, 
Senator Huey Long, the singer Paul Robeson, the Republican 
representative and neighbor Hamilton Fish, Father Charles 
Coughlin, and many others. I believe he was the champion abuser 
of the IRS, from my record.
    During President Truman's watch, a massive and long-
festering IRS corruption scandal erupted, during which hundreds 
of agency officials and agents were implicated, including one 
Treasury Secretary, one Commissioner, one Assistant Attorney 
General. The Assistant Attorney General went to jail for 
corruption, taking a bribe. A good number, hundreds of agents 
were convicted and sent to prison in that period.
    With the full knowledge of President Kennedy and his 
brother, the IRS commissioner of that administration 
established a program to go after extremist organizations.
    Although memos describing the program said the extremists 
of concern were on both the right and left, it appears that all 
those that lost their tax-exempt status in connection with this 
program were Fundamentalist conservatives who had been 
criticizing the President.
    President Nixon, among other abuses, established the SSS, 
which we all know about. It was going after dissident groups 
and individuals.
    During the Reagan years, the IRS forgot the lessons of 
corruption and there was a mini-ground swell of really quite 
widespread corruption in offices in Los Angeles, Philadelphia, 
and Chicago.
    Although it may not at first be obvious to you, my point 
here is not that the IRS is inevitably a corrupt and badly run 
organization. On the contrary, growing out of the exposure of 
the problem of both the Truman and Nixon Administrations came 
periods of serious public concern and genuine reform. This can 
be done with serious oversight.
    Now, one reason there is not good oversight, it seems to 
me, is that there is not very much good information about what 
the agency is doing. I think Congress, the news media, and even 
the GAO do not look with sufficient rigor at what this agency 
is doing.
    In 1989, I got interested in and formed an organization 
that is a part of Syracuse University, and we use the Freedom 
of Information Act and we get internal administrative data 
tapes out of the agency and we examine them, we add Census 
data, and then recently we have been putting this up on the 
World Wide Web so that citizens all over the country and news 
organizations, and Congress, you can look at what you are 
doing.
    Now, that does not sound very interesting, but let me give 
you a couple of examples of the data. I think it fits into the 
horror stories that you are going to be hearing. It is going to 
show you a erratic enforcement, cowboys, districts going off 
and doing what they want to do.
    From 1980 to 1995, IRS criminal enforcement underwent a 
dramatic shift in emphasis. That is during the Reagan, Bush, 
Clinton years. During this period in 1980, three-quarters of 
all IRS prosecutions were aimed at individuals accused of 
traditional tax crime, like failure to file, filing a 
fraudulent return.
    By 1995, less than half of the IRS prosecutions were going 
after traditional tax violations. The IRS had moved into money 
laundering, drugs, and other criminal things.
    Now, while one can argue that drugs is more important than 
tax cheating, one could also say, why is the DEA not doing 
that, why is the IRS not concentrating on the collection of 
taxes; is that not its responsibility?
    Second, from 1988 to 1995, civil audit rates of non-
business taxpayers with over $100,000 declined by a factor of 
four. The percentage of taxpayers over $100,000 has declined by 
a factor of four from 1988 to today. The percent of taxpayers 
being audited at $25,000, at $50,000, has doubled.
    Why is the IRS auditing fewer and fewer $100,000, wealthy 
people, upper middle class people, you can define them as you 
want, and doing more relatively less affluent is the question. 
I do not know the answers, but it is a very good policy 
question. The Ways and Means Committee ought to be asking it, 
the newspapers ought to be asking it, and they are not.
    I can give you a lot more example about the IRS performance 
that raised questions about erratic enforcement, about the 
median sentence if you are convicted of a tax crime in one city 
is 60 months, the median sentence in New York City is zero 
months for tax fraud. Why are we allowing this erratic 
enforcement effort to go on? I think it is unnecessary. I think 
if we pay attention to it we can make this agency work.
    I think you need an IRS, I think you need a New York Police 
Department, but it has got to be held accountable. The hard 
numbers are there, the good questions are there. All that has 
been lacking are a skeptical group of Congressional committees, 
reporters, scholars, and tax practitioners willing to invest 
the time and energy to understand the numbers and to ask the 
questions.
    Thank you very much.
    [The prepared statement of Mr. Burnham appears in the 
appendix.]
    The Chairman. Thank you, Mr. Burnham.
    We will now open the panel to questions from the members.
    Let me ask you this question, Ms. Davis. You worked as an 
historian for how many years?
    Ms. Davis. Just over 7 and a half. Well, it was 16 years as 
a Federal historian, 9 years for the Department of Defense, 
then 7 and a half for the IRS.
    The Chairman. In what other divisions or departments did 
you serve?
    Ms. Davis. Other than the IRS? I worked for 9 years in the 
Department of Defense. Most of those years were with the United 
States Air Force, and then a couple of years with the Defense 
Mapping Agency, one of the intelligence agencies of the 
government.
    The Chairman. Did you have similar problems in the Defense 
Department?
    Ms. Davis. Oh, absolutely not. In fact, I brought with me 
those years of experience. The Defense Department, for all of 
its other troubles, has a tremendous sense of the value of 
understanding its past and preserving its documents.
    One of the things I like to point out to people is that, 
although we may hear complaints about government secrecy, and 
Senator Moynihan is very familiar with those and there is a 
serious problem with that, I did see, perhaps, a tendency in 
the Defense Department to take that rubber stamp, Top Secret, 
Top Secret, Top Secret, over and over again on documents that 
might not necessarily merit that.
    There is a problem with over-classification. But there is a 
huge difference between what I saw in my years with the 
Department of Defense and what I saw at the IRS. There is a 
huge difference between putting a Top Secret stamp on a piece 
of paper to withhold it from the American people, from the 
media, from Congress for a period of time and simply shredding 
everything.
    That was what I found most shocking at the IRS, and it took 
me really, I would say, probably a year and a half into my 
tenure to really believe this was happening. I spent the first 
period of time saying, I am just not asking the right people, I 
am not looking in the right places, because I, myself, could 
not believe that one of our government agencies had literally 
shredded its entire paper trail. But that was what was going 
on, because nobody was looking.
    The Chairman. Let me ask you this question. As you I know 
appreciate, the privacy laws, of course, as you indicated, are 
used to protect the IRS from scrutiny. On the other hand, we do 
have a responsibility to protect, I am sure you will agree, the 
rights of taxpayer privacy. So how do we change the law to make 
the IRS more accountable, and yet at the same time protect the 
privacy of the American citizen?
    Ms. Davis. I appreciate that question because it gets to 
the heart of part of the legislation that is currently pending 
before Congress.
    One of the problem is, the section of the Internal Revenue 
Code that includes the privacy protections is Section 6103. 
Currently, there is no provision in that part of the Code which 
would allow the National Archives, which is the repository for 
the documents of our entire Federal Government, whether they be 
from the CIA or the IRS, whatever it might be, those records.
    While the National Archives is permitted to hold and review 
and store documents from every other agency of our Federal 
Government, the IRS has stood fast and firm in saying, without 
an exemption, the National Archives cannot even look at our 
documents to evaluate whether or not they are historical.
    Now, the problem that I did see, and I saw evidence of this 
and this is actually what led to my resignation from the IRS, 
is that the IRS claims that material that simply does not 
contain any taxpayer information, any 6103 information, does 
contain such information.
    The problem is, there is no one but the IRS to look at what 
is true. You have the National Archives able to look at Top 
Secret information from other government agencies to store it, 
to protect it, but they cannot look at IRS records to determine 
whether or not it should be protected, it should be saved.
    There is a provision in the legislation that came out of 
the Commission on Restructuring the IRS to allow the National 
Archives to have that access, and I think it is paramount that 
that section of the law, at least, be passed.
    I have problems with other parts of that legislation, but 
that particular section, I think, is the most important because 
until we start having access to the information and stop 
allowing the IRS to control that access and to claim, wrongly, 
that everything they do has taxpayer information, nothing will 
change.
    The Chairman. Mr. Schriebman, I agree with you when you 
talk about the importance of protecting the taxpayer, having 
the right to be heard, and an opportunity to participate in 
this process before his/herbusiness, his/her residence is 
seized.
    How do you believe that Congress can protect taxpayers' 
rights when it comes to IRS seizures?
    Mr. Schriebman. There is a provision in the Internal 
Revenue Code, Mr. Chairman, I think it is Section 7402, that 
gives a Federal judge the right to sign--in fact, I brought it 
with me. If you would like, I can just read it. It is very 
short. It says basically they can sign any writs, any kind of 
orders.
    But, you see, we have got to work within the framework of 
the 4th and 5th amendments here. I think that was troubling the 
Supreme Court in the GM Leasing case back in 1975. But if you 
have this section here, 7402 has to be amended to make it clear 
that the word ``writs'' where it says, ``shall make and issue 
civil actions, writs, and orders of injunction,'' no ex parte 
writs.
    This is the problem. You have got these ex parte writs 
where all the revenue officer has to do is knock on the 
taxpayer's door and say, hi, I am here to close you up; are you 
going to let me do it voluntarily, or am I going to have to get 
a court order?
    Well, if the taxpayer has any sense at all he says, I am 
not going to let you come in here voluntarily. So the revenue 
officer says, all right, I have to get a court order. It takes 
about three or four weeks to get this order. But what is 
involved in it? Very little. The U.S. Attorney's Office 
prepares a document called an ``application,'' and cites some 
standard legalese.
    But the heart of it is the revenue officer's 
``declaration,'' and that declaration says that on a certain 
date I went to the taxpayer, I asked the taxpayer if I could 
enter and seize the business premises, the taxpayer said no; 
ergo, your Honor, I want my writ.
    The judge does not see anything else but these two pieces 
of paper. I do not know any judge that does not sign those 
things. I do not know any judge that says, ``Wait a minute. I 
want to talk to that taxpayer. I want to see if you are right 
here. I want to see if the taxpayer owes what you say is owed. 
I want to see if the assessment that underlies this bill is 
correct here, Mr. U.S. Attorney.'' No, the judge just rubber 
stamps it and the taxpayer's business is gone. What I would 
like to see, is that this cannot happen.
    I want to see notice being given to the taxpayer, I want to 
see a certain date set in court for the taxpayer to argue the 
merits of the assessment. If the taxpayer does not want to 
exercise those rights, that is up to the taxpayer, but at least 
he has them. He does not have that now, Senator.
    Then when you read the Code, you read Section 6334(e) of 
the Code where it says the District Director can take 
somebody's house by just his signature. How would you like it? 
How would you like to have a situation where, let us say the 
computer sent you a bill.
    You say, ``I do not owe this money.'' And you're right, but 
the computer does not answer and people do not answer. One day 
a revenue officer shows up and says, ``Say, Mr. Roth, when are 
you going to pay this bill?'' You say, ``I do not owe this 
bill.'' ``Well, Mr. Roth, that is not my problem. I have got a 
collection notice here that says you owe this bill. Now, when 
are you going to pay it?'' You say, ``I am not going to pay 
it.'' Mr. Roth, he says ``I am sorry, but I am going to have to 
ask the District Director to take your home. That is all.''
    I do not know of a District Director who does not sign the 
approval. I have not seen a case yet where the District 
Director says, ``Hey, wait a minute, let us see what is going 
on here before we take somebody's home.''
    That does not happen, at least not in the Los Angeles, 
Southern California area where I am, or other areas, because I 
get calls from all over the country from practitioners asking 
for help. I have never seen one case yet where the District 
Director said, ``Whoa, let us back up here.'' That is the 
problem we have.
    The Chairman. I am going to ask the witnesses today to 
please be as concise as possible in your answers, because we 
have a full day and we want to get as many witnesses as 
possible.
    Mr. Schriebman. I am sorry, Senator. I get a little carried 
away by this issue. If I have an agenda here today, I think 
this is it.
    The Chairman. I appreciate that.
    Mr. Burnham, you make the very serious charge that 
increasingly the taxpayer that is audited is the middle class 
or low income one, increasingly less for those over $100,000. 
Why do you think that is the case?
    Mr. Burnham. One part of the answer, Mr. Chairman, is that 
the number of taxpayers over $100,000 has gone up considerably 
in this period, so the percent goes down. That is part of the 
answer.
    However, it is still fact that the percentage of people 
over $100,000 being audited has gone down a factor of four. 
They seem to be putting their effort on, as I understand it, 
the tax credit that was given for the people whose income is 
very low, and there apparently was a lot of fraud there. Well, 
if you are going to put a lot of effort into one area you do 
not have people to do another area.
    So there are some good reasons, explanations for this, 
which would be worth asking the IRS. The IRS does not really 
speak to me very much when I come to them with this data. 
However, it also is true that the number of taxpayers being 
over $100,000 who are having face-to-face audits is just off 
the map. It has really just gone off the chart.
    I think that really may be a problem in long-term 
compliance. I think you need some auditing going on. An 
increasing percentage of the audits for those over $100,000 are 
those done out of the service centers where they just sort of 
check the documents.
    It is a good question. Is it policy? Did the Bush 
Administration, the Clinton Administration, say we want to go 
easy on wealthy taxpayers? I do not know. I cannot get that 
answer. You can get the answer.
    The Chairman. We will wait and see. Well, my time is up.
    Senator Moynihan?
    Senator Moynihan. I will take the liberty, Mr. Chairman, of 
predicting you will not get the answer. We have had wonderful 
testimony from a very thoughtful, scholarly panel. I am going 
to take the liberty, if I may, and ask the indulgence of my 
colleagues to read you a passage on the subject of secrecy, 
which you have all raised on one level or another.
    It says, ``Every bureaucracy seeks to increase the 
superiority of the professionally informed by keeping their 
knowledge and intentions secret. Bureaucratic administration 
always tends to be in administration secret sessions insofar as 
it can.
    It hides its knowledge from action and from criticism. The 
pure interest of the bureaucracy in power, however, is 
efficacious far beyond those areas where purely functional 
interests make for secrecy.
    The concept of the official secret is the specific 
invention of bureaucracy, and nothing is so fanatically 
defended by the bureaucracy as this attitude which cannot be 
substantially justified beyond those specifically qualified 
areas.
    In facing a parliament, the bureaucracy, out of sheer power 
instinct, fights every attempt of the parliament to gain 
knowledge by means of its own, from experts, or from interest 
groups.''
    Mr. Burnham. Amen.
    Ms. Davis. Hear! Hear!
    Senator Moynihan. All right. Come on, Mr. Schriebman, you 
were an adjunct professor. Who wrote that? Max Weber. In 
Wirtschaft and Gesellschaft, published after his death in 1920. 
Weber was a German professor, and I see my friend nodding down 
there, Dr. Gramm. He probably wrote this before the war. He was 
describing the appearance of bureaucracy in Wilhemite Germany. 
This is the nature of this beast. If we do not pursue it, it 
will keep to its organizational instincts.
    Mr. Burnham. Excuse me. It will pursue you.
    Senator Moynihan. Yes, it will pursue you.
    Mr. Burnham. You do not pursue it.
    Senator Moynihan. I could not more agree. Sir, do you 
realize the list of people you read off to us about this 
organization and its secrets, Herbert Hoover checking out the 
Navy League, every one 100 percent Republican, but getting the 
IRS to find out if they had paid their bills; Franklin 
Roosevelt checking out Huey Long.
    When an executive starts using the IRS to check out a 
Senator, Senators better pay attention or they will not be 
Senators long. I mean, there is a real institutional problem 
here. Do you recognize it?
    Mr. Burnham. It is an institutional problem. I mean, the 
reality is that the bureaucracies in this town are responsive 
to the President in power, and they are supposed to be. I mean, 
the problem is, they are supposed to be, up to a point. That is 
why you elect a President. But it is so easy to go over the 
line, and we do go over the line.
    Historically, we have gone over the line over and over 
again. You have to give them discretion. You cannot make rules. 
You cannot prevent this from happening, if you are going to 
have an IRS. But you have got to have oversight. That is the 
only thing, you have to have oversight.
    Senator Moynihan. We have to have oversight. You have to 
have some sunlight.
    Mr. Burnham. And break up the secrecy.
    Senator Moynihan. Break up the secrecy.
    Mr. Burnham. Yes.
    Senator Moynihan. You have to fight against it. You cannot 
issue a rule that says, no more secrecy, or not too much 
secrecy, then turn your back, because it will come right back 
at you; is that not right?
    Mr. Burnham. Yes.
    Ms. Davis. That is right. It is important to realize that 
all of the examples that Mr. Burnham is giving, the evidence 
for those does not come from IRS records, it comes from records 
that he ferreted out out of other historical files, 
Presidential libraries, other things, but not IRS. If you think 
about it, think about what the American people would think if 
we had no records at all from the Department of Defense for 
this entire century.
    We would have no records of World War II, the Cold War, 
World War I, the growth of the defense industry, any of the 
Secretaries of Defense and their decisions. I think there would 
be a massive public outcry. CIA. We have access to CIA records 
many years later.
    Senator Moynihan. We have mostly access to CIA records that 
are found in Moscow. [Laughter.]
    Ms. Davis. Right. This is true. I will not disagree on 
this. But it is just amazing. You go looking for the records of 
IRS commissioners. In my years at the Department of Defense, 
what an historian does, is you go and you research the records 
of the Secretary of Defense, or the Secretary of the Air Force, 
or whomever it might be, and you gain all sorts of insights 
from even scribbles in the margins, drafts of documents, what 
the chief in charge of the agency did.
    There is not a single collection of records from any IRS 
commissioner ever, from 1862 to the present, in the National 
Archives, so all that evidence that Mr. Burnham is talking 
about comes from other sources. He is a very diligent 
researcher and it is very hard work to find evidence of what 
the IRS does. We do not know what the commissioner is writing, 
we do not know what the commissioners are thinking, because 
they have gotten away with shredding everything.
    Mr. Burnham. Senator Moynihan, the story about the Kennedy 
years. I went to visit a lawyer in this town who had worked for 
the IRS commissioner at that time and he had the copy of the 
memorandum describing this attack on the dissident groups, and 
he was afraid to give it to me because of the privacy laws.
    But I came into his office and he said, well, I have to go 
out for lunch. He went out for lunch, and I assumed that he was 
letting me look at these documents, so I looked at them.
    One of them was a memorandum describing this attack on 
dissident groups, and up in the left-hand corner there was a 
handwritten scribble saying, ``The President called and says 
full steam ahead,'' in handwritten note. So this was approved 
by the President.
    Senator Moynihan. Mr. Chairman, I have nothing further to 
say. We had better start institutionalizing oversight, and I 
think a little history of what we have heard today would do no 
harm.
    I think that is what we have investigators for, and that is 
what we have a Department of Justice for, but it is a 
bureaucracy too. I worry about that. You solve the details, I 
have set down the theory. Phil Gramm can do the rest.
    The Chairman. We will call on Senator Grassley, next.
    Senator Grassley. I want to dwell on just a little bit of 
history, because I hear so much of it being repeated in these 
hearings. When I conducted oversight hearings of the Defense 
Department and the Justice Department in the 1980's, I, by the 
way, had near unanimous support from members of the Democratic 
party to do that. They obviously enjoyed seeing me as a 
Republican overseeing agencies headed by members of my own 
party.
    Those Democrats thought that oversight was very important, 
very necessary, and very antiseptic back then. My Republican 
colleagues at the time defended those agencies. They saw that 
as their obligation, since an administration of their own party 
was being attacked. I viewed it differently, from my 
perspective of my constitutional responsibilities.
    Here are some examples of how my Republican colleagues 
defended Reagan Administration mismanagement practices back 
then. You would hear accusations that all I was doing was 
defense bashing, or the excuse was that the real problem was 
Congress, or that it was an anomaly that there was $640 paid 
for a toilet seat, or we wished that we could explain why we 
have all these problems, but we cannot because it is classified 
to protect the national security.
    Having gone through oversight battles in the past, I am now 
hearing kind of an echo. IRS bashing. These horror stories are 
anomalies. The real problem is the laws passed by Congress. 
There are no problems with IRS management, but we cannot 
demonstrate it because of 6103 secrecy.
    Anyone who cannot see through this folly, this tired and 
weak defense of the IRS, is not a serious observer of the 
workings of government. That is my view, based on my 
experience. I guess it has got a longer history, based upon 
what Senator Moynihan just quoted for us.
    There are those among us here who will feebly defend the 
IRS using the same old, tired defense. But the public can see 
right through it, because they are on the receiving hand first-
hand of IRS abuses.
    So let me ask four fairly general questions. I am going to 
ask them all at once, and you do not all have to answer each 
one, but collectively I hope you will respond to them.
    Do you believe that these oversight hearings constitute IRS 
bashing? Is the real problem the laws passed by Congress? Are 
these horror stories that we are hearing only anomalies? Is the 
IRS Section 6103 authority abused and used too often to cover 
up mismanagement? Those are the four questions. I would like to 
have all of you speak to some of them.
    Mr. Burnham. There are different answers to different 
parts, but clearly the laws passed by Congress have put a 
terrible burden on the IRS. I mean, it would be better if it 
were simpler. You have to give them more and more discretion. 
That contributes to the problem. I do not think that is the 
basic problem, and I clearly do not believe this is IRS 
bashing, to look at the IRS. I will let my colleagues respond.
    Ms. Davis. I want to jump in with a quick story. I referred 
in my testimony to the 1989 hearings that were held on the 
House side. Back at that time, Fred Goldberg was the incoming 
commissioner, who I think had just been confirmed or was headed 
into confirmation hearings. Anyway, he was brand-new and 
ultimately could not be held accountable for any of the things 
that were going on as a result of that.
    It is interesting that once again today we find ourselves 
between commissioners. Somehow, it is just an interesting 
little twist. I do not think there is anything behind it, but 
it is a twist because there is no one there to point fingers at 
when you have someone new coming in, hopefully.
    But Mr. Goldberg sat there in 1989 and he told the House 
Committee on Government Reform that he felt that really it was 
not important to get into the real nitty-gritty of the horror 
stories that were heard at that time, that it was not that 
important to go and hold the individual IRS employees whose 
stories were being told at that time accountable for what they 
did. He sat there and he said, it is more important that we 
just move ahead, and I commit to you as the new commissioner of 
the IRS that I will take care of all this and I will turn it 
into the premiere ethical agency of our government today.
    Well, we all know that did not happen. But therein lies the 
key problem to this whole thing, and primarily the answer to 
your question about whether or not the horror stories are 
anecdotal. They are not anecdotal, they happen. They are 
recurring. It does not happen to the majority of taxpayers, but 
if it happens even once, I heard many of you say this 
yesterday, that is too much.
    I think the gist of the problem is that the IRS itself does 
not hold its own employees accountable. Congress, with its 
oversight responsibilities, does not force the IRS to hold its 
own employees accountable.
    So ultimately, until IRS employees are held accountable for 
their individual actions, I would like to see the IRS employees 
who falsely investigated me, were able to bring false charges 
against me, to be investigated seriously for what they did.
    I would like to see every IRS agent who interacted with one 
of the taxpayers you will hear here investigated. I would like 
to know from the IRS what exactly they did to the employees who 
were the perpetrators in these tax cases. That is what we are 
not getting.
    The IRS sends a message to its own employees when they do 
not discipline them that it is all right to do what you do. It 
is a tacit endorsement. Congress endorses the IRS's tacit 
endorsement by not demanding that level of accountability. So 
there is no question that, ultimately, if you get away with it 
and nobody does anything, it is a license to continue.
    Senator Grassley. Ms. Davis, you testified to our National 
Commission to Restructure the IRS. Based on that testimony, I 
have included in this legislation your idea to require the 
archiving of IRS records. Will that help?
    Ms. Davis. Oh, without question it will help, because right 
now the IRS is using 6103 and abusing 6103 to withhold all 
information, information that does not have any tax 
information, information that may be simply embarrassing to the 
IRS. That is ultimately what led to the false investigation of 
me, and my resignation from the IRS.
    I mean, I was attempting to respond to a wonderful Freedom 
of Information Request from a history professor who actually 
wrote this book. I brought it here just in case I needed it. It 
is a great book. It is an academic book about the Kennedy 
Administration.
    This professor was doing what professors all over the 
country do, he was trying to research and write a book. He sent 
Freedom of Information requests to the IRS. They landed on my 
desk. I found just a tiny bit of documentation to support what 
he was looking for.
    The Chairman. I am going to have to ask you to try to bring 
your response to a close.
    Ms. Davis. Sure. What happened, was this information did 
not include any taxpayer information, but the IRS wrongfully 
withheld it from him because they did not want to be 
embarrassed.
    The Chairman. We are allowing 10 minutes for each member to 
ask questions. We are going to have to strictly enforce that, 
because unfortunately we are still continuing with what was to 
be yesterday's hearing, so we have a very, very full day. So I 
do ask the witnesses to please not repeat, but to be as concise 
as possible.
    Senator Hatch.
    Senator Hatch. Thank you, Mr. Chairman. One reason I ran 
for the Senate is because I tried a number of tax fraud cases, 
and frankly they were so unjustly brought that I really got 
offended by it and got involved. I have not seen many changes 
since.
    Your testimony here today has been very, very essential. It 
has been suggested by some that this committee is on a witch 
hunt. That could not be further from the truth. There is 
certainly no vendetta against the IRS. I will only say two 
things about that.
    First, we are not here to destroy anyone or anything. We 
quite obviously need a strong and effective IRS. We are not 
here to burn anybody at the stake, but we are here to try to 
get the answers to some very serious and some very real 
questions, and you folks have been very helpful here this 
morning.
    But the current regime of the IRS is feeling a little heat. 
I hope because of that they will remember this experience. It 
is exactly what they put the taxpayers through when the IRS 
calls and starts asking questions and requiring more 
information and more documentation.
    For example, the IRS initiated an audit of a taxpayer who I 
know quite well, and assessed deficiencies for the tax year in 
question. During the ensuing period, the case was transferred 
to six different revenue agents, with several instances of 
agents not communicating or relying on the work already done by 
a previous agent.
    With each new agent came a set of different adjustments 
and, naturally, delays. This went on for 8 years, two of which 
saw no IRS activity or attention at all. There were extensions 
of the statute of limitations.
    The taxpayer made offers in compromise to resolve the 
disagreement. The IRS would not even discuss, let alone work, 
on any such resolution. You have been indicating that that is 
your experience, Mr. Schriebman, is it?
    Mr. Schriebman. Yes. Schriebman, Senator.
    Senator Hatch. Schriebman. All right.
    They would not even discuss it. Finally, the taxpayer was 
informed that all of the items under examination were 
disallowed and he owed a substantial amount. That was not all. 
Because of the long period of time that had elapsed for the 
audit to be completed, the interest was nearly three times the 
amount of the additional tax assessed. It now amounts to almost 
a million dollars.
    Now, think about it. It was a legitimate question whether 
he owed the taxes to begin with. But the taxpayer is willing to 
pay, but they have, with penalties, interest, and delays, 
raised this almost triple what it was.
    This taxpayer is now making payments, has made them 
faithfully, has paid faithfully more, as I understand it, or 
pretty close to the actual amount that was owed to begin with 
through regular payments, diligence, doing what was right and 
living up to the obligations that they had.
    So the taxpayer is now making payments that amount to 
little more than interest on interest, with little chance that 
the debt will ever be paid. Now, that is not unusual, is it?
    Mr. Schriebman. Are you asking the question to me?
    Senator Hatch. Yes, I am asking you as a tax practitioner, 
Mr. Schriebman.
    Mr. Schriebman. I hear this, I deal with this every day. 
First of all, this fellow made a mistake initially by signing 
the statute extension. That is one of the things the IRS 
brainwashes the public about. You do not have to sign the 
statute extension.
    Senator Hatch. Well, they threaten to indict you if you do 
not. They threaten to bring charges against you if you do not.
    Mr. Schriebman. If you would not have signed the statute 
extension, they probably would have run out of time to do it. 
This interest situation that your person has, that is part of 
the Taxpayer Bill of Rights, too.
    Senator Hatch. It is not just interest, it is penalties and 
interest.
    Mr. Schriebman. I understand.
    Senator Hatch. It is crazy.
    Mr. Schriebman. Well, your man should now again, under the 
new IRS liberal position on offers in compromise, now is the 
time to go into that offer in compromise. Now is the time.
    Senator Hatch. Well, he has done it. I have done it. I have 
asked them to see what they can do to resolve this problem, and 
it is just a no. They are at least partially responsible for 
the interest and penalties that have been assessed.
    Mr. Schriebman. I certainly, under the Taxpayer Bill of 
Rights, too, would bring an interest abatement administrative 
claim and take it to the Tax Court.
    Senator Hatch. They did. They did, and abatement was 
denied.
    Mr. Schriebman. Well, did they take it to the Tax Court? 
That is part of the Taxpayer Bill of Rights, too.
    Senator Hatch. Well, the taxpayer court denied it also.
    Mr. Schriebman. The Tax Court denied it?
    Senator Hatch. Yes. Then they filed for an additional 
abatement proceeding, and then of course was denied again. I 
mean, I have got to tell you, looking at the facts, it is very, 
very unjust.
    Mr. Schriebman. Somebody does not like your client, it is 
obvious. [Laughter.]
    Senator Hatch. Well, this particular client is one of the 
most loved people in the whole world, but the IRS does not love 
him.
    In another situation, a taxpayer attempted to work with the 
IRS to pay the amount that was owed. However, the IRS refused 
each one of her suggestions. Consequently, they lost 
everything, their cars, their home, and all other assets that 
they had.
    The IRS was totally uncompromising with this taxpayer. 
Unfortunately, the seizure mentality is all too common, 
especially when agents seem to be evaluated and promoted based 
on dollars collected and property seized.
    Let me give you another example. An elderly couple made 
some poor investment choices that led to the disallowance of 
certain deductions and losses. The tax is rightfully owed.
    However, because of their age they have little income and 
their only asset is their home. As with so many of these cases, 
the interest on the debt has piled up to be a considerable 
amount compared to the actual tax debt.
    Again, the IRS was unwilling to discuss a compromise to pay 
the debt over time. They had the option of getting a loan to 
pay part of the debt, however, the taxpayers would still be 
liable for not only the interest on the loan, but the penalties 
and interest on the tax debt as well.
    Instead, these elderly taxpayers were forced to sell their 
home when faced with the threat of the IRS seizing the property 
and selling it for them at a cut-rate price in order to satisfy 
the tax obligation.
    Now, where has all the reason gone? These are just some 
examples that highlight the need for the hearings that we are 
having, and I want to commend our Chairman and Ranking Member 
for being willing to do this. It is the first time ever, 
perhaps, but certainly the first time in my 21 years here, and 
I think it is about time.
    Let me just ask one question to all of you on the panel. 
Each and every one of you have mentioned, and even painted a 
picture of a terrible culture at the IRS. Can you be more 
explicit for us in suggesting ways to change the IRS culture 
for the better? And maybe we could start with you, Mr. Burnham, 
Mr. Schriebman, and end with Ms. Davis.
    Mr. Burnham. Well, several of the witnesses mentioned this 
yesterday, Senator. One of the basic problems is that the IRS 
has come to think of itself as a law enforcement agency rather 
than a service agency. How you change that, is very hard. If 
you did a careful analysis of the IRS budget, you will see a 
big chunk of their budget goes for enforcement and audit, very 
little goes for the service.
    Comparatively little goes to the service part. Congress can 
change the budget. You can change the emphasis of the IRS. A 
lot of people who were in noncompliance overpaid. Did you know 
that? I mean, a lot of people overpaid. A lot of people 
underpay because they do not understand. The rhetoric yesterday 
when you referred to the people not paying, you say they are 
tax cheats. A lot of the people who do not pay or over-pay are 
not tax cheats, they do not understand.
    I mean, did you know President Lincoln overpaid his taxes. 
There was an income tax during the Civil War. He overpaid them, 
and after he died they got a refund. The tax law is complicated 
and it is hard. The taxpayers need help and they need a lot of 
that.
    It is this cop mentality, the ``us'' against ``them.'' To 
fall into the easy use of the words ``tax cheat'' for everyone 
in noncompliance is very dangerous. You do it, the newspapers 
do it, and we ought to try to change it.
    Senator Hatch. Mr. Schriebman?
    Mr. Schriebman. Senator, I heard your three stories.
    Senator Hatch. Well, I can give you a lot more.
    Mr. Schriebman. So can I, believe me. But I have to say a 
couple of things, in all fairness, in all objectivity here. I 
think a lot of people get into trouble with the IRS because of 
their own ignorance. A lot of them get into the IRS because 
they are too penurious to get good advice.
    The cases that you have mentioned here, while egregious, if 
these people might have gotten some good advice, I think some 
of the bankruptcy laws could have helped these people. I think 
that you in this room are part of the problem. You have written 
these provisions in the Code that allow the District Director 
to take a house on a signature. I am a grunt; I am not an 
investigative reporter and I am not an insider. I am a guy who 
was never with the IRS.
    Everything I know, everything I have written about I have 
had to experience. I deal with these things every day. I will 
tell you something, a lot of what I see people go through--I 
mean, I have had a client, a widow, come to me when her husband 
had blown his brains out in the lobby of the Lawndale IRS field 
office. I have represented the widow. I want to say in that 
particular case the IRS could not have been kinder to the 
widow.
    Senator Hatch. I guess my time is up.
    The Chairman. The time is up, I regret. But we have to move 
on. I would point out that the members are called upon in the 
order they appear. We have the early bird rule. So we are not 
just letting the Republicans go first.
    We have, next, Senator Gramm.
    Senator Gramm. Mr. Chairman, thank you.
    I want to thank our witnesses. I had made the point 
yesterday when we had another panel that I wanted desperately 
to have a chance to ask them some questions. They are not here, 
but I want to refer back to their comments and then pose a 
question to you.
    We had a panel yesterday that was made up of people who 
were representatives of major groups that interfaced with the 
IRS, such as the CPAs, and enrolling agents.
    Maybe I am over-simplifying what they had to say, but their 
basic approach was a sort of a sociological approach which said 
that the problem at the IRS was that these people at the IRS 
think of themselves as law enforcement agents and not as people 
who are a service agency. In essence, what they were saying is 
that we need this massive effort to sort of change the thinking 
at IRS.
    I profoundly disagree with that approach. I do not find 
that approach to be very successful because it does not change 
the basic parameters in which people work. I think one of the 
things that each of your testimonies has done today, is to make 
it very clear that what the problem is here is that the IRS has 
massive power, and power corrupts.
    As a result of having no checks and balances, as a result 
of having an agency that investigates, prosecutes, and makes 
judgments all by itself, you do not have the checks and 
balances that you might have in the criminal justice system 
where a police officer makes the arrest, has a fact report, it 
goes to the district attorney's office, and so on through the 
courts.
    There is to some extent a check and a balance in that the 
district attorney looks at what the police officer has done. 
Then you have the whole case go before a court that looks at 
what the district attorney has done and what the police 
officers have done.
    So it seems to me that our problem is not a sociology 
problem. Our problem is not that the people that work at the 
IRS are bad people. My guess is that, by and large, they are 
good people, even the ones who act badly.
    The problem is, these people have too much power, they have 
no checks and balances, we have no access to information, and 
people are afraid of them. The system that people operate under 
changes the behavior both of the people who have the fear, and 
the people who are feared. I think that is basically the 
problem.
    Now, the question is, what can we do about it? That is what 
I want to focus my question on. But let me say that I think a 
couple of you have made the point that Congress is, to some 
degree, culpable, and I agree with that. I think we have 
written a very complicated code that not even we can comply 
with without expert assistance.
    I have not forgotten all the budgets that were passed over 
the years where we added more money for the IRS compliance 
office and then counted it as generating additional revenues, 
which if that is not a clear indication----
    Mr. Burnham. A quota system.
    Senator Gramm. That is right. If that is not a clear 
indication of what we want done, then I do not know what is. So 
I believe we need some fundamental changes in the system, 
structural changes. I think what should come from these 
hearings is a change in law and not just oversight, but 
changing the structure of the system itself.
    I would like to ask each of you, as short as you can give 
the information and be brief, what structural changes do you 
believe should be made. If you could change the laws in only 
two or three ways, based on your individual experience, what 
changes would you make?
    Let me start with you, Ms. Davis?
    Ms. Davis. This is tough. I am going to give you a little 
bit of a very quick sociological answer to your very specific 
question. Last year in some of the early testimony before the 
Commission on Restructuring a former high-ranking IRS official 
told the commission that he believed from his, I do not know, 
about 30 years of experience with the IRS that the key to 
effective work of the IRS was mystery, to keep the tax system 
mysterious, I could not agree with that more, because mystery 
just breeds fear and distrust among the American people.
    I guess during my 7\1/2\ years with the IRS I tried my own 
little sociological experiment, because one of the things I 
tried to tell them, I agree with everything you say, most IRS 
employees, if not all, are fundamentally good people. They do 
not mean to be bad people, and I am not totally opposed to the 
IRS. It is an agency that has an incredibly fascinating and 
interesting past and tradition and it is part of the 
sociological fabric of the United States.
    What I did, was I tried to tell them, if we taught our own 
employees at the IRS and if we taught the American people about 
the role of the tax collector throughout the past, about how 
important it has been in the development of this great country, 
maybe taxpayers might be more inclined to comply. I do not 
think you make taxpayers comply only by beating them over the 
heads.
    But when was the last time that the IRS, or even members of 
Congress, reminded the American people about the terribly 
important role--I mean, everybody does bash the IRS; it is 
great fun. But we do not talk about how important it is.
    That is one reason I told them over and over again, you 
need an historian, you need an historian to gather the research 
and write the documents that will show people the importance of 
this. So I will just leave it at that, because I think that is 
just so very important.
    Senator Gramm. Yes, sir?
    Mr. Schriebman. You have asked for some concrete 
suggestions and I would like to give you some.
    Senator Gramm. Great.
    Mr. Schriebman. First of all, let us get rid of these ex 
parte writs.
    Senator Gramm. Tell us what that is.
    Mr. Schriebman. Well, ``ex parte'' is Latin. It means that 
you can go into court, close somebody's business down or take 
somebody's house without giving that taxpayer a notice.
    What we need to do, is we need to give a taxpayer notice, 
the court needs to set a hearing date. Now, if a taxpayer does 
not use that, that is the taxpayer's problem. He has got a 
right to it, whether it is his house, his business, his bank 
account, his wage garnishment. We need that.
    Now, where can we go to get that? Well, we have got the 
U.S. Tax Court. You probably need a few more tax court judges 
and you have to put them in residences in several cities.
    Right now they travel in circuits, except for Larry 
Nameroff, who is based in Los Angeles permanently. We need more 
Larry Nameroffs. We need them in cities where they are 
permanently based instead of working out of Washington and 
traveling in a circuit.
    Senator Gramm. Is there a shortage of Tax Court judges?
    Mr. Schriebman. Big time.
    Senator Gramm. All right.
    Mr. Schriebman. I have some more suggestions. I will tell 
you, Senator, these will work, because I know my experience 
here.
    Let the Tax Court have jurisdiction over employment tax 
cases. It does not have any jurisdiction over employment taxes. 
If somebody gets hit with this thing called the 100 percent 
penalty, now call the Trust Fund Recovery Penalty, big deal, it 
is the same thing. The Tax Court cannot hear that. There is no 
assessment.
    See, the problem that you have is that you have got an 
internal conflict of interest within the IRS. They are their 
own judge and jury over people's lives. Let us remove that. 
This will cure the ``Ivory Soap's'' worth of taxpayer abuse.
    Repeal Section 6344(e), where the District Director has the 
right to sign and take somebody's house. You should not be able 
to take anything from anybody without giving those people 4th 
and 5th amendment rights.
    I say over employment taxes and collection problems, 
because the Tax Court does have a little jurisdiction over 
collection problems right now, but it is esoteric. They are all 
in Sections 6212 and 6213 of the Code. They are real esoteric 
stuff.
    A person has a collection beef, has an assessment beef, 
whether it is with income taxes, excise taxes, employment 
taxes, estate taxes, let the Tax Court have jurisdiction over 
all of those. No assessment without a right to a hearing.
    Senator Gramm. Let me go to Mr. Burnham, because I see the 
yellow light on.
    Mr. Burnham. In my high school year book, Margo Wood, I 
will never forgive her for it, wrote under me, ``It is easier 
to be critical than correct.'' I spent all my years 
criticizing, and it is hard to come up with a correct answer.
    But, with due respect, I think I agree with the witnesses 
yesterday that said that the enforcement mentality dominates 
the IRS rather than the service, and that not that you can do 
away with enforcement, you have to have enforcement, there are 
bad people doing bad things and you need an enforcement arm, 
but maybe an idea would be to separate the IRS into an 
enforcement sort of cop arm and a service arm more than it is 
now. Maybe that would make sense.
    Senator Gramm. Well, I think that is the checks and 
balances we are looking for. But I think the idea of putting 
people through sociology training is not going to have any 
permanent impact.
    Mr. Burnham. We are not talking about that.
    Senator Gramm. We respond to the world that we live in, we 
respond to the rules that exist. I think again here the problem 
is power corrupting.
    The Chairman. The time of the gentleman is up.
    I would point out to you that in our legislation that we 
recently adopted we did expand the jurisdiction of the Tax 
Court to employment taxes, but you might take a look and see 
whether you think it is adequate.
    Mr. Schriebman. But the only expansion on that, with 
respect, Mr. Chairman, is the determination whether somebody is 
an employee or an independent contractor. That is just not far 
enough.
    The Chairman. Not far enough.
    Mr. Schriebman. No, sir.
    The Chairman. Senator Lott.
    Senator Lott. Thank you, Mr. Chairman.
    I have been very interested in your statements and your 
responses. We appreciate your time. I think you are giving us 
some very helpful suggestions.
    One of you commented about, a lot of the problems with 
taxpayers is that they just do not know what is the right thing 
to do, or it is ignorance. But, as a matter of fact, some of 
the most egregious cases that I have been familiar with have 
been caused by actions by the taxpayers after having received 
so-called expert advice.
    Mr. Burnham. That is true.
    Senator Lott. Tax lawyers and CPAs.
    Mr. Burnham. They do not understand it.
    Senator Lott. And that is the problem, though. You are 
giving advice. You have got a little extra money, you work in a 
shipyard and you have got a farm on the side and you are given 
advice by a CPA or a tax lawyer that here is something you can 
invest in that would be beneficial to you, and it turns out it 
was on the margin, it turns out maybe IRS said maybe this is 
all right, and later they say it is not all right.
    They wind up having their lives destroyed, losing their 
farm, and just about everything they have. What can we do about 
that? Expert counsel is not a defense, apparently, unless of 
course you then can come back and take action against them for 
incompetence.
    Mr. Burnham. But are they expert? The law is so 
complicated.
    Senator Lott. Tax lawyers and CPAs are supposed to be 
experts.
    Mr. Burnham. I know of a situation in New York. The editor 
of one of my books went to a very high-priced tax lawyer who 
did not know how the IRS functioned. He was not familiar with 
IRS procedures. He knew tax law. Those are two entirely 
different things. If you do not get the right advice, you are 
in trouble.
    Mr. Schriebman. I disagree.
    Senator Lott. What about the poor taxpayer? I mean, he has 
done his best to get expert advice, then he finds out later 
that it was not expert.
    Mr. Schriebman, go ahead, sir.
    Mr. Schriebman. You are talking about the tax shelter wars 
of the 1980's, I presume, and hopefully those days are behind 
us.
    But you know, Senator, there is an awful lot of greed in 
that equation. You can advise somebody any way you want. If you 
have got an inherent conflict of interest, if you are being 
retained by their promoter and you are getting a commission off 
of the investment, you have got a big greed equation there, 
especially in those days where you thought you could not get 
tapped by the IRS and they were all a bunch of buffoons.
    Well, the IRS showed them. In all fairness, some of that 
stuff that people went into was ridiculous, and the attorneys 
who wrote the opinions were motivated, in my opinion, by greed. 
I do not know how you legislate greed.
    Ms. Davis. I guess what I would say to that--were you done?
    Mr. Schriebman. Sure.
    Ms. Davis. The growth of the tax preparation and help 
industry has exploded in recent years. I think one of the 
things I see as a very dangerous thing is, I guess, the hand-
in-hand working of that community with the IRS. One of the 
things that bothered me, and I was one of the few people 
thinking this and talking about this, I think, was the 
development, as it was developed by the IRS, of the electronic 
filing program.
    I saw this as a very dangerous precedent, because nobody 
was focusing on the fact that when IRS launched its electronic 
filing program this was the first time in the history of our 
tax system where taxpayers, in order to take advantage of a so-
called increase in benefits or simplification of their filing, 
were literally forced into the arms of the tax preparation 
community. If you wanted to file your tax return 
electronically, you had no choice but to pay a professional tax 
preparer to do it. I went to the IRS in 1988, and they had 
launched electronic filing just a few years earlier in 1985. It 
was one of the first subjects I looked into.
    I asked them the question, why did you not wait until you 
could offer this to taxpayers, first of all, at no cost, or in 
a way in which they did not have to use a tax preparer, because 
I was thinking of all those middle and lower income taxpayers 
who have simple tax returns who for years had prepared their 
own 1040's, 1040-A's, or EZ's all by themselves who were now, 
in addition to their tax liability, having to pay even more 
money to a tax preparer who may or may not, as you point out, 
know the law. I think that is one of the problems.
    Senator Lott. Let me ask two other questions. I know we 
have the Taxpayer's Bill of Rights I and II. One of the things 
I do not think we did, is when the IRS makes a mistake or when 
they have some of your money improperly and hold it for a 
period of time and they eventually have to pay it back, they do 
not have to pay, on behalf of the government to the people that 
were wrong, interest and penalties. Why not? The government 
pays interest and penalties to the taxpayers?
    Mr. Schriebman. Oh, not penalties, no.
    Senator Lott. All I am saying there is, if you make a 
mistake you pay interest and penalties. If the government makes 
a mistake, they do not. Once again, I feel like for the 
taxpayers, there is not a level playing field there.
    Ms. Davis. Well, that is definitely in the category of a 
law that you have not passed, and it is within your power to 
pass such legislation.
    Senator Lott. I guess that is what I want to ask you. Is 
that something worth doing, Mr. Schriebman?
    Mr. Schriebman. Well, Senator, I think it is a good idea. 
It is like the first two Taxpayer's Bill of Rights are good 
starts, but I think if you are going to do another Bill of 
Rights, let us put some real teeth into it.
    Senator Lott. All right. Now let me go to one other 
question before my time runs out. I believe Mr. Burnham, it was 
your testimony. Yes. You point out that it seems that IRS 
agents prefer to target less wealthy taxpayers because they are 
less likely to be able to afford the lengthy defense, and so 
forth. You note in here something that caught my eye.
    On the civil side, taxpayers in the IRS's San Francisco 
district, Mississippi, Idaho, and New York City stood the 
highest chance of being audited. Now, that is very odd. The 
highest adjusted gross income and the lowest were represented 
in that group of only three areas. Now, why is that?
    Mr. Burnham. I do not know, Senator. Again, it is a good 
question for you all to ask. When we put this data up on the 
World Wide Web the IRS denounced the data and said it was 
wrong, it was the government's data.
    We asked, well, what is wrong with it, and would you meet 
with us, and will you come? They refused to meet with us. For a 
year and a half, we have sent repeated letters to them to 
discuss their problems with the data. There is nothing wrong 
with the data.
    Senator Lott. What would your speculation be as to how New 
York City and Mississippi would fall into that trap?
    Mr. Burnham. I mean, one possible speculation is that the 
people of Mississippi, it is a much poorer district, less 
expert, is easier pickings. New York City is a more 
sophisticated city, more income, more lawyers, more 
accountants. It is harder work. But there may be others. I 
mean, I really do not know whether that was a policy decision 
or part of the ad hocracy of the IRS.
    Senator Lott. Anybody else want to comment on that? Ms. 
Davis.
    Ms. Davis. Yes, I have a theory I will share with you. I 
think it all comes down to who the district director happens to 
be. There is tremendous power placed in the hands of individual 
district directors. I will tell you a quick story about the 
taxpayer Carol Ward, whose story you probably heard about on 60 
Minutes this past weekend.
    When I first became familiar with the outlines of her story 
I was unemployed by the IRS by that time, but I went to some 
old friends of mine who work at pretty high levels of the IRS. 
I outlined the case and I said, how could this happen? They 
told me, I do not think that that is right.
    I do not think it really happened. We do not do things like 
that. They just denied it. These are people that I really 
trusted that I had had good working relationships with, and 
they were confiding in me. They said, I just cannot see that 
that could happen. So then I learned a little bit more.
    I went back to one of my sources who was a former district 
director, and I said, well, here is the name of the person who 
was the district director in Denver at the time that this 
incident occurred. This former IRS district director, who is 
now working in Washington, said to me, oh, I did not know that. 
That explains everything.
    In other words, what this IRS executive was telling me was, 
once he or she--to hide the identity of my IRS informant--once 
I told them who it was, they said, well, that was not 
surprising because they knew that person and that person had a 
personality to do that.
    Senator Lott. Mr. Burnham?
    Mr. Burnham. I would like to add to that. Our data shows 
all this erratic business. From my research, I do not think the 
IRS commissioner and the upper echelon of the IRS look at these 
erratic, crazy patterns and find out if there is some 
legitimate reason for it. They just sort of sit there. It is 
not well-managed.
    We do not want every district to be exactly the same, that 
would be wrong. Montana is different than Miami. But they do 
not look at it that way. There is a surprising lack of serious 
management at the top levels.
    Senator Lott. One last question, I think, that can be 
answered briefly. I have known a lot of people who were 
accounting majors and became CPAs and tax lawyers and wound up 
at IRS, nice folks, then something happens. [Laughter.]
    Ms. Davis. Good thing I got out when I did.
    Senator Lott. Now, I guess the answer is, I presume there 
is a culture there, this law enforcement culture, or the 
arrogance that comes from power. Is that it, is that what 
happens to, in many cases, good people? All of a sudden they 
are the local agent in the hometown and they become nasty 
people.
    Mr. Schriebman. May I?
    Senator Lott. Yes, sir.
    Mr. Schriebman. I have a lot of contacts that are that way. 
Some of my students, of course, have gone that route. I think 
that it is not so much nasty people, I think it is some kind of 
insulation, because when you have a problem with an agent and 
you try to get their manager or you try to get their branch 
chief, they are always in a meeting. They have more meetings 
than President Clinton. They are always in a meeting. They 
never return your calls, never respond to your faxes.
    There is one lady whom I think is so fantastic. She happens 
to be a branch chief in the Long Beach field office. There was 
a problem. She handled it right away. She met with me and the 
revenue officer, and she sat in the meeting. I was so impressed 
with that. But she is about the only one. I do not know. They 
just feel like they do not work for us.
    Senator Lott. All right. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Lott.
    Senator Conrad. Thank you, Mr. Chairman.
    Again, I believe I bring a special perspective to this as a 
former tax commissioner of the State that elected me to the 
United States Senate. I think one of the reasons they elected 
me was because we gave good service to people.
    One of the things that I instituted when I was tax 
commissioner that I think paid great dividends, and it is a 
very small thing. We sent people out to audit, because there 
really are people who cheat, there really are people who abuse 
the system, there really are people who will go to great 
lengths to avoid paying what they legitimately owe. That is 
totally unfair to the vast majority of citizens who do pay what 
they owe and who do pay their fair share.
    So there is a certain adversarial relationship with those 
who try to cheat and those who try to avoid paying their fair 
share. But one of the things we did when we sent out auditors, 
was send out a questionnaire after an audit was completed. It 
was very brief, and ask them, how are they treated?
    Our people knew that we were going to engage in that 
process, that we were going to check on how they were treating 
people. I tell you, I think it made a great difference. There 
is a tendency by some to abuse their power. I want to again put 
this in perspective because I have dealt with the IRS in my 
previous career and I found the vast majority of people there 
were honest, were hardworking, and did not abuse people.
    When we talk about a culture, that strikes me as kind of a 
condemnation of everybody there. I do not buy it. I have worked 
with these people, honest, hardworking, decent people. Are 
there people who are not? Absolutely. I have seen that, too. I 
have seen people who abuse their authority. I have seen people 
who got arrogant. The quickest way to stop that is to hold 
people accountable and to check on how they treat people.
    I tell you, that simple device of sending out a very brief 
questionnaire. How were you treated? Were you treated with 
respect? Were the people on time? Did they answer your 
questions? At the end of the audit did they explain to you the 
findings of the audit?
    Amazingly enough, we had some people who went in and would 
audit and would not tell the people the results of the audit. 
Well, that is arrogant and that is frightening to people.
    Mr. Burnham. I do not believe I recall the IRS having such 
a questionnaire.
    Senator Conrad. And I tell you, I think maybe that is the 
kind of action that could come out of what we do here, that 
after an audit there be a procedure to ask people how they were 
treated.
    I tell you, I think they would find what we found, that in 
fact you do have some people who get a little filled with 
themselves, and they are out there on their own, they had a bad 
day, they had a disagreement with their spouse, and by God, 
they are going to take it out on the taxpayer. Well, that is 
not acceptable.
    One way to avoid that is to hold them accountable. One way 
to hold people accountable is to have information on how they 
acted. You might find a taxpayer who misreports, who is one of 
those abusive taxpayers, because there are some abusive 
taxpayers out there too, but you can find a pattern.
    If one person says the auditor did not treat them with 
respect and then you get subsequent reports that they did not 
treat them with respect, then you have a pretty good indication 
you have a problem, and it is time to deal with it.
    The Chairman. Would you yield for a question?
    Senator Conrad. Yes.
    The Chairman. You talk about filing the paper, which is a 
good suggestion. But did the people in North Dakota not know 
that there was a tax commissioner that was going to follow 
through and check those papers?
    Senator Conrad. Yes. Yes.
    Senator Gramm. And who was elected.
    Senator Conrad. I was elected as a tax commissioner, the 
only elected commissioner in the country. I think it has a 
tremendous impact, too, on accountability.
    One other thing that has been said here today, I think, may 
have a fairly simple solution. I hear that, well, the IRS 
targeted lower income people. This committee has complained 
repeatedly about fraud and abuse in the Earned Income Tax 
Credit section of the Code. We have colleagues here who have 
talked about it repeatedly.
    In fact, there has been fraud in the Earned Income Tax 
Credit and I would not be surprised if the IRS actually 
listened to this committee; sought to do something about it and 
focused on the whole question of fraud in the Earned Income Tax 
Credit. Well, of course, that would involve lower income 
people. Mississippi is, I think, perhaps the lowest-income 
State in the country.
    It might not be surprising that you would see a 
disproportionate number of people who are in the Earned Income 
Tax Credit program being looked at because there have been 
suggestions by this committee of fraud in that program. In 
fact, it has been more than assertions by members of this 
committee, there has been pretty good evidence that there has 
been fraud in the Earned Income Tax program.
    I would just like to ask the witnesses here, do you think 
something as simple as what I have suggested might do some 
good, that is, send out a questionnaire after people have been 
audited and ask them, ``how were you treated?''
    Mr. Burnham. I think it is a very good idea, assuming that 
someone at the IRS looks at them and acts upon them. That is 
not necessarily an assumption we can count on.
    Senator Conrad. Do you think there should be something like 
an ombudsman at the IRS?
    Mr. Burnham. There is.
    Ms. Davis. There is an ombudsman at the IRS. It is a career 
IRS employee.
    Senator Conrad. Do you think there should be somebody that 
has a specific responsibility for a program like this one, that 
maybe this would be an assignment given to the ombudsman?
    Mr. Burnham. Maybe the ombudsman ought to just do that, 
have that kind of program going.
    Ms. Davis. Let me jump in here. I cannot more strenuously 
disagree with that. I think your idea is an absolutely 
wonderful idea, but I think the surveys should not be sent to 
the IRS. That is the key to this kind of idea succeeding. If 
you send them to the IRS, they will go into the IRS black hole.
    Have the surveys sent to the Senate Finance Committee, have 
the surveys sent to the Joint Committee, some oversight body 
that could review them. If you put them in the hands of the 
IRS, I will tell you very quickly, it is one thing to have 
information, it is another thing to make use of that 
information.
    Senator Conrad. To act on it. Yes, you have to act on it. 
It does not do any good to get information if you do not act on 
it.
    Ms. Davis. The IRS conducted an internal survey program, 
which had this bizarre name of Survey Feedback Action, while I 
was there, and then continued after I left.
    I will tell you, from my conversations with IRS employees, 
not executives but the IRS employees, the general sense was the 
results of that survey indicated that there was a serious 
morale problem at the IRS and the morale reflected IRS employee 
attitude towards the top executives of the agency.
    When those results came in, because they were not what the 
IRS wanted to hear about its own employees felt about what was 
going on inside the agency, the results were quickly buried and 
nothing ever came of that. So, once again, have your survey, 
but have it sent to an outside, independent body.
    Mr. Burnham. Senator Conrad, you know you all have an 
interesting survey. You all have State offices that take 
complaints about Federal service. As I understand it, the 
majority of those complaints coming in to offices in every 
State involve the IRS.
    It would be interesting for you to pool, with the 
permission of the individual taxpayers, those complaints and 
examine them and see how valid they are. You have got 25 
Senators, 25 offices. You could really look at the complaints 
coming into your offices in a systematic way and do not treat 
it as an individual thing, but look at it and see if there are 
patterns and trends. Get the Senate Finance Committee looking 
at that.
    Senator Conrad. Well, I would just say that my colleague 
Senator Moynihan has just given me something that apparently 
has begun along the lines of what I was suggesting, that is, a 
questionnaire sent to taxpayers who have been dealing with the 
IRS to ask them how they have been treated.
    Now, perhaps Senator Moynihan can tell us when this was 
instituted.
    Senator Moynihan. I believe just in August.
    Senator Conrad. Just in August.
    Senator Moynihan. Yes. So we can follow-up on your idea.
    Senator Conrad. Well, I tell you, I know this is effective. 
Not only does the taxpayer have a chance to give feedback, but 
the person who is going out there to audit knows that they are 
going to be ``audited.'' That has a real way of affecting 
behavior.
    The Chairman. We are running out of time. We have got 
several members still needing to ask questions, and we have 
several panelists. So, I must move on.
    Senator Grassley. Could I have 30 seconds just on this 
point? Mr. Burnham brought up that they are now putting out a 
questionnaire of this type. This is another example of so many 
good ideas coming out of the IRS just since the IRS 
Restructuring Commission has been studying and making 
suggestions, because in our legislation on page 36 we call for 
this same survey. So it is nice that the IRS is waking up, but 
they are waking up because we are doing our oversight and not 
because they are good ideas.
    The Chairman. Senator Nickles.
    Senator Nickles. Mr. Chairman, thank you very much.
    Mr. Burnham mentioned that he thought that this was the 
first time in the history of the Senate that we have actually 
had IRS oversight.
    Mr. Burnham. By the Senate Finance Committee.
    Senator Nickles. By the Senate Finance Committee. I would 
guess that there might have been some when we have had 
commissioners nominated and come before the Senate, but Mr. 
Chairman, I would certainly think that this should be possibly 
a recurring activity, whether it is annual or by each Congress.
    But I think there is a lot of legitimate necessity, 
frankly, to have oversight over all government agencies, and 
certainly the IRS, because it is one of the most important and 
it is also one of the scariest for our constituents. It is one 
that our constituents fear most. So I compliment you for doing 
it, and I hope that we do it regularly.
    I will say also the very fact that we are having these 
hearings, I have been besieged. I have had Congressmen calling 
me saying, ``I have something I would like for you to expose.'' 
I have had constituents come up and say, ``I have got a horror 
story.'' I just read one that was about 15 pages.
    Actually, the letter came from a person that I have been in 
business with for years, or actually did some of our work in my 
private sector days. He was talking about the relationship with 
an IRS agent. This is an accountant. He has been in business 
for 35 years, telling me about a horror story about an abusive 
IRS agent. He said, he had dealt with hundreds of agents over 
the years and never had a problem like the one that he 
described.
    I mentioned in my comments yesterday, I do not have any 
doubt that most all of the 102,000 IRS employees do an 
outstanding job, but on occasion there are some people that 
abuse their power. I think we have to have some means of 
rectifying that situation. I think I heard Mr. Schriebman, 
maybe in your comments, you mentioned some actions that could 
be taken against the IRS if they have been abusive. Could you 
mention a couple of those again?
    Mr. Schriebman. Yes. Right now, the Taxpayer Bill of 
Rights, the first version, under Section 7430 of the Code 
provided monetary damages against IRS people who violate the 
provisions of the Internal Revenue Code. But they do not 
violate the provisions of the Internal Revenue Code very often. 
What they violate, are their internal manuals, press releases, 
things like that. See, those are not considered law under 
Section 7430.
    I want to see an amendment to Section 7430 that does three 
things. Number one, provides taxpayer damages for violation of 
internal manuals and internal procedures, because they are 
taught those.
    Number two, I would like to see some punitive damages, 
because there is only one place in the Internal Revenue Code 
where there are punitive damages, and that is for Privacy Act 
violations. There are not any punitive damages for violating 
basic taxpayer rights.
    Also, I would like to see the ceiling raised. It was raised 
in the Taxpayer Bill of Rights II from $100,000 up to $1 
million. I do not think there should be really a limit on that.
    Senator Nickles. All right. Let me thank you for those 
suggestions.
    Mr. Burnham, you mentioned something in your opening 
comments that kind of made me step back. You mentioned 
historically--and Ms. Davis, you might want to comment on this 
too, or any of you--that there have been some abuses by the IRS 
by previous administrations.
    I think you referred to the Hoover Administration and the 
Navy League, you mentioned FDR, I also think you mentioned 
President Kennedy, President Nixon. I do not know if you 
mentioned LBJ or not. Are all those correct, that you have 
uncovered evidence that maybe the administrations have abused 
the IRS?
    Mr. Burnham. Absolutely. The IRS has been used for 
political purposes on quite a regular basis.
    Senator Nickles. Let me bring it up a little closer. You 
touched kind of briefly on Reagan, Bush, and I do not know if 
you mentioned Clinton or not. Did you find evidence that the 
Reagan Administration or the Bush Administration used the IRS 
for political purposes?
    Mr. Burnham. During the Reagan Administration there were 
several groups that were opposed to the Reagan Administration 
position in Central American who were audited. Now, whether 
that was political harassment, they believed it was. An audit 
happens, and it may be done for a good reason.
    There was also a very interesting case during the Reagan 
Administration, and I am sure President Reagan had nothing to 
do with this, where a group of teachers in Minnesota formed an 
organization to promote the idea of Darwinism, of evolution. 
They asked for tax-exemption, and they got a really incredible 
letter back from the IRS saying, who are you to say Darwinism 
is right? Are you going to show the other side? An IRS lawyer 
was apparently a Creationist and felt very strongly about it, 
and wanted this other side.
    Now, these people had it together and they went to their 
Senator. It was a Republican Senator, I believe, from Minnesota 
at the time. He wrote a letter, and the thing disappeared. But 
this kind of thing happens.
    Senator Nickles. But be careful, because there are 
allegations being made on this administration and I have not 
really heard, and I was here during the Reagan and Bush 
Administrations, but I have not heard anyone say that either of 
those two administrations audited their enemies.
    Ms. Davis?
    Ms. Davis. I just want to add a quick historical note 
because it is important to understand what really happened. The 
two instances with which I am most familiar are the Kennedy era 
abuses and the Nixon era abuses. In the Kennedy era the IRS had 
a program called the Ideological Organizations Audit Project. 
It was quite a mouthful to say.
    In the Nixon years, it was called the Special Services 
Staff, or the SSS. These were the entities inside the IRS that 
performed the political targeted audits, if you will. But it is 
very important to understand that both of these organizations, 
from the historical record that does exist, did not come about 
as the result of someone at the White House directing the IRS 
to do this.
    In both cases, the evidence that I see indicates that the 
IRS in the Kennedy era listened to a news conference that 
President Kennedy held in which he railed about the problems of 
the right wing, and we had to do something about these tax-
exempt organizations, and by gosh, the only way to control them 
is through the IRS. It was shortly, if not immediately 
thereafter that the IRS internally created this organization. 
No one directed them to.
    They were reacting to a perceived need of the 
administration. The same thing happened with the Special 
Services Staff, which was launched in 1969, quite some time 
before, if you look at the archival evidence, the term 
``enemies list'' became in vogue in the White House.
    They did it as a result of Congressional hearings in which 
concerns were raised about activities of extremist groups 
across America, and IRS bureaucrats got together, hunkered 
down, and said, well, gosh, we can do something about that 
here. That is the most important point I make when I talk about 
whether or not the Clinton Administration or any administration 
is conducting political audits.
    It is not as simple as the White House calling the 
commissioner and saying, go get these guys, because if there is 
a perception inside the IRS that this it the type of activity 
the administration wants to protect its budget, to protect 
itself from this kind of scrutiny, then the IRS may very well 
do it on their own. It does not take direction from the White 
House. The IRS has the power on their own to do it. There is 
nothing to stop them from doing it now.
    Mr. Schriebman. Senator Nickles, may I just make one point?
    Senator Nickles. Yes.
    Mr. Schriebman. I would like you, if you have some time, to 
review an article in the Washington Times. I do not know when 
it came out, but it is Volume 434. I have copies for the 
committee. It talks about people who have gotten judgments 
against the IRS and the IRS keeps appealing and appealing and 
wearing them down so they do not have to ever pay anything. 
That is a very insightful article that I would direct your 
attention to.
    Senator Nickles. All right. I appreciate that.
    Also, Mr. Schriebman, you mentioned one other thing. You 
said you thought we should change the section in the Code that 
allows, is it a district manager?
    Mr. Schriebman. District director.
    Senator Nickles. Director. To be able to seize assets.
    Mr. Schriebman. Yes.
    Senator Nickles. Right now, he is able to, over his 
signature, seize assets whether it is a paycheck, a home, a 
car, or other assets?
    Mr. Schriebman. The IRS does not need his signature to go 
after a car, a paycheck, or a business. The Code is specific. 
In order to take a home, just a home, a residence, the revenue 
officer cannot do it without his signature. But I know of no 
case where a revenue officer has gone to a DD and the District 
Director has refused to sign.
    Senator Nickles. In some areas of the country they have had 
a lot higher, I guess you would call it, seizures rates than in 
other. Maybe is that because of more aggressive district 
directors?
    Mr. Schriebman. I would only have to assume so, Senator.
    Senator Nickles. Are you saying they should not have that 
authority or they should have to go through a Tax Court before 
they could get that information?
    Mr. Schriebman. Yes, that is what I am saying. Let them go 
to a Tax Court or an independent forum in order for them to be 
able to seize anything, but let the taxpayer have a notice and 
a right to be heard under the 5th amendment.
    Senator Nickles. All right. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Moseley-Braun.
    Senator Moseley-Braun. Thank you, Mr. Chairman. I want to 
thank you and congratulate you for convening these oversight 
hearings. I think it is absolutely appropriate that this 
committee undertake to provide this kind of oversight. It is 
certainly part of our charge and our responsibility. It is 
important in order to be responsive to the public, generally.
    I would take issue with Mr. Burnham. Mr. Burnham suggested 
that the most cases we heard from our constituents have to do 
with the IRS. I think it has been overtaken by immigration of 
late. But certainly we hear enough horror stories that this 
kind of oversight is very, very timely, and the work of the 
commission is to be commended and congratulated.
    I think the point has been made that the taxes are what we 
pay to support our expectations as a society, and that most of 
the people who work for the IRS are honest, hardworking 
individuals who perform an important community service.
    At the same time, I know taxpayers view with horror the 
prospect of having to come in contact with the IRS, and we do 
have a lot of difficulties getting through. The citizens 
generally are confused and upset about the mystery associated 
with the IRS, the seeming capriciousness of what they do, and 
the lack of accountability.
    I think if there is one level of objection that we hear the 
most about, it is that nobody can figure out how to get through 
the maze of procedures or how to get through to where they need 
to go to get an answer.
    I have, and I am going to pass this on to the people from 
the IRS here, again, a constituent issue from Fannie Woods 
about her military retirement. She goes A through Z of steps 
that she took to try to reconcile a problem with the IRS, that 
she could not get information, she even traveled to Kansas 
after being told that that is where her case could be resolved, 
only to be told that Kansas was the wrong place and that she 
should have gone to her local office. She has gotten different 
phone numbers. Even this letter is directed to two different 
places.
    So people do not know where to go, they do not know who to 
talk to, they do not know how to get through the process, and 
they wind up, in her case, having a bank account levied over a 
military retirement. Military retirement. This is somebody who 
had a service-connected retirement, and had to go through what 
seems like, just to be charitable, a catch 22.
    Having said that, I want to focus in on Section 7430 and 
what, if anything, we can do about it. It is always easy to 
talk about the apocryphal stories, but the question is, how can 
we make this process work better?
    I was looking at Section 7430(a), which has to do with the 
cost on appeal. Assuming for a moment that a taxpayer goes 
through the process and goes to Kansas when they could have 
gone to the hometown, or makes phone calls and cannot get 
through, has to hire a tax preparer or a tax assistant or an 
accountant to go through, has to order back copies of credit 
card bills, or whatever.
    Section 7430 does not allow, on the face of it, for those 
costs to be recovered if they go through the process and win 
and it is determined, after administrative appeal, or 
alternatively after going to court, that the taxpayer really 
was right, they had paid their taxes, they had done an honest 
job of it, they had done the right thing, and they were not 
liable for the lien, the levy, or for the collection action 
that had been charged, and somebody had done something wrong 
with the computer.
    Assuming that happens and the person appeals and wins, to 
what extent can these costs of the accountants, of the tax 
assistants, of the travel, of even attorneys fees--the section 
provides for a $75 an hour attorney fee.
    Mr. Schriebman. Which was raised.
    Senator Moseley-Braun. Right. And not to put down legal 
assistance, but you cannot get legal assistance, even a 
paralegal, for $75 an hour.
    So assuming you go through the process, you were right to 
begin with, you have gone through the aggravation, your mental 
health cannot ever be compensated for, but certainly your trips 
to Kansas, your telephone bills, your tax assistant's costs, 
your accountant's costs, and your legal fees ought to be 
recoverable.
    So my question is, how can we provide taxpayers with some 
assurance that if they go through all of this and they are 
right, that they will not be further burdened and out of pocket 
for the costs associated with getting justice done to them?
    Mr. Schriebman. Well, it just so happens that I was at the 
Government Printing Office yesterday, and something told me I 
had better get a copy of the Taxpayer Bill of Rights II, that I 
might need it.
    First of all, 7430 was amended by the Taxpayer Bill of 
Rights essentially to do two things, raise the hourly from I 
think $75 to $110, which you are not going to find anyone 
competent for $110 these days. So, I think that is unrealistic.
    I think if you are going to put some teeth into the 7430, 
you should not put any dollar amount at all, the rate should be 
the prevailing professional fee in the community.
    Number two, you have got a ceiling here that you had in 
Taxpayer Bill of Rights I, which I think was $100,000 and was 
raised to $1 million in the TBR II. But you do not get it, as 
you said. You are 100 percent right. You do not get it for 
every dollar of professional fees or costs that you incur 
because it starts, I believe, at the appellate level.
    So the exhaustion of the administrative rights, Senator, 
you have to either get or ask the IRS to give you an appellate 
conference; you have to request an appellate conference. It 
starts with the appellate conference.
    Anything that you have incurred prior to an appellate 
conference, you are out of pocket and I think that is wrong, I 
think, the money that you have incurred for an unjust audit 
should be awarded. Of course, in a collection action you do not 
get an appellate conference.
    Senator Moseley-Braun. Would it be possible to break this 
down and give some additional authority to the appeals entity 
at the administrative, as well as at the court level? That is 
to say, if at the administrative level an individual could 
recoup his or her cost of defending him or herself, that might 
provide some balance in the situation.
    You have unlimited resources on the IRS side, and the 
taxpayer is out of pocket. Sometimes I think that may go to the 
heart of why people feel so burdened, because they cannot in 
all cases continue to meet those costs on an ongoing basis.
    Mr. Schriebman. You are 100 percent right, Senator. The 
couple of flaws in 7430 are, number one, when it kicks in. It 
should kick in from the beginning when you are contacted by the 
service, whether it is an audit or a collection matter. I think 
the ceiling should be raised way beyond $1 million. After all, 
as the old joke said, $1 million does not buy what it used to.
    The attorneys' fee provision, the accountants' fee 
provision, there should not be any ceiling at all, it should be 
whatever the prevailing fee is in your particular community. 
Now, maybe in Mississippi $110 an hour is the going rate. Where 
I come from it is a little higher. But it is an unrealistic 
dollar amount and I do not think it should hinge on whether or 
not you get an appellate conference. I think it should start 
from the initial IRS contact letter.
    Senator Moseley-Braun. Ms. Davis?
    Ms. Davis. Can I respond to that by sort of issuing a 
challenge back to you, the entire Senate Finance Committee. I 
think it would be interesting if you would, as a body, as the 
IRS to provide you with detailed information on the number of 
cases of taxpayers who have challenged the IRS and who have 
been successful in their challenge against the IRS who have 
actually been paid by the court system.
    I can tell you that I did some background work with 60 
Minutes on the piece they did last week, and one of the things 
they told me, is this is a question that they repeatedly asked 
the IRS, and the IRS simply refused to respond to their request 
for that information. But the IRS could not refuse you.
    So, because we the American people cannot get that 
information, my guess is you are not going to find very many 
taxpayers who have ever been paid.
    Senator Moseley-Braun. Well, I thank you.
    Mr. Chairman, I would like to ask the service, and we can 
perhaps continue with this tomorrow, if they would give us some 
numbers, not only on the number of audits that are initiated, 
but the extent to which they go on further in the process, and 
then the extent to which taxpayers are able to recoup at least 
even the costs that are presently authorized after the 
conclusion of the appeals process. If we can get those numbers 
for our next set of hearings, I think it would be very helpful 
to this.
    The Chairman. You will have that opportunity tomorrow when 
the representatives of the IRS will be here.
    Senator Moseley-Braun. Well, if they are here, that way 
they will not come and say, well, we will have to get back to 
you. It would be really helpful to get it, if they could work 
on that today in preparation of the hearing tomorrow. Thank 
you.
    The Chairman. Senator Hatch has asked for 30 seconds to 
make a correction.
    Senator Hatch. I just want to correct the record. To 
correct the example I used in my earlier comments, the taxpayer 
did not go to the Tax Court to have the interest that was 
assessed abated. Unfortunately, this case began before the 
Taxpayer Bill of Rights II allowing the tax court review was 
effective. So it is a very unjust case and something that I 
think would upset most people who looked at it fairly. Thank 
you, Mr. Chairman.
    Senator Moseley-Braun. Mr. Chairman, 30 seconds indulgence 
before Senator Kerrey. If someone would take Ms. Woods' case 
and take a look at this, because it really is kind of a 
nightmare and I would like, if they would get started on this I 
would appreciate it.
    The Chairman. All right.
    Senator Moseley-Braun. I do not know who from the service 
is here, but if someone could take this. Thank you very much.
    The Chairman. Senator Kerrey.
    Senator Kerrey. Mr. Chairman, one of the things I would 
point out is that one purpose of oversight is to answer the 
question, ``What should the law be?'' I mean, we are, in the 
main, writers of laws. There are laws governing the Internal 
Revenue Service today and I am prepared to argue strenuously 
that those laws need to be changed.
    Senator Grassley and I have introduced legislation that has 
in it a long, detailed section dealing with many things that I 
have heard the panel discuss having to do with taxpayer 
protection rights, new penalties on the IRS, new rights for the 
taxpaying citizen.
    We have a section dealing with accountability that gives us 
a greater capacity to do our oversight. I mean, one of the 
problems is, we just do not get a sufficient amount of 
information across the board to know what is going on over 
there.
    In that section we deal with the funding of the date change 
to the year 2000, which is a huge problem and could create 
enormous friction between the IRS and taxpayers. We deal with 
the complexity of the Code as well. Very often we are the 
people, as Senator Moynihan indicated the other day, 
responsible for creating complexity in the Code and difficulty 
as a consequence for administering the Code.
    We are not always as good as we were this year in enacting 
tax legislation early. It is not uncommon to pass a tax law 
around here late in October or early in November, well into the 
filing season, creating, obviously, some difficulties with 
filling out taxes.
    We have a section on electronic filing, which I believe 
offers enormous potential for reducing costs and increasing 
service. The rate of errors with electronic filing is less than 
1 percent, with a 25-percent error rate in the paper 
environment.
    We do have a section as well on governance, as well as 
senior management policy. There is considerably less authority 
with the commissioner in making management decisions and 
management policy decisions than meets the eye, though I know 
that some regard the governance, I think one of the panel 
members said, as window dressing. I think it is a critical 
issue.
    We saw with the Social Security Administration, with the 
new administrator that was nominated by the President, already 
a willingness to be independent of the President and say this 
is the problem, this is the situation.
    I would love to see an IRS commissioner at some point in 
time say, great tax idea, Mr. President, great tax idea Senator 
Blowhard, but this is what it is going to cost the taxpayer, 
this is what it is going to do to our capacity to be able to 
get the job done. So this independence, in my judgment, is a 
critical issue in order to be able to get accountability to the 
taxpayer.
    Again, in the interest of time, I appreciate very much the 
panel taking the time and exposing yourself to come up here and 
be witnesses. I would appreciate very much if you could look at 
the legislation that Senator Grassley and I have introduced, S. 
1096, and all these various sections and just get back to us 
and give us your constructive input as to how to make this 
proposed law even better based upon your vast amount of 
personal experience in this area.
    Senator Moynihan. Mr. Chairman, could I just say one word 
here.
    The Chairman. Senator Moynihan.
    Senator Moynihan. Would it not be a special moment when a 
commissioner of the Internal Revenue Service came before this 
committee and said, that provision is too complex, nobody can 
understand it, we will never be able to enforce it?
    Senator Kerrey. Yes.
    The Chairman. Well, I want to express my appreciation to 
all three of you for being here today. I think the discussion 
this morning has been very helpful. It is only a beginning. We 
look forward to your continued advice and assistance.
    Mr. Schriebman. It is an honor, Senator.
    Ms. Davis. Thank you.
    Mr. Burnham. Thank you.
    The Chairman. I would now like to ask our next panel, 
Father Ballweg, Mrs. Hicks, Mrs. Jacobs, Mr. Savage, to join us 
at the witness table.
    Now, I would point out to the members of the committee that 
we will hear now from four taxpayers about their experiences in 
dealing with the IRS. There is a common theme in three of these 
cases: the inability of the IRS to perform a simple 
administrative task and the lack of will by the IRS to correct 
the problem. Then a parade of horror is unleashed against the 
taxpayer.
    We will hear from Monsignor Lawrence Ballweg, how he was 
unable to get a copy of his tax filing within a reasonable time 
so that he could respond to the IRS allegation that he owed 
thousands of dollars of tax.
    We will hear from Mrs. Katherine Hicks how the IRS was 
unable to send her a bill for the out-of-court settlement she 
made with the IRS almost a decade ago.
    Because of the IRS mistake and its inability to track her 
account, Mrs. Hicks has been subjected to tax liens against her 
house, levies against her husband's wages. She even took the 
drastic step of filing for bankruptcy and divorce to try to 
escape from the heavy hand of the IRS. She is accompanied today 
by her husband, Mr. James Hicks.
    We will also hear from Mrs. Nancy Jacobs how the IRS was 
unable to straighten out the employer identification number for 
her husband Dr. Barry Jacobs' optometry practice. Their case 
spans 17 years, with the Jacobs being subjected to liens, 
interest, and penalties for someone else's taxes.
    Each of these taxpayers attempted to deal with their 
problem in good faith for an extended period of time. The IRS 
made little effort to resolve their problems. Instead of 
treating them as customers, they were treated as if they were 
tax cheats.
    Now, let me repeat. The problems were created by the IRS's 
inability to perform a simple administrative task and the lack 
of will to correct the problem. If these had been credit card 
disputes, they would have been resolved expeditiously. It is 
telling that these cases were resolved when this committee and 
the media began to probe.
    The fourth case we will hear about is in many ways even 
more disturbing. It did not start with an administrative error. 
We will hear that the IRS intentionally went after Mr. Tom 
Savage and his company to collect taxes owed by an unrelated 
business. Faced with a choice between saving his business or 
fighting the IRS, Mr. Savage's company paid $50,000 in taxes 
that it did not owe. I find this absolutely indefensible.
    I want to thank each of our witnesses for taking the time 
to come before the committee today. I will now administer the 
oath to each of you and I will ask you each to respond 
separately. Will you please rise and raise your right hand.
    [Whereupon, the five witnesses were duly sworn.]
    The Chairman. Mr. Hicks?
    Mr. Hicks. I do.
    The Chairman. Mrs. Hicks?
    Mrs. Hicks. I do.
    The Chairman. Mr. Savage?
    Mr. Savage. I do.
    The Chairman. Monsignor Ballweg?
    Monsignor Ballweg. I do.
    The Chairman. Mrs. Jacobs?
    Mrs. Jacobs. I do.
    The Chairman. Thank you, and please be seated.
    We will now ask you, Mrs. Hicks, to proceed with your 
testimony.

     STATEMENT OF KATHERINE LUND HICKS, APPLE VALLEY, CA, 
                   ACCOMPANIED BY JAMES HICKS

    Mrs. Hicks. Thank you, Chairman Roth and members of the 
Senate Finance Committee. Thank you for allowing me this 
opportunity to appear here this morning to relate to you my 
experience with the Internal Revenue Service.
    Like many women who have gone through a divorce, I was the 
one stuck with the tax bill for our last joint return for the 
tax year 1983. The IRS assessed that return for additional 
taxes of $7,000, but sent all the notices to my former spouse. 
Unfortunately, it took him over a year to notify me of the 
assessment.
    I immediately contacted the IRS. The IRS had ceased to be 
willing to examine my records and was demanding that I pay them 
$16,000 instantly. At the time, my former spouse was earning in 
excess of $40,000 a year as a glazer and had no dependents. My 
income was approximately $15,000 a year as a newly-hired bank 
employee, with a dependent 14-year-old daughter. For the 2 
years following my divorce, I was financially destitute. I had 
just managed to get an apartment, a real home for the two of 
us.
    I mention this to remind you good people that when an IRS 
collection procedure gets out of control, the victim of that 
collection still has to deal with all the other traumas of 
their life.
    An honest collection by the IRS with no snafus of an amount 
actually owed is incredibly stressful in itself. Therefore, it 
is critical that the IRS not be allowed, whether by design or 
accident, to pursue taxpayers for erroneous debts. At present, 
there are no effective protections against this.
    In my case, I had to file a Tax Court petition to force the 
IRS to examine my records, which I did in 1988. This is not 
unusual if the IRS does not get a response to early requests 
for records and I did not feel resentful or persecuted.
    However, it did cause problems and added to my stress. I 
had to use my rent money to pay the accountant and lawyer, and 
so I lost my apartment. My daughter and I were reduced to 
sharing a rented room. I consoled myself with the thought that 
we had survived worse, and we would get another apartment 
later.
    It is important to note here that my ex-husband was not a 
party to this petition in Tax Court. We settled out of court 
and the IRS agreed to a reduced tax, from $7,000 to $2,709, a 
reduced total demand from about $16,000 to approximately 
$3,500.
    I went to the meeting in July 1988 to sign the agreement 
and, checkbook in hand, prepared to pay the amount in full at 
that time. The IRS refused my payment until they had sent me a 
bill, because they would not have anywhere to credit the money 
without the bill. They claimed they needed time to calculate 
the exact interest due.
    I wanted the payment properly credited, I wanted this to go 
well and to be permanently resolved. I thought, in a few weeks 
I will have a bill. But the IRS said that the bill would take 6 
months to prepare and arrive no later than January 1989. Six 
months.
    I recall asking if I was going to be charged interest for 
the 6-month waiting period, and the IRS attorney, through my 
accountant, said no, the interest would be calculated through 
the date of the agreement and as long as I paid it right away 
in January, there would be no additional interest.
    He said it would be about $3,500 total. I never understood 
why they could not just whip out their calculator right then 
and there and tell me what I owed and get this whole thing over 
with. The bill never came. In February, 1989 I started calling 
the IRS, asking where it was.
    I called the Fresno office and they suggested I also call 
Laguna Nigel. Both offices had no record of any taxes owed by 
me. I found this hard to believe. I wanted to be absolutely 
certain they were correct. I wanted to remarry and I did not 
want to bring this tax bill into the marriage.
    I called both offices again in March and again before July. 
I was told the same thing, that I owed nothing for 1983. I 
asked for a receipt or something to show this was paid, because 
I was simple-minded enough to believe this was a reasonable 
request.
    The IRS employees all said that they ``don't do that.'' I 
had to take the word of the IRS that I owed nothing, and in 
this, I had no choice.
    At the time, I was not aware that my account had been set 
up on a separate bookkeeping system to which the IRS employees 
with whom I spoke did not have ready access. It works like 
this. When you file a tax return it is recorded in a master 
file. This is what the IRS clerks pull up on their computer 
when you call and ask if you owe money.
    However, at some point in 1989 the IRS split the master 
file of our joint 1983 return and transferred separate 
assessments into two non-master files in each of our individual 
names and respective Social Security numbers. This was due to 
the fact that I had gone to tax court and my ex-husband had 
not. The IRS set up separate accounts.
    These non-master files do not show up on the computer when 
the IRS clerks check a taxpayer's Social Security number for a 
balance owed. According to the attorney who explained this to 
me in 1997, the master file continues to exist, but may show a 
zero balance until the IRS recombines those accounts.
    It will then reflect the correct amount owed according to 
the agreement. Until that happens, every time the IRS clerk 
pulled up my or my joint signer's Social Security number they 
would see a zero balance owed and conclude that no taxes were 
due.
    To add to the confusion, there is no notation in this 
master file that it has been split. Therefore, there is no way 
for the IRS clerk to know that you might have an outstanding 
collection in a non-master file.
    As a result, I was repeatedly told by the IRS clerks that I 
owed nothing. So far as I know to this very day, these accounts 
have not been recombined and the master file continues to exist 
with a zero balance, while the non-master files show a balance 
owed.
    Yet the IRS has been aware of this error at least since I 
notified them of it earlier this year, if not even earlier. I 
have made repeated requests of the IRS to recombine these 
accounts ever since I learned of the problem. As far as I know, 
it has not been done.
    It is incredible to me that non-master files are allowed to 
co-exist with master files at all. It creates two accounts 
under the same name, with the same Social Security number that 
can reflect conflicting balances due for the same tax year for 
the same person.
    Such a practice substantially increases the potential for 
error and confusion inside the IRS, while simultaneously making 
it impossible for a taxpayer to get reliable information from 
the IRS. The taxpayer either gets conflicting information, or 
in my case, consistent but incorrect information.
    Every day the taxpayer is unable to get accurate 
information from the IRS about a balance owed is another day's 
interest added to the debt. Even while the taxpayer is 
wandering around in this IRS maze of multiple accounts, the 
clock never stops running. This is incredibly frustrating and 
unfair to any taxpayer.
    Unable to overcome this obstacle to compliance through no 
fault of the taxpayer, he or she is charged penalties as well 
for their failure. Much of my misery was caused because the IRS 
could not accurately answer the simple question, how much money 
do I owe? As far as I know, that condition has not changed.
    To add to the confusion, my former spouse telephoned my 
fiancee to complain that he had paid the tax and now the IRS 
was after him for it again. He refused to share his records 
with me, but his story and the IRS story both matched. Still, I 
had no independent records to prove either one.
    I requested his payment records from the IRS in 1988, 
records to which I believed I was entitled. I made a second 
request for those records in 1997. The IRS has refused me these 
records, or even a statement as to their content.
    Why, if my joint signer has never paid anything on this 
tax, is the IRS hiding that information from me? How can I know 
for certain what my liability is without the records of my 
joint signer? Perhaps he has paid nothing. But if that is so, 
then their refusal to share that information with me makes no 
sense.
    Mr. Chairman, I did everything humanly possible to obtain 
correct information. I made every attempt to get this tax paid 
and every conceivable request for some kind of record to 
evidence what the IRS was telling me. I know of nothing else I 
could have done.
    So after being wrongfully informed that there was nothing 
owed, I remarried in July 1989. I carried on business with the 
IRS without incident, and my new husband and I filed a joint 
return in 1990 and received a refund. We were not convinced, of 
course, that if I owed any money to the IRS, the IRS would 
never have issued a refund. So now we were confident that the 
IRS information was correct. It was not.
    In September 1990, without any notice and without our 
knowledge, the IRS filed a tax lien against me. On December 19, 
1990, the first lienholder on our home sued us as a result of 
that Federal tax lien in the sum of $6,161.41. The lender 
threatened to call our loan if we did not immediately get the 
IRS lien released.
    We would have lost our home, a home, by the way, that my 
new husband bought for himself 6 years before he ever laid eyes 
on me. So the real damage was being done to him, an entirely 
innocent spouse. All of this, after I had been so careful to 
pester the IRS repeatedly for a bill and had been repeatedly 
told that no money was owed.
    Worse than that, the lien did not reflect the terms of our 
earlier settlement agreement. The tax lien reflected an 
assessment nearly twice that of the IRS agreement, and the IRS 
refused to discuss that fact with me.
    Meanwhile, the assessment was ripening and it had gone up 
to over $8,000. I tried to reopen my tax case and was told that 
the Federal Tax Court did not enforce out-of-court settlements 
made with the IRS. How convenient this is. Only the taxpayer is 
held to the agreement, not the IRS. I was adamant that this was 
just morally wrong. I was very upset.
    I fought this collection for two reasons. One, because 
based on information provided by the IRS itself I sincerely 
believed I owed nothing, and two, because I believed the IRS, 
even if they intended to collect twice, was obligated to 
calculate my collection in accordance with our agreement.
    My new husband contacted the revenue officer who had filed 
the lien. The revenue officer informed my husband, and later 
me, that he had my former spouse's file right here on my desk, 
and he knew that my former spouse had paid the taxes, but that 
it was not relevant because these were separate collections.
    He insisted that if we wanted my former husband's payments 
to offset my liability we would have to produce those records. 
Otherwise, we would have to pay it again; the duplicate payment 
would balance the IRS books, and he would help us file for a 
refund of the overage. Imagine my new husband's frustration at 
the prospect of effectively paying $8,000 that we believed had 
already been paid.
    At this point, which was early 1991, I requested a problems 
resolution officer who, after some inquiry into my account, 
came to the conclusion that I, indeed, did not owe anything for 
the 1983 taxes and that, once she got written confirmation of 
this from the Fresno office, she could get everything abated to 
zero. Meanwhile, she said, the IRS agent should stop collection 
activity, which he did not.
    However, I thought, great, this is all going to be 
straightened out soon. I was wrong. A few days later she called 
me and informed me that the IRS Fresno office had changed its 
mind about providing her with the necessary documents, and 
without those there was nothing she could do.
    I made one final attempt at reasoning with the collection 
agent. He merely repeated that he knew the tax had been paid 
and he knew I did not owe the money, but it did not matter. The 
only way to get rid of the tax lien was to pay the $8,000, 
whether we owed it or not.
    The collection agent then offered to assist us with regard 
to the refund application. He knew we were being sued by the 
bank because the IRS was a co-defendant, so he just refused to 
do anything and let the bank force us to pay what we did not 
owe. With the bank about to call the loan, we had no choice but 
to pay the IRS demand in full.
    Mr. Chairman, although I am giving you a rather general 
description of these events for the sake of overall continuity, 
it is important for me to tell you that both my husband's and 
my own physical and emotional well-being suffered tremendously 
under the constant strain of these repeated attempts to get the 
IRS to honor their agreement and collect only what I owed.
    It was physically exhausting. We almost never slept. Every 
conversation had to be memorialized in a letter. There were the 
visits to the attorneys and the accountants, their bills, and 
their depressing advice: pay it, it is cheaper than fighting, 
and the very real prospect of losing our home to the bank if 
they called the loan.
    You do not eat, you do not sleep, you are afraid to talk 
too much to each other for fear you will take it out on your 
spouse. If you do talk, it is about the IRS. We were newlyweds. 
I cannot describe the guilt, knowing that I had brought my new 
husband into this.
    My parents became so concerned for my health that they 
cashed in a retirement CD and loaned us the money to pay the 
IRS. Since they were living on a fixed income, this was a big 
deal for them to do. I know they made sacrifices to do this. It 
was a selfless act of love.
    On February 21, 1991, we handed the collection agent a 
cashier's check for the entire amount they demanded, $8,194.73. 
Please keep in mind, the original underlying tax was $2,709, 
and that the original amount due was supposed to be no greater 
than $3,500. The balance was interest that accrued from July 
1988 to February 1991, a period of 18 months.
    In that time frame, the bill that I could not get anyone to 
give me to pay nearly tripled from the original amount. I was 
forced to pay $4,500 for their mistakes. In exchange for this 
payment we were given a Certificate of Release of Federal Tax 
Lien.
    My cashier's check reflected my name, my Social Security, 
the tax year to which it was being applied, 1983, as well as my 
Tax Court docket number. In other words, the IRS had everything 
it needed to properly credit the payment. I could not have made 
it any clearer where to apply the proceeds of the check.
    In February of 1992, a letter arrived from the IRS office 
in Maryland signed by a woman with the authoritative title of 
Chief, Accounting Branch. The letter said the IRS had received 
a payment, and if we had made this payment, please send the IRS 
a copy of the check with an explanation, which we did.
    We also asked her in that letter not to refund the money or 
any portion of it unless she first made sure neither of us owed 
any money anywhere, for any year. In March 1992, we received an 
unsigned IRS form letter indicating that the payment had been 
applied to our 1990 joint return.
    I actually telephoned the IRS and asked about this and was 
told simply that if the Accounting Branch determined that there 
were no taxes owed for any year, the only way to refund the 
money was to credit it to the most recent tax year. In other 
words, they could not credit the payment to my 1983 tax year 
unless there was a balance due.
    Therefore, we logically concluded that the Accounting 
Branch did what we asked, checked out our taxes, found nothing 
owed, and was merely refunding us the overpayment in accordance 
with their own bookkeeping system. We had absolutely no reason 
to think that the refund was in any way erroneous.
    In November of 1996, nearly 5 years later, out of the blue, 
without so much as one prior notice, we received a certified 
letter from the IRS containing a Notice of Intent to Levy. The 
particulars of the tax being levied were identical to the 
particulars of the tax lien that had been released in 1991. For 
reasons unknown to us, they changed their mind and wanted more 
money again. Why?
    I telephoned the agent who sent the letter and was told, it 
was a different assessment, because even though everything else 
was identical, the tax year, the amount, the assessment date, 
there was an ``N'' after my Social Security number on this 
assessment and, therefore, I had to pay it again. The ``N,'' I 
later learned, is a tag for non-master file. Remember those, 
the separate collections that nobody seems to know about? Well, 
this was one of them.
    Whether the IRS failed to close it at the time we paid it 
in 1991 or whether they reopened it because they wanted to get 
the refund back they gave us in 1992, does not really matter 
much to me. Whichever one occurred, the fact remains the IRS 
made yet another error. Once again, they demanded that I 
balance their books and pay for their mistakes.
    How many times was this going to happen, I wondered? A tax 
attorney informed me that my Release of Lien was meaningless, 
adding, the IRS refiles these all the time. I cannot tell you 
how many people come in here clutching these things, Release of 
Lien, for dear life, thinking that they offer some kind of 
protection.
    He stated the Taxpayer Bill of Rights did not allow the IRS 
to collect interest from the taxpayers based on its own errors, 
and even suggested that I write to my Congressman, but 
cautioned me not to expect a significant outcome because 
``they,'' Congress, he meant, ``cannot really do anything. 
Congress is less than effective when dealing with the IRS on 
behalf of taxpayers.''
    I gave problems resolution another try. This time they were 
less an advocate for me than an arm of the IRS collection 
office. It was, in fact, the problems resolution officer who 
told me, you know, you kept a refund to which you knew you were 
not entitled, and her tone of voice was not friendly; keeping a 
refund that you know you are not entitled to is a crime. She 
demanded I pay back the refund. So much for the problems 
resolution office.
    After a brief hospitalization for surgery resulting from a 
freeway pileup that totaled our car, my husband resumed work in 
January 1997, only to discover that while he was recovering 
from surgery the IRS had levied against his salary. My husband 
would be allowed to keep $18 a week to support me and the 
children for approximately two months.
    Anyone entering a grocery store today knows that is 
tantamount to condemning us to a soup kitchen for our meals. 
Two months of being unable to meet our other financial 
obligations would have sent us into bankruptcy and foreclosure. 
Again, the innocent spouse was going to be published for my old 
tax problem.
    To protect his ability to provide for his children and 
myself, my husband set up a separate residence in San Clemente 
and filed for divorce on February 3, 1997. In California, the 
day you file for a divorce your salary is your sole and 
separate property. The IRS ignored that fact and left the levy 
in place.
    In an unusual determination, the county refused to comply 
with the second levy and my husband's income was safe. However, 
his retirement fund was not. That was community property, and 
we fully expected the IRS to swoop in the next day and take the 
whole thing.
    So on the 5th of February, 1997, I filed bankruptcy to stop 
the IRS long enough for us to figure out what to do about this. 
The bankruptcy notice was hand-delivered the same day.
    The following day, the IRS notified me that my Schedule Cs 
for 1993, 1994, and 1995 were questionable and asked me to 
reconsider them. We took this as a thinly veiled threat to 
punitively audit our returns. The IRS refiled the lien for 
which I had a release. We discovered this in March of 1997. I 
am informed that this is common practice.
    The liens threatened my husband's residence, which was his 
separate property, but the IRS ignores this in community 
property States. I have been informed that the liens would 
survive the bankruptcy, as all liens do. So even though this 
was his sole and separate property, it was possible the IRS 
would take it.
    My now widowed mother could not bear watching us go through 
this and took out a loan against her retirement so we could pay 
the IRS and get this over with. However, my husband and I knew 
that paying the demand would never resolve this. We tried that 
in 1991. They would screw this payment up too, and in a few 
years be back for more, with interest.
    We needed closure, some way to end this forever. Since the 
real problem occurred back in 1989 and the IRS never correctly 
set up my account for $3,500, and because every penny over that 
amount was a result of their own error, we determined that 
under the Taxpayer Bill of Rights provision that the IRS could 
not make us pay interest for their mistakes. We should not owe 
more than $3,500.
    If we could get the IRS to correct their errors, we should 
be able to pay $3,500 and be done with it. So, that is what we 
did. We made a directed, voluntary payment of $3,500. We put 
the rest of the money in a CD in case the IRS swooped in to 
destroy us unannounced. We waited.
    Our lives are now forever altered. Joint tenancy, joint 
bank accounts, joint tax returns are no longer a part of our 
life. We will pay additional taxes every year as a result. Our 
confidence in the integrity of the IRS has been completely 
shattered.
    This year we got a refund on our 1996 taxes, and it sits in 
a CD, as does the $3,500 that the IRS recently returned to us 
without any explanation. We do not dare cash refund checks 
anymore. My credit is completely destroyed, and my husband's 
credit is seriously damaged. We will suffer the effects of this 
IRS collection for the rest of our lives.
    I originally wrote to you, Mr. Chairman, because the IRS 
should not be above the law. Couples should not have to divorce 
because of the IRS. Once you became involved, the IRS released 
all of the liens and sent us the $3,500 back.
    Senator Roth, your effort saved us from being forced to 
live apart and preserved our ability to provide for our 
children and for this we will be forever grateful. However, the 
conduct of the IRS remains the same, and for thousands of other 
taxpayers there is no help. Ours is a hollow victory if the IRS 
is allowed to continue this type of conduct.
    People tell us how terrified they would be to do what we 
have done. They are convinced that the IRS will target us for 
punitive audits. One person put it this way when she learned we 
had written to Congress. She said, that is like painting a 
bull's eye on your chest and giving the IRS a loaded gun. She 
believes the IRS will never forget this, and some day get back 
at us in retaliation. Mr. Chairman, she could very well be 
right.
    The IRS is judge, jury, and executioner, answerable to 
none. We do not believe that our experience is isolated. For 
over 10 years the IRS has conducted itself as a legalized 
extortion operation, willing to commit abusive acts to collect 
money, even that which they know is not owed.
    An agency of the U.S. Government allowed such sweeping 
authority as that granted to the IRS should be held to the 
highest standards of honesty and integrity. The IRS is not. 
Those of us subject to that authority should be guaranteed an 
accessible and effective remedy for its abuse, and we are not. 
It is a disgrace to our Nation that an arm of our democratic 
government is allowed to behave as if it were an extension of a 
police state.
    I hope that Congress can act to end this National shame. 
Thank you for allowing me this time.
    The Chairman. Thank you.
    [Applause]
    The Chairman. The committee will please be in order.
    Mrs. Hicks, I thank you for being here today. I apologize 
and regret that you and your husband have been put through this 
kind of an ordeal since 1983. It should not happen, and that is 
the reason we are here today.
    Mrs. Hicks. Thank you.
    [The prepared statement of Mrs. Hicks appears in the 
appendix.]
    The Chairman. Next, I would like to call on Tom Savage for 
his testimony.

             STATEMENT OF THOMAS SAVAGE, LEWES, DE

    Mr. Savage. Good afternoon, Senator. Thank you for allowing 
me to come here, and distinguished people on the panel, for 
being here to hear our case.
    My name is Tom Savage. I run a small construction 
management company in Lewes, DE that my wife and I own. I want 
to thank the committee for the opportunity to share my story, 
which has been no less than a true horror story for my wife and 
me.
    We were unfortunate to have been the subject of a zealous, 
unrelenting, and abusive pursuit by an IRS revenue officer, 
with assistance and complicity of the attorneys, particularly 
the lead attorney at the Department of Justice who was charged 
with advising the IRS. They were in a position to stop the 
abuse and yet permitted it to continue, perhaps even causing 
much of it.
    In the interest of time, I will simply say that the 
emotional damage done to my wife and me outstripped the 
financial damages we suffered, which was not insubstantial. 
There were many sleepless nights. Believe me, when the 
resources of the government are unleashed on you, you are in 
trouble, no matter how good your case. Few people know what it 
is like to be in the cross-hairs of the IRS. We, unfortunately, 
do.
    I am here today in hopes that by telling my story and by 
participating in these hearings I might help bring about the 
real and lasting changes at the IRS. For the sake of other 
taxpayers, I hope this happens.
    The nightmare began when a subcontractor of Tom Savage 
Associates, or TSA, my company, fell behind paying his 
unemployment taxes. The case ended with an intense litigation 
in the U.S. District Court. Tom Savage Associates was forced to 
bring an order to recover a payment check issued by the State 
which had been wrongfully seized by the IRS.
    In order to keep my company afloat, we had to settle the 
case. Much of this offended our desire to stand on principles. 
We allowed the IRS to keep $50,000 of the check that was seized 
in order to get the case over with, since the litigations were 
bankrupting our company financially and us emotionally.
    We regret not having pursued the case to the end, but we 
had to save our business. The government has endless resources 
to drag the case out, we did not. In settling the case, the 
government extorted $50,000 before giving back the check. The 
government attorney knew that it was going to cost an 
additional $50,000 to litigate the case and use it as leverage 
on the IRS position.
    In brief, the subcontractor had tax problems that surfaced 
during the period that he was working for my company, TSA, on a 
project for the State of Delaware. Unknown to TSA, the 
subcontractor had not been paying his employment taxes for 
approximately 1 year before the project commenced.
    TSA, with the subcontractor's assistance, was building a 
women's correctional facility. The subcontractor performed the 
construction, while TSA oversaw the project and provided a 
performance bond for the project.
    Towards the end of the job, the subcontractor's tax 
problems came to light. The IRS investigated the subcontractor, 
but quickly concluded that the amount of taxes due were 
uncollectible.
    The revenue officer, in his zeal, set his sights on TSA. 
First, he attempted to hold me personally responsible for the 
unpaid taxes, asserting that I was a responsible person 
representing the subcontractor.
    This approach failed when my tax advisor filed a legal 
memorandum explaining the severe deficiencies with this theory, 
so the IRS then went after my company. The IRS now asserted 
falsely that TSA and the subcontractor were partners, and that 
the employees of the subcontractor working on the project were 
actually employees of this fictitious association between TSA 
and the subcontractor.
    My tax advisor pressed the revenue officer for some 
authority for asserting the existence of this fictitious 
partnership that he had established between TSA and the 
subcontractor. The revenue officer pointed to a non-tax 
Delaware case that was totally inapplicable.
    Undaunted by the challenge to provide the authority in 
support of this fictitious partnership, the revenue officer 
caused the IRS to issue a 30-day letter which proposed an 
assessment against the fictitious partnership.
    We immediately filed a written protest with the IRS appeals 
officer and eagerly awaited an appeals conference to put the 
case behind us. As things turned out, we were never given an 
opportunity to present our case to the appeals office.
    While awaiting the appeals conference to be scheduled, the 
IRS seized a large check paid to my company by the State of 
Delaware for the project. At the time of the seizure, and this 
is significant, there was no assessment entered against either 
TSA or the fictitious partnership between TSA and the 
subcontractor.
    Even if there was one, assuming the partnership existed, 
which is a generous assumption even for the sake of the 
argument, the only assessment on the books allowing the IRS to 
enforce the collection was against the subcontractor.
    The seizure of this check thus constituted a wrongful levy, 
open and shut. Existing IRS revenue rulings clearly hold that 
``assessment of a partnership on another partner may not be 
seized to satisfy the debts of another partner.''
    It is a fundamental principle of the tax law that the 
government may not seize any taxpayer's property or undertake 
any type of enforcement action against the taxpayer until there 
has been an assessment entered against a taxpayer. For those of 
you not versed in tax procedure, an assessment is the 
administrative equivalent of a judgment.
    In our case, the right to be free of the government 
collections action until such time as an assessment had been 
entered was flagrantly violated. Not only was this right 
violated, as will be explained in a moment, the IRS would now 
later attempt to sweep this fact under the rug in U.S. District 
Court.
    Indeed, the government's attorneys were so hell-bent on 
winning that they waged a behind-the-scenes campaign during the 
proceedings in the District Court to sanitize the record 
presented to the judge.
    The government requested an extension of time to respond to 
the plaintiff's brief in support of its motion for summary 
judgment, then during the extension in an assessment against 
the fictitious partnership between TSA and the subcontractor by 
hand-delivering a notice of demand the Saturday before the 
government's answer brief was due.
    The government attorney had the audacity to argue in their 
answering brief that an assessment had been entered against the 
fictitious partnership, but no mention was made in the 
government's brief that the assessment was entered 25 weeks 
after the IRS seized the check, and literally days before the 
answering brief was filed. And these were the attorneys we 
thought would stop the abuse?
    When we instituted the suit we were convinced that the case 
would be resolved quickly, that the government would concede 
the case once it got into the hands of competent attorneys. We 
guessed wrong. The government had my money and it was not going 
to give up without a fight.
    Faced with this ``win at all costs'' attitude, we were 
clearly in a protracted battle with the IRS. As much as it 
offended my wife and me, we chose to settle the case and permit 
the IRS to keep $50,000 of the proceeds. We wanted to pursue 
the case to the end, but to do so would have destroyed our 
business.
    On top of the $50,000 that the IRS kept, I had other 
financial losses. Although my attorney reduced her fee 
substantially, in encouraging me to settle the case their fees 
were substantial. We spent $51,000 in legal fees in connection 
with this case. We lost approximately $600,000 in business 
during the proceedings with the IRS in its wake.
    Finally, we lost our sense of well-being, confidence, and 
freedom from government intervention. I believe the IRS, the 
revenue officers, the district counsel's attorneys, and the 
attorneys with the Tax Division of the United States Department 
of Justice should be held accountable for their conduct.
    Unless abuse of this type committed by the IRS and its 
representatives are met with strong responses including 
legislation to compensate the victims of these IRS abuses, they 
will continue. I thank the committee for the opportunity to be 
here today.
    The Chairman. Mr. Savage, we thank you for being here 
today. Again, as I said to Mrs. Hicks, it is hard to understand 
how these occurrences do occur, and we apologize for the 
problems you have been put through.
    [The prepared statement of Mr. Savage appears in the 
appendix.]
    The Chairman. Now I would like to call on the very 
distinguished Monsignor Ballweg for his testimony.

     STATEMENT OF MONSIGNOR LAWRENCE BALLWEG, NEW YORK, NY

    Monsignor Ballweg. Good afternoon, Chairman Roth and 
members of the Senate Finance Committee. I found this to be a 
very interesting and educational experience, and I thank you 
for inviting me to come here this afternoon.
    I am Monsignor Lawrence F. Ballweg. I have been a priest in 
the Catholic Church for over 57 years. I was retired in 1990 at 
the mandatory retirement age of 75.
    My mother, Elizabeth Ballweg, died in August 1988, and in 
her will established a trust, the benefits of which go to 
charity. In the will I was named the trustee and, since her 
death, I have faithfully and conscientiously performed my 
duties as trustee. I have submitted an annual report of the 
trust activities to the IRS each year without any problem at 
all.
    During the year 1995, I made more numerous transactions 
than in previous years. In order to record all the income of 
the trust I listed the various items on separate sheets 
entitled ``Statement 1,'' ``Statement 2,'' and so on, then 
placed the totals in the appropriate spaces on the IRS Form 
1041.
    I did this more for the convenience of the IRS than for my 
own convenience. Since I did not pay a professional to prepare 
the trust return, I spent hundreds of hours collecting the 
necessary papers and balancing the figures. I asked for an 
extension of time for 1995 so that I could be more confident 
that the report was as accurate as possible.
    Two months later, the return that cost me so much time and 
effort was returned, requesting that I put all my figures on 
the appropriate forms that were enclosed.
    My second report was done hurriedly and returned on July 7 
to make sure that it reached the IRS office in the few days 
that were allowed. In my hurry to return this report on time it 
may not have been done as perfectly as the first, although the 
figures were exactly the same.
    I spend 6 months in Florida and 6 months in New York. The 
day after I arrived in Florida, November 4, 1996, I received a 
letter from the IRS Atlanta office stating that I owed more 
than $18,000 in taxes and penalties for the trust.
    Since I had left a copy of my final report in New York, I 
asked that a copy be sent to me. I was informed that I had, 
first, to request an application for a copy of my report, and 
then return the application with a check for $14. When the 
application arrived I filled it out and enclosed the check.
    About 6 to 8 weeks later, I received a form that indicated 
that I could not receive the copy since my name, Lawrence F. 
Ballweg, was different from the name of the trust, which was 
Lawrence F. Ballweg, Trustee, under the Will of Elizabeth D. 
Ballweg, and reflected on line 1 of Form 1041, Elizabeth D. 
Ballweg, my mother, who had died 8 years before.
    I wrote a long letter dated January 6, 1997, explaining 
that I had submitted annual reports since 1988 and that my name 
was the signature on each report. At the same time, I submitted 
another request for a copy of my file. The request was ignored.
    Instead, I received a final notice dated January 20, 1997 
in which I was told that the IRS intended to take steps to take 
my bank account, auto, and other property if they had not 
already done so.
    I have read several stories about threats of this kind and 
how they have caused extreme physical and mental suffering to 
taxpayers, and now began to understand what those stories 
meant.
    I must confess that I spent sleepless nights thinking of 
the possible consequences, not knowing where to turn, since by 
this time I was certain I would get no help from the IRS.
    Mr. Chairman, it was at this time that I heard of your 
investigation into the conduct of the IRS. I immediately wrote 
to you and received prompt action. CNN presented my case on 
television.
    The next day I received a call from an IRS taxpayer 
advocate who later received a copy of my file and advised me 
how to make the necessary adjustments. On March 24, 1997, I 
received notice from the IRS Atlanta office that I did not owe 
any tax.
    For 8 months I lived in constant worry, if not fear, that 
the trust that my dear mother had established to help the poor 
would be penalized because of what I can only call the 
unprofessional, calloused, and indifferent behavior of IRS 
employees who are devious enough never to sign their names to 
any notice that they send out. The taxpayer is dealing with 
people who can do inestimable harm, and cannot even be 
identified.
    I can only thank you, Senator Roth and the Senate Finance 
Committee, for trying to correct such abuses. I pray that as a 
result, conscientious citizens will be spared the humiliation, 
embarrassment, fear, and anxiety that I have experienced. Thank 
you very much.
    The Chairman. Father Ballweg, again, I must apologize to 
you for what you were put through. This is the kind of 
treatment of a taxpayer that should never happen. While we are 
glad that it was finally resolved, you should not have had that 
emotional suffering.
    [The prepared statement of Monsignor Ballweg appears in the 
appendix.]
    The Chairman. It is now my pleasure to call on Mrs. Jacobs. 
Would you please proceed?

           STATEMENT OF NANCY JACOBS, BAKERSFIELD, CA

    Mrs. Jacobs. Good morning, ladies and gentlemen of the 
Senate, Mr. Roth. I just want to say a quick word, that it is a 
great privilege and honor to be here today speaking to the 
Senate, something I never thought I would ever do.
    The Chairman. It is an honor to have you here, and we thank 
you for coming.
    Mrs. Jacobs. Well, I am here on behalf of the people of the 
United States. I am not here on behalf of any Democrat or 
Republican, and I want everyone to know that. I am hoping that 
someone will see our stories here today will take a real grip 
on what their life is all about and give them some hope.
    Chairman Roth, Senators of the Finance Committee, thank you 
for the opportunity to appear before you this morning to 
present my personal experience with the Internal Revenue 
Service. I am sorry.
    The Chairman. That is all right. Just take your time.
    Mrs. Jacobs. I am Mrs. Nancy Jacobs. My husband, Dr. 
Frederick Jacobs is a practicing optometrist from Bakersfield, 
California. We have operated for approximately 30 years.
    When my husband first opened his practice in March 1965 in 
Stockton, California he was assigned an employer identification 
number, or EIN, for reporting purposes to the IRS. Between 1977 
and 1979, my husband closed his practice.
    But in November 1979, he reopened in a new location in 
Riverside, California. We applied for an EIN number at that 
time, because we were restarting the practice at a new site and 
we needed an EIN for tax reporting purposes.
    What neither of us knew at the time was that the EIN is 
like a Social Security number; it never needs to be changed or 
renewed. The original EIN from the IRS had been assigned to us 
forever.
    However, when we requested the new EIN from the IRS it 
complied with a request that the IRS provide us with a second 
number. What we did not know at the time is that the EIN that 
the IRS provided to us in 1979 actually belonged to someone 
else, someone that we would not be aware of until the year 
1992.
    By March of 1981, we were unexpectedly assigned yet a third 
EIN number from the IRS via a preprinted label on a quarterly 
941 tax return. However, we continued to use the number we were 
assigned in 1979 on all of our quarterly tax payments.
    In June 1981, out of the blue, without any warning, the IRS 
placed a lien against us for $11,000 for unpaid back payroll 
taxes. We could not find anyone at the IRS that would do us the 
courtesy of checking into the lien and to find out who the lien 
was for.
    After attempting to deal with the IRS, my husband and I 
were so intimidated by the tactics used by the IRS that we 
agreed to pay $250 a week until the balance was paid. For 
anyone who has not had to deal with the IRS under such 
circumstances, you probably cannot understand why we agreed to 
pay $11,000 that we did not owe. Only after having experienced 
what my husband and I endured would you consider paying an IRS 
bill that you did not owe.
    Even after the $11,000 was paid, we continued to receive 
subsequent liens from the IRS. My husband and I were forced to 
comply with these IRS demands under the penalty of experiencing 
further enforcement actions, with the possibility of the IRS 
closing down my husband's practice. We were forced into debt, 
our credit was damaged, and the mental stress was overwhelming.
    During all this time we could not convince anyone at the 
IRS that we did not owe these taxes. In fact, during one of our 
visits to the San Diego IRS office we were flatly told by an 
IRS employee that she was too busy to help us any more. She 
refused any additional assistance in straightening out our 
account also.
    We were then informed by her supervisor that this matter 
would be cleared up. It was a kind offer, but that was all it 
was. Our nightmare continued. By 1987, we had received 
additional liens totalling roughly $15,000.
    In 1982, we did seek the assistance of a congressional 
representative. He contacted the IRS on our behalf, requesting 
that the IRS stop all collection efforts and for them to 
contact us in an effort to straighten out the problem.
    We did hear from the IRS in 1982, and we met with someone 
from the Laguna Nigel office who told us that we had received 
four refund checks. We assured him that we had only received 
one for approximately $3,600. He promised that he would get 
copies of the other checks. Unfortunately, he never did.
    The only consistent occurrence over the course of the years 
was the occasional appearance of the original EIN number on 
notices that we had received from the IRS, while all others 
reflected our second EIN number.
    My husband and I began to wonder exactly where the taxes 
were going that we had been faithfully paying. No one with the 
California IRS office that we contacted could explain it 
either. But they were adamant that, whatever the reason, we 
owed those taxes.
    By 1987, we again contacted a congressional representative, 
seeking intervention on our behalf. This time we heard from the 
IRS, but that too led to another dead end.
    In 1992, a patient of my husband's, a tax attorney, agreed 
to review our case and was the one who discovered the confusing 
EINs going back to 1979. Someone with a name quite similar to 
my husband's, but with an entirely different Social Security 
number, shared the EIN.
    Back in 1979, had the IRS employee properly informed us 
that we did not need a ``new'' EIN number, or at least checked 
the status of the number, this 17-year nightmare would have 
been avoided.
    Mr. Chairman, since 1992 when we first discovered the 
mistake IRS had made my husband and I have been trying to get 
our money back from the IRS, money that was wrongfully taken 
from us by the IRS, but to no avail. We have never received the 
money from the IRS as we had been promised. We estimate the IRS 
still owes us $10,000, if not more, plus interest, stemming 
from the wrongful liens, penalties and interest.
    Only in 1994 in an encounter with the IRS's Bakersfield 
office did we meet the first truly helpful person who was 
willing to work with us and investigate the cause of our 
problem. We were informed that our problem was, indeed, due to 
a clear case of an erroneous employment identification number. 
Unfortunately, this employee became ill and our case was 
apparently lost.
    After yet another congressional inquiry on our behalf in 
1996, we learned that our ``lost'' case was not really lost, 
not at all, but had been referred to an IRS employee at the 
IRS's Fresno service center. Unfortunately, she was not 
responsive to our case and almost another year languished 
without any satisfaction.
    Out of sheer frustration, my husband and I went to our 
local newspaper and told our story. Roughly two hours after 
this story appeared, the same IRS employee was on the telephone 
informing us, ``we discovered that you were right,'' and 
proceeded to discuss how our money would be returned to us.
    We then received a fax from her stating that all liens had 
been lifted and the IRS was at fault for the incorrect EIN 
number. However, when this IRS employee extended her ``sincere 
apologies'' in writing, she did not mention a refund of the 
money the IRS unfairly took from us.
    She did state, however, ``the liens previously filed under 
our employment identification number were not correct and 
should not have been on Dr. and Mrs. Jacobs' accounts. The 
liens were not for their liabilities. Within the next 6 to 8 
weeks, Dr. and Mrs. Jacobs will be in full compliance on all 
taxes, both individual and business.''
    Mr. Chairman, both my husband and I are certainly pleased 
and greatly relieved that this 17-year confrontation with the 
IRS is almost over, but we cannot agree with the IRS that it is 
completely over. We would appreciate receiving our refund with 
the same enthusiasm and speed with which the IRS collected it.
    However, the real reason I am here this morning is to bring 
to light what my husband and I feel is an attitude that 
permeates the IRS. It is one of manipulation and control of the 
taxpayer. Both my husband and I were met with indifference when 
dealing with the IRS offices. IRS employees were not interested 
in listening to us, much less investigating our assertions. 
They assumed we were guilty, that we did owe the money.
    The IRS is beyond the law. Congressional inquiries on our 
behalf met with only limp response. Mr. Chairman, an agency 
with this type of power over American citizens requires someone 
to rid it of such abusive conduct. My husband and I commend you 
for the efforts here today in accomplishing that goal. Thank 
you.
    [The prepared statement of Mrs. Jacobs appears in the 
appendix.]
    The Chairman. Well, let me start out again by thanking each 
of you for being here today. I know it is not easy to appear 
before a Senate panel, but it is critically important, not only 
from your standpoint, but for the taxpayer as well. We are here 
to learn and each of your testimonies has been extremely 
helpful.
    I am going to ask the members of the panel to try to limit 
their questions, but everybody will be given an opportunity to 
ask questions. I would hope that they could keep within a 5-
minute rule, everyone but Senator Moynihan and me. [Laughter.]
    The Chairman. Mrs. Hicks.
    Mrs. Hicks. Yes, sir.
    The Chairman. Did I correctly understand from your 
testimony that you separated from your husband?
    Mrs. Hicks. That is correct.
    The Chairman. Filed for divorce.
    Mrs. Hicks. That is correct.
    The Chairman. And eventually filed bankruptcy because of 
actions taken by the IRS.
    Mrs. Hicks. Yes, sir.
    The Chairman. Now, Mrs. Hicks, could you have avoided years 
of grief if the IRS had had a procedure to properly post your 
account and send you a bill which you could have paid in 1988?
    Mrs. Hicks. Oh, yes. Yes. I would say if a taxpayer is ever 
faced with what I was faced with, and you are told by anyone at 
the IRS, do not pay us now, wait for a bill, do not wait for a 
bill. Send the money to the main office and sit on your 
canceled check. That is what I wish I had done now. I should 
have just paid it anyway, despite their advice.
    The Chairman. Let me ask you this. Did you find that, in 
general, you confronted an agency not interested in helping you 
resolve your problem? How would you have been treated if you 
had had a glitch with a credit card?
    Mrs. Hicks. Well, that is a different story because they 
generally care about whether or not they actually collect the 
debt. I am no longer convinced the Internal Revenue Service's 
primary goal with some of us is collecting the debt. They 
obviously did not want me to pay this debt. I kept giving them 
the money, they kept giving it back. They did not want the 
payments.
    Yes, a credit card company would have taken my money for 
sure. If a credit balance showed up on my Visa card and I owed 
them money on another card that they held, they would snatch 
that credit balance over to the balance due. I mean, this is 
silly. They could have collected this three times over.
    The Chairman. One of the important points, I think, to 
recognize is that your problem was not just one employee, it 
was the fault of the system.
    Mrs. Hicks. Yes. Yes.
    The Chairman. How many IRS employees and offices do you 
think you dealt with over the years that your problem lingered 
on with the IRS?
    Mrs. Hicks. Well, I would not say I dealt with a large 
number of offices, but quite a few employees. The list is like 
three pages of different individuals that I dealt with.
    The Chairman. Three pages.
    Mrs. Hicks. Yes, it is about three pages.
    The Chairman. Let me ask you this. How many times did you 
try to pay the taxes owed as a result of your settlement with 
the IRS?
    Mrs. Hicks. Three. The first time when they would not even 
take my check, then I waited for the bill, then when they 
levied us the first time. When they liened me and the house was 
threatened, I paid it and then they did not keep the money, 
then recently again. So, three times. They did not keep that 
money either, by the way.
    The Chairman. How many times did the IRS tell you that you 
owed no tax?
    Mrs. Hicks. About six. About every 45 to 60 days, just that 
6 or 7 months before I got married. So five or six times.
    The Chairman. Five or six times.
    Let me now turn to Mr. Savage. Thank you, Mrs. Hicks.
    Mrs. Hicks. You are welcome.
    The Chairman. I see you breathing a sigh of relief. I do 
not blame you.
    Mr. Savage, is it your testimony that IRS employees 
fabricated a case against you by creating a false entity that 
linked your company and your subcontractor in a partnership?
    Mr. Savage. Yes, sir. The internal revenue agent created a 
totally false company, Tom Savage joint venture with such and 
such subcontractor partnership, gave a new EI number, 
established the EI number, sent a bill for roughly $177,000 the 
first time, $138,000 the second time. He created the company. 
It did not exist, it does not exist to this day, and it never 
existed, with my authority or anybody else but the internal 
revenue agent himself. He created the company.
    The Chairman. Now, I want to be very clear about this. Was 
there any common ownership between you individually or your 
company and the subcontractor?
    Mr. Savage. None whatsoever. In fact, that was the first 
time I had ever worked with this man. I had been in business 
approximately at that time around eight years, and this is the 
first time I ever had any contact with this particular 
individual.
    The Chairman. Now, if that is the case, why did you settle? 
Why did you settle with the IRS, allowing them to retain some 
of the funds that you say you did not owe, that they were not 
entitled to keep?
    Mr. Savage. As I explained a little earlier, basically what 
it amounts to is they seized a check of mine for $145,000 
immediately. I had used that money. Actually, it was set aside 
to pay bills and so forth. So right then and there, I am out 
$145,000 to the Internal Revenue Service. I had to pay off my 
bills.
    In turn, I had a line of credit. I borrowed $150,000 to 
keep my business going, paid interest on it during that period 
of time, paid attorney's fees during this period of time, 
trying to get this case settled for over a year and a half or 2 
years, it has almost run.
    In the meantime, anytime they send the assessments and so 
forth my attorney filed the proper papers to show we did not 
owe these taxes, it was not our company, it was a self-created 
company by an internal revenue agent. The company did not exist 
other than through his procedure of issuing an EI number, and 
so forth.
    The Chairman. Now, as I understand what you are saying, 
that when they attached the lien there was no assessment of tax 
made against you, individually or against your company, and 
that is contrary to the rules and regulations.
    Mr. Savage. That is correct. There was no assessment 
whatsoever on the books against Tom Savage Associates, or 
Francis T. Savage, me, personally.
    The Chairman. And you also testified that it is incorrect 
to seize the assets of a partner when another partner is 
liable.
    Mr. Savage. That is correct. That is the general tax law. I 
mean, my attorneys are competent attorneys in the State of 
Delaware for tax laws.
    The Chairman. I would like to call your attention to an 
exhibit over there, a letter. This letter is from the U.S. 
Department of Justice addressed to the District Counsel of the 
Internal Revenue Service.
    In that letter, this is the U.S. Department of Justice 
writing saying, ``Specifically after reviewing the complaint, 
the motion for summary judgment, your defense letter, and all 
the information forwarded by revenue officer, we believe that 
the levy in question was wrongful.''
    Mr. Savage. That is correct. That is the first time I have 
seen this morning, when it was presented to me by one of your 
staff. The only reason this letter has even come about is the 
fact that you had the authority to go into the Justice 
Department and the IRS and obtain this letter, or else God 
knows, nobody would ever receive it. What it amounts to is what 
we were arguing all along. From the day they seized our check, 
they had no legal right whatsoever to this check. That was 
totally wrongfully seized.
    The Chairman. Let me reemphasize. What this letter from the 
Justice Department says is that the levy in question was 
wrongful. Now, if you had known that was the position of the 
Justice Department, would you have settled?
    Mr. Savage. No way. After all, look at some of the dates. 
Our case started in the eighth month of 1993 when we answered 
the brief. As of November 1, these attorneys representing the 
IRS knew they were legally wrong. They had been advised by the 
Justice Department they are wrong. They kept this case going on 
for another year and a half. They did not care for anybody but 
themselves.
    Now, if I had known this was wrong, no way in the world. If 
you read further down, ``We do not believe that the IRS can 
levy on a partnership for unpaid Federal taxes.
    In fact, we read your defense letter to essentially concede 
that the levy was wrongful.'' I mean, these people, here they 
are getting a letter from the Department of Justice telling 
them, you are wrong going after this man and his money. But 
they did not care. They went and continued to do it.
    I hate to lose my temper, but if you live under this and 
the pressures that we were under to do this, we have a 
business, we had an obligation to our subcontractors to keep 
them working, and so forth. I had an outstanding record. I had 
never owed taxes.
    In fact, the first day the gentlemen--I use the word 
loosely--the internal revenue agent came to my house, we had 
our home up for sale because we planned on retiring. I am 69 
years of age. Four years this has been going on.
    I opened the door and said, who are you? He said, well, I 
am here to collect the taxes. What are you doing, trying to get 
out of town before you pay your bills? I said, what ails you? I 
do not owe any money. He explained what he was there for. I 
said, well, come in. Here are my books; look at them. I had no 
attorney or anybody at that time. I said, here are my books. He 
looked them over. He went over every page that I had, and I 
kept all of the records.
    I said, I do not owe taxes. He said, no, I checked on you. 
You always paid your taxes monthly. I had never even paid them 
quarterly. Federal taxes have always been paid monthly. He 
left, then this harassment of letters started and so forth that 
I owed money. First he tried to hold me personally responsible, 
then he held the corporation responsible, then he created a 
corporation that does not exist and did not exist.
    So, I mean, how illegal can they get? But here they have. 
Like I say, thanks to you today we have a letter that says 
these people knew they were acting illegally. Illegally. Let us 
stress that. They knew it and they deliberately did not care.
    The Chairman. So you paid $50,000 you did not owe.
    Mr. Savage. That is correct, sir.
    The Chairman. You have not been able to be repaid for that, 
is that correct?
    Mr. Savage. No way. In other words, this case itself, up to 
that time and I will give you a quick run-down as an example. 
My total settlement costs, counting attorney fees and so forth, 
$101,023.05.
    During the period of time from 1994 to 1997, I have paid 
interest and lost interest on my accounts to keep this account 
going. For a total of over three and a half years, the Internal 
Revenue Service has cost me $167,16.32, and that is as of 
September of 1997. These people do not care.
    They have cost me over $600,000 as far as income. Right 
now, I still have debts that I am paying off. I have worked 4 
years longer than I planned to. When I retire, hopefully by the 
end of this year, I am going to have to take out $80,000 more 
to pay off the balance that I owe on this $167,000. So these 
people have cost me in excess of $250,000, and I want my money 
back.
    The Chairman. Thank you, Mr. Savage.
    Now I would like to turn to you, Father Ballweg. Again, I 
find this situation incomprehensible. Let me ask you this 
question. You probably do not deal with credit cards, but if 
this had been in the private sector, could your problem not 
have been solved by picking up the telephone?
    Monsignor Ballweg. Senator, this could have been solved 
with the simple telephone call that I made to the IRS office 
the day after I received the notice that I owed them $18,000. I 
called and I said, what is the problem? They would not tell me. 
So I said to them, I do not have my tax report or a copy of it 
down here, it is back in New York.
    I had thoughts overnight of going back to New York just to 
pick up that thing so I would have it before me. But I called 
the next day and said, could you send me a copy of the report. 
They gave me a long lecture about being conscientious about 
making out your income tax for the trust. He then informed me 
that in order to get a copy of that report that I had submitted 
I would have to apply for an application and fill it out and 
return it with a check for $14, which I did.
    I waited 6 weeks until I received a notice saying that I 
was not entitled to a copy of it because my mother's name was 
on the top of the trust, Elizabeth D. Ballweg, and it should 
have been Lawrence F. Ballweg under the Will of Elizabeth 
Ballweg. But I had sent in my reports all these years and my 
name was on it.
    They do not sign anything at all, but all they do is 
highlight something. I had to look to find out what the problem 
was. On the back page there was something highlighted that 
indicated that since my name was different from my mother's 
name, they could not send me a copy.
    So I sent a long letter back and I said, please bring this 
to the attention of the supervisor, because I thought it came 
from somebody or it would reach somebody who did not know how 
to handle this kind of thing. So I said, bring this to the 
attention of your supervisor. Well, the response to all of that 
is that I received the final notice shortly after that, telling 
me that they are going to levy my house, my car, and so on. 
That really scared the living daylights out of me. I called 
again and I was told that it was being reviewed. My case was 
being reviewed. But I wondered how it could be reviewed because 
there was no additional input into all of this, so how were 
they going to review it?
    It was around this time that I read in the newspaper about 
your committee being organized and I wrote you immediately, and 
got a call the next day from Eric Thorston offering his 
assistance. The next thing I knew, CNN was on it. They did a 
little segment and put it on the news.
    Apparently the tax advocate down in South Florida heard 
about this, and she was probably embarrassed that this poor, 
old man is being harassed by the IRS, and she tried to get in 
contact with me. She called my chancery office back in 
Rockville Center, and they heard it was the IRS and they would 
not even tell her where I was. [Laughter.]
    Monsignor Ballweg. So I was kind of a fugitive, you know. 
But she took a chance and addressed it to my address at 220 
Main Boulevard in Boynton Beach. As soon as she caught up with 
me, things began to happen. She got a copy of my report and in 
a couple of days the whole thing was resolved.
    Now, this went on from November until March until the 
things was finally resolved. All that was necessary was that I 
get copies of the K-1 form which I had not received and 
neglected to do. As soon as I filled those forms out, the whole 
situation was solved.
    Now, in the meantime I went through all of those months of 
sleepless nights, worry, and anxiety, fear, and everything 
else. It could have been solved very, very simply. All of the 
persons in the Atlanta office had to do was tell me what the 
problem was. I needed the K-1 form. They would not tell me. 
They would not send me a copy of my file. No response at all. 
No response at all.
    The Chairman. Would you characterize your experience with 
the IRS as being consumer friendly, or would you call it 
bureaucratic us against them; how would you characterize it?
    Monsignor Ballweg. Adversarial, no question about that. Not 
consumer friendly at all. They made no effort at all to help 
me. I had been a pastor for 14 years and I was director of the 
Propagation of the Faith for 12 years. If I treated people like 
that when I was pastor, you can be sure the pews in my church 
would be empty. The people would not bother coming if I treated 
people like that, ignored them.
    If somebody came to me and said, Father Ballweg, could I 
have a report, an annual statement, about my contributions to 
the church during the past year and I ignored that person, the 
person made another request, I ignored that request again, the 
person would look for another parish, I am sure of that.
    I am sure the Senate here, if they did not respond to 
people, they would not be holding office too long either. So it 
could have been solved very easily, that is all I can say.
    The Chairman. The thing that is so much a matter of concern 
is the emotional distress this kind of situation causes the 
taxpayer. We cannot just say it is one case as some would do. 
The fact is, these situations can create not only great 
emotional problems, but the kind of problems as Mrs. Hicks has 
pointed out of even having to file for divorce and other 
actions. These circumstances are not the result of just one 
single anecdote.
    Monsignor Ballweg. Mine is not a horror story. I listen to 
these stories and I say, what am I doing here. Mine is just a 
little situation where all they had to do is send me a form and 
they did not do it, so my story does not compare with their 
stories. I feel for these poor people here.
    The Chairman. Finally, I would just like to say, basically, 
was any additional information submitted after we got involved 
here?
    Monsignor Ballweg. No, everything was basically the same. I 
think they started off the whole thing by saying in the first 
notice that I received from them that there was a little error 
in arithmetic, but when I checked on it I found out that the 
error was in my favor, so substantially there was no change at 
all.
    I had distributed all the funds that should have been 
distributed, and they recognized that fact. The only thing is, 
I failed to send the K-1 form to the IRS and they got me for 
that.
    The Chairman. Well, again I apologize, Father. I thank you 
for the good work you are doing.
    Monsignor Ballweg. Thank you.
    The Chairman. Thank you for administering your mother's 
estate for the good of the people.
    Mrs. Jacobs, in your testimony you state that you were so 
intimidated by the IRS tactics that you agreed to pay, even 
though you did not owe a debt. Would you please explain, why 
would you pay something you do not owe?
    Mrs. Jacobs. Well, when you have someone come to you from 
the IRS and tell you they are going to take your home, your 
vehicles, whatever you own, close your business so you have no 
way of making a living, you do what they tell you to do.
    The Chairman. And these threats were made directly to you 
and your husband?
    Mrs. Jacobs. Yes, they were.
    The Chairman. By more than one?
    Mrs. Jacobs. By more than one person? Oh, yes.
    The Chairman. How many would you say?
    Mrs. Jacobs. I have worked with 18 people, and I was 
harassed by every one of them.
    The Chairman. Over a period of how many years would you say 
this harassment took place?
    Mrs. Jacobs. It has covered basically from the year 1981.
    The Chairman. Mrs. Jacobs, is this a copy of the letter of 
apology you received from the IRS?
    Mrs. Jacobs. Yes, it is.
    The Chairman. It stated, as I understand it, that you are 
in compliance with all taxes.
    Mrs. Jacobs. Yes, sir.
    The Chairman. Now, did you ever receive a full refund from 
the IRS?
    Mrs. Jacobs. No, we have not.
    The Chairman. What reason has the IRS given you?
    Mrs. Jacobs. They have not given me any at all.
    The Chairman. Have you requested----
    Mrs. Jacobs. We requested information on the disbursement 
that they did give to us, and we have yet to receive that 
information at this time.
    The Chairman. And how much do you estimate is still owed 
you?
    Mrs. Jacobs. About $26,000.
    The Chairman. A total of $26,000.
    Mrs. Jacobs. Yes, sir.
    The Chairman. And you have received no part of that 
$26,000?
    Mrs. Jacobs. We received a portion of approximately $12,000 
from the IRS with no explanation, not really telling us much of 
anything other than just giving us the checks, with some 
interest, but with no explanation as to where they came from or 
what they were for.
    The Chairman. Again, I have to tell you, Mrs. Jacobs, I 
appreciate your coming here today. You are among friends. I 
hope that justice is done before this matter is completed.
    Senator Moynihan?
    Senator Moynihan. Well, briefly, Mr. Chairman, I think the 
most revealing information we have learned all morning is that 
the chancery at Rockville Center, when they learned that the 
IRS was after a monsignor, clams up. [Laughter.]
    Senator Moynihan. But you are very generous to say how 
relatively mild your experience is compared to the duration of 
much of your other fellow panelists. But that relation was 
adversarial throughout and that speaks of an organizational 
culture.
    Senator Kerrey and Senator Grassley have asked about this 
matter of, is the IRS a law enforcement agency or is it a 
service agency. They would wish it to be the other. The most 
difficult thing you run into in civic life is, what do you do 
when law enforcement offices break the law? David Burnham, who 
spoke earlier today, was very much involved in these matters in 
New York City some 10 years ago or so.
    I mean, it seems to me, Mr. Savage, that that letter in 
1993 to the district counsel with a line-up that says immediate 
response requested, says the levy in question was wrongful. It 
could mean that that could extend to being criminal.
    Mr. Savage. I was not aware of this letter until this 
morning.
    Senator Moynihan. Yes. Yes.
    Mr. Chairman, I think we are going to have people from the 
IRS before us. We have to ask, what disciplinary measures have 
been taken or will be taken.
    It is just the famous bit of lore from the Napoleonic wars 
in which an Admiral Bing, who retreated too quickly from 
Maorca, was shot on board his flag ship on the way back by 
executive order, an order from the admiralty, and it was said, 
``Pour encore a jais le sault,'' to encourage the others to do 
better.
    I hope we will ask for accountability. We are deeply in 
your debt. You have had some awful experiences. I hope it makes 
a difference to you that you are being heard in the Senate 
Finance Committee and we have learned a lot from you.
    I thank you very much.
    The Chairman. Thank you, Senator Moynihan.
    Senator Grassley.
    Senator Grassley. Yes. We cannot help but feel shame that 
our government would carry on this way. It is a sad situation 
that we have stories like yours, because it is obvious that you 
as taxpayers have not been shown the same respect and the same 
speed of resolution of your problems that they expected of you 
and every other taxpayer in America to pay their taxes.
    They really have a double standard. They expect right now 
you pay up. They want you to respond right now on everything 
that they say. They want you to meet the law. If you do not 
meet the law, you get a letter from them. They want you to 
respond right now. But when you want resolutions and answers to 
your questions, you are not able to get that.
    So obviously that sort of double standard in our society is 
not right. I do not know what we can do about it. I know that 
within every bureaucracy there is a great deal of peer pressure 
to go along, to get along. We are lucky to have a few people 
coming up in the next couple of days to testify who, from 
within, want to tell us what is wrong.
    There are probably a lot of other people that would like to 
do that, except that they just know that if they were being 
right to the taxpayers the same way that the agency expects the 
taxpayers to deal right with the IRS, they would probably lose 
their job.
    I would say that if the IRS is going to come up here and 
testify, that one of the ways that they can show their good 
faith efforts to admit that something is wrong and changes are 
going to be made, every one of the wrongs that are still 
unresolved here ought to be righted. There is no reason for 
them not to be.
    That would be a good faith effort showing on the part of 
the IRS leadership to those of us that have oversight 
responsibilities that they are really sincere in their efforts.
    Now, for every one of you I suppose there are thousands of 
others out there that I could say that about that ought to have 
their cases righted, and they would not have time between now 
and the time they come before this committee to do this. But 
they surely ought to have the time and the capabilities of 
taking care of five very obvious cases of wrongdoing, and to do 
those things.
    Then following up on what Senator Moynihan said, we ought 
to have the name of every person you have dealt with and, where 
your rights have been wronged, what sort of contrary action has 
been taken by the agency to make sure that there has been 
discipline taken? Because when there is that sort of discipline 
taken, when heads roll, then it sends a clear signal to other 
people that this sort of action will not be tolerated.
    Anything short of that, it seems to me, is going to show 
that this sort of action is all right and it can be done by 
others as well. We ought to have that as well before our 
committee.
    Mr. Savage, if you were an IRS senior manager and the 
people who asserted this unlawful levy in your case worked for 
you, what would you do to make sure that there were no more 
unlawful levies?
    Mr. Savage. They would be fired the next day, without 
question. But I know the Federal procedures. As far as that 
goes, that could take 20 years to get rid of a bad agent. But I 
do agree with Senator Moynihan, Senator Roth, and yourself, 
sir. I regret to say, I do not know if you are a Senator. 
Correct?
    Senator Grassley. Yes.
    Mr. Savage. I mean, I see so many gentlemen up there, but I 
thought everybody up there was a Senator, but I do not 
recognize all of you.
    Senator Grassley. Some people might wonder whether we are. 
[Laughter.]
    Mr. Savage. But what I was speaking about is, yes, we must 
correct these people who have abused their position. I assume 
right now we can send them to Timbucktoo. That would be the 
easiest way to get rid of them.
    But also, we must be reimbursed fully for all of our 
expenses, interest, lost business, and so forth. I mean, that 
is the only way. Unless you hit a person with penalties such as 
this for their incompetence, nothing will ever be resolved.
    So I will be definitely keeping in touch with yourself, 
Senator Roth, Senator Moynihan, and anybody else on this 
committee to let you know as to the status of the Internal 
Revenue Service. I expect to hear from them very soon. My two 
attorneys who represented me completely are still present, and 
we will be glad to see them even this afternoon. But I want to 
take home a big check.
    Senator Grassley. Mrs. Hicks, I will say that you must have 
in the world the most understanding husband. Second, I want to 
say that it appears that you were a victim of incompatible 
computers at the IRS. You were also a victim of poor IRS 
customer service.
    For Senator Bob Kerrey of Nebraska over there and me, these 
are two things that we have been listening to from over 600 
contacts of the IRS of the Commission to Restructure the IRS. 
He was chairman of it, I was a member of it.
    So what you are telling us about computers, what you are 
telling us about lack of customer service, were the most oft 
repeated problems that we heard at the IRS. So did you know 
that we gave the IRS, for instance, over the last few years $4 
billion for new computers and they still have computers that do 
not talk to each other.
    Mrs. Hicks. Yes.
    Senator Grassley. Which was greater in your case, which 
created the most anxiety for you, your IRS computer problem or 
your IRS personnel/customer problem?
    Mrs. Hicks. Personnel.
    Senator Grassley. Personnel.
    Mrs. Hicks. You can understand, because a computer does not 
have the capacity for meanness. It is a machine. When you deal 
with people that behave the way some of the people I dealt with 
behaved, then that is very distressing.
    I would like to say right up front though, I have relatives 
and friends who work for the service, as they call it, and I am 
acutely aware that most of the people employed there are folks 
like us and equally subject to the same abuses and problems we 
are subject to, but not as likely to speak out because of where 
they are employed. I would like to say that I think most of the 
personnel problems taxpayers encounter with the IRS are with a 
small number of employees that directly deal with collections.
    Once you leave that master file for some reason and become 
a case not being collected automatically by a computer and 
being processed by nice, smiling clerks, and there are a lot of 
them who answer the phones with sweet voices and are very 
helpful, once you leave that arena and they shift you over to 
this non-master file system or any other special form of 
collections, that is where I think I see a culture difference, 
not in the first part, but in the second part.
    So I would not be able to say all IRS people are this way 
or that way. They are people. But the ones I dealt with out of 
collections could be extremely nasty.
    The second thing I would like to say is that I did note 
that every time collections agents looked at my case and said, 
after a couple of telephone conversations, you know, I am going 
to check this out, this looks odd, that agent disappeared and 
the IRS transferred my case to a new agent.
    So if you do not like the agent because he or she is nasty, 
you cannot get away from that person. If the agent is offering 
you help when someone does not want them to, you cannot keep 
that person. So this is a dilemma. I do not know. It is your 
job to figure out how to fix it.
    Senator Grassley. Thank you.
    The Chairman. Senator Kerrey.
    Senator Kerrey. Mr. Chairman, I thank the panel for their 
willingness to come before this committee and present these 
problems. As Senator Grassley said, these are not new. These 
are problems we have heard repeatedly for the past year on our 
IRS Restructuring Commission that actually began as a result of 
the observation that we had spent a lot of money for tax system 
modernization, but had not gotten much benefit.
    So my hope is that we are able, as a consequence of this 
hearing, to take action. There are things that we can do to 
change the law, to give immediate relief to these individuals 
and others.
    We reached the conclusion that relief should be provided so 
that they can go on with their lives. We, it seems to me, could 
fashion relief if we choose to do so, and I would suggest that 
we not act as if we were powerless and exercise the power that 
we have to try to provide relief where we think relief is 
deserved.
    Second, I want to say that I have received over the last 24 
hours, Mr. Chairman, as a result of your first day of hearings, 
lots of additional notes and faxes from citizens in Nebraska 
who are facing problems. I would like to, if I could, read one, 
or at least a couple of paragraphs from one.
    This is from a small business person, someone just starting 
business out in Nebraska. It says, ``My biggest problem in 
business today is not new accounts, it is not my computers, it 
is not changing technology. My biggest problem in business is 
dealing with the IRS.
    ``As a small business owner, I spend countless hours on the 
phone trying to work out the problems associated with these 941 
payments being credited to the wrong quarter.'' He said, ``If 
we all must pay taxes, we should not have to hire someone just 
to tell us how.'' As a small business owner he files 14 times a 
year. He says he has got clients he does not talk to that 
often.
    We have, it seems to me, an accumulation of evidence that 
we need to change the law, both, it seems to me, to provide 
some long-term opportunity for the IRS to operate more 
efficiently, and perhaps in the short-term.
    If nothing more, it seems to me that we ought, as 
representatives of the people, with a change in the law provide 
some relief to individuals we have concluded deserve to have 
relief, demonstrate to the IRS that we are willing to stand up 
to them, that we are not intimidated.
    Instead, we find ourselves not being able to intervene on 
behalf of a constituent out of fear that we are going to be 
identified as having done something unfair, unjust, and so 
forth.
    So it seems to me, Mr. Chairman, that just what we have 
heard thus far has provided us with a sufficient amount of 
evidence both to change the law for the long-term, but also, to 
change the law in the short-term to try to provide some relief 
to individuals and demonstrate that this Congress is writing 
the laws of the land and that we are prepared to stand and 
intervene on behalf of citizens whom we believe have been 
treated unfairly and unjustly.
    The Chairman. Senator D'Amato.
    Senator D'Amato. Mr. Chairman, let me commend you for these 
hearings. I think that you have touched a very real point of 
contention and one of the reasons that people are so angered at 
times at the whole government, because they feel that they pay 
their taxes, then they wind up getting abused.
    It is pretty tough to figure out even how to pay, when to 
pay. If you run a business, a small business in particular, and 
I am looking at two of our witnesses who give ample testimony 
to that, and I think that Senator Kerrey touched on something 
that is rather important.
    Number one, I think, Mr. Chairman, we have to look at, how 
do we empower the Congress with the proper kind of oversight, 
because I know even the Chairman has had to jump through all 
kinds of hoops, get various permission in order to be able to 
put these cases here. Here you have the resources, and I want 
to commend you for them, to bring to light these horrific 
stories.
    We have been getting e-mail now of examples since your 
hearing of these kinds of things, and we cannot even intercede, 
so to speak, to make an inquiry. We have got to get a release 
from the person, and by the time with the back and forth, it is 
incredible.
    So I join with the Senator in saying I hope that we would 
look at that, because proper oversight and people knowing that 
there are consequences for their acts will more aptly be held 
accountable.
    In every one of the cases here, they put human faces on the 
story and it is not just a number. That is why it is so 
important that we get hold of that. But right now there is no 
oversight, were it not for these hearings that you have 
conducted. What a story, Mr. Savage, in terms of what you went 
through, where the Justice Department itself said, do not 
pursue this case.
    You know what? You will now undoubtedly have a situation 
where, under the law, they will say, well, you agreed to a 
settlement, therefore you will be precluded from getting your 
money back because you settled this by way of a quasi-judicial, 
or even a judicial, proceeding. Therefore, it would take a 
special act of Congress, Senator Kerrey and I were talking 
about it, in order to get your money.
    Mr. Savage. That is all right with me. [Laughter.]
    Senator D'Amato. But you are one person. But think of how 
many thousands of others that may have been before you and 
continue to be in this process. How do we assure them that you 
do not need a special act of the Congress and that there is a 
special committee hearing where this one person comes forth? 
How do we get you justice, and Mr. or Mrs. John Q. Public, all 
of those nameless faces?
    You put a face to this and you were able to come forth, 
fortunately, and so did others. Mrs. Hicks, really an 
incredible tale of how many years. Imagine having to go through 
a divorce so as to keep your new spouse from having his assets 
seized, et cetera. Again, you demonstrate just how horrific.
    Of course, the good Monsignor, whom they chased from our 
Rockville Center diocese down to Florida, when he has paid his 
taxes repeatedly. There has got to be a better way.
    I hope, Mr. Chairman, that we will be able to make some 
meaningful reforms and not only simplify the process as it 
relates to the little guy, the small businessman and 
entrepreneur, the homemaker, but in addition see to it that 
people are not abused and that, where they are abused, that 
there is proper action. I understand the person involved in 
this case against Mr. Savage, the agent who fabricated a 
business relationship that did not exist and pursued this, is 
still working for the IRS. I am wondering and I would like to 
know, when the lawyer got this, this was sent to a district 
counsel, Mr. Kesselman, we ought to put his name out there, how 
did he respond to this memo that was up there in 1993? How did 
they respond when they said you do not have a case? Even 
viewing this in the most favorable light, that is what they 
said. In other words, if we were to look at everything you 
said, you still do not have a case. Just to bring these people 
up here, and I commend you, this is a start, I think we have 
got to go further. Then I think we have to say to Kesselman, 
what did you do, why did you do this, and was there somebody 
else involved? Otherwise, this culture is going to continue.
    So I applaud the Chairman. I think we have an obligation to 
see to it that this horrific system is changed where it can be, 
recognizing, and I think Mrs. Hicks put it well, that there are 
some tremendously competent, gracious, good, hardworking, 
talented people in the IRS. But when it reaches a certain 
level, there are some that just go out of control.
    Well, how do we protect the American taxpayer from those 
who were out of control and who were accountable to basically 
no one? The stories here I think have put faces to this 
problem.
    So Mr. Chairman, let me commend you. I look forward to 
working with you, Mr. Chairman, and Senator Kerrey, in seeing 
if we cannot bring about some legislative reform that will help 
curb these abuses so that honest, good, decent citizens are not 
treated as if they have committed a crime.
    Again, the Monsignor's testimony as to how he was treated, 
I think, is an example of all too often that kind of attitude, 
that you are guilty, you are wrong, and people going after 
them. So we commend you, Mr. Chairman, and look forward to 
working with you.
    The Chairman. Thank you, Senator D'Amato.
    Let me thank each of the individuals who came forward.
    Senator D'Amato. Excuse me, Mr. Chairman.
    Monsignor, did you want to say something?
    Monsignor Ballweg. I just wanted to say that I think that 
the best kept secret of the IRS is that taxpayers have an 
advocate. I do not know of anybody who pays taxes who ever 
heard of an advocate. I would not have known about the 
existence of such a person until that person contacted me.
    So I think the IRS should be made to publicize the fact 
that there are advocates available, and how you get in touch 
with them. Now, this person happened to be somebody in South 
Florida in Ft. Lauderdale. I think if you looked her up in the 
telephone book I do not think there would be any listing at 
all. You do not even know these people.
    That is one of the big problems with the IRS, they are all 
phantoms. Nobody signs a name to anything, any documents that I 
received. You talk to somebody on the phone and they do not 
identify themselves. You feel very helpless in a situation of 
that kind.
    The Chairman. Father, you raised a very good point about 
the taxpayer advocate. I would just like to ask, the others 
here, did you have any contact with a taxpayer advocate, were 
you aware of that, and were they of any help?
    Mrs. Hicks. I had contact with problems resolution 
officers. If there is another advocate office, I do not know 
about it. They behaved like a collection arm. The first time 
they did not, but the second time they behaved like a 
collection arm of the IRS. So I think that somewhere in here 
the IRS has kind of snatched them up and now they do not belong 
to us anymore, they belong to the IRS.
    Some years back they were as helpful as could be expected 
and very nice, but this time they were like, ready to come out 
and get me. So I do not know of another office. Is there 
another one besides the problems resolution office?
    The Chairman. Well, this is a change, I think, in name and 
title.
    Mrs. Hicks. Oh, maybe. It might be the same office.
    The Chairman. But my concern is, how independent are they, 
and what kind of service, in fact, they are offering.
    Mrs. Hicks. Right. I would not call them very independent, 
not the people I dealt with. I think this may vary from region 
to region, district to district, State to State. I do not think 
that it is as homogeneous.
    It would be simpler if it was more homogeneous because we 
could say you are all evil and we are lining you up and we are 
going to let God make a decision, but we cannot do that. But 
you know what you could do? You could get rid of this double 
bookkeeping. That thing could go. That would be a huge help. I 
would not have had any of these problems without that.
    The Chairman. I understand your problem.
    Mr. Savage. Regretfully, Senator Roth, I do not think that 
a tax advocate that is anywhere connected with the Federal 
Government can be effective. He has to be totally independent 
because he cannot be affected otherwise. You had best have a 
good tax lawyer. A tax advocate has got to be totally 
independent, salary and everything else. It would be nice to do 
it, but I do not think it will work because it is just like the 
IRS agents, they answer to nobody.
    The Chairman. Mrs. Jacobs, in your 17-year ordeal did you 
have any contact with an advocate?
    Mrs. Jacobs. No, we had never encountered an advocate. In 
fact, to mention to you that just prior to coming to DC my 
husband received a call at his office from an IRS advocate, 
stipulating that he wanted to really help us solve our case 
after all these years that we had suffered. And my husband 
basically asked the question like, well, why now, why not 
before? But I think a lot of it had to do with what was 
happening here today.
    Senator Kerrey. Mr. Chairman.
    The Chairman. Yes.
    Senator Kerrey. Mr. Chairman, during the deliberations of 
our commission----
    The Chairman. I would ask you to be brief because we have 
to move on.
    Senator Kerrey. During the deliberations of our commission 
we considered actually recommending in statute that the 
problems resolution officer be made independent of IRS. We took 
a step in that direction, and it is something that this 
committee needs to look at very carefully as to whether or not 
it needs to be made independent.
    Another good suggestion that was made that we did not 
incorporate into the legislation, but I certainly think it has 
merit in this whole question of taxpayer powers dealt with in 
Title 3 of our bill, is establishing a citizen committee at the 
local level that would enable these kinds of problems to be 
examined in a responsible fashion and for common sense to be 
brought to bear and a resolution to occur in a low-cost, 
expeditious fashion.
    I mean, that is really the problem here. These cases drag 
on forever, and ever, and ever, and you really cannot get a 
resolution. So if it there is one recommendation in this area 
that I would make, it is to change the law that would require 
an expeditious, community-based resolution of these kinds of 
problems.
    The Chairman. Ladies and gentlemen, again I want to thank 
you for being here. You have made a very significant 
contribution to what I hope is good government. I know for many 
of you it was truly an ordeal to even get here, but it was very 
important for the purposes of these hearings and I want to 
thank you for making this contribution.
    Mrs. Jacobs. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Mrs. Hicks. Senator Roth, be sure to come back and do this 
again often, all right?
    The Chairman. Thank you, Mrs. Hicks.
    There has been a lot of discussion about the IRS employees 
and I want, once again, to emphasize that the vast majority of 
employees of the IRS are competent, dedicated, well-meaning 
employees.
    So today I am very pleased to have before us four former 
IRS employees and one current employee who have been very 
helpful to our investigation. These individuals all represent 
many years of experience and we are privileged to be hearing 
from them today.
    Will you all please come forward and take your seats. Mr. 
Bruce Strauss had been with the agency for 31 years. He was the 
senior division chief within the Collection Division of the IRS 
at the time of his retirement. He is now an enrolled agent 
practicing in Florida.
    Ms. Darren Larsen was an attorney with the IRS for 14 
years. Her last 3 years were as an assistant district counsel 
and acting district counsel. Her expertise was in collection 
issues. Today she is a practicing attorney representing 
taxpayers with tax matters.
    The next witness is Mr. David Patnoe, who is now an 
enrolled agent having over 10 years experience as a revenue 
officer in the Collection Division of the IRS. While working 
for the IRS he was an instructor for revenue officers and an 
expert in the area of offers in compromise.
    Next, we have Mr. Lawrence Lilly, who was both an attorney 
and special agent with the Criminal Division for 28 years. For 
the last 9 years of his service with the IRS, Mr. Lilly was the 
assistant district counsel in Miami and the district counsel in 
San Jose, CA.
    Ms. Jennifer Long is currently a revenue agent with the 
IRS, with 14 years of experience. She joins the panel today 
after originally intending to keep her identity concealed.
    The only condition she asked of the Chair and the Ranking 
Member was that her identity be protected until she took her 
place at the table. Senator Moynihan and I agreed to that 
condition and her statement is now being released.
    We want to welcome each and every one of you. We appreciate 
your being here today.
    As you know, we swear in all witnesses. So would you please 
rise and raise your right hand.
    [Whereupon, the five witnesses were duly sworn.]
    The Chairman. Mr. Strauss?
    Mr. Strauss. I do.
    The Chairman. Ms. Larsen?
    Ms. Larsen. I do.
    The Chairman. Mr. Patnoe?
    Mr. Patnoe. I do.
    The Chairman. Mr. Lilly?
    Mr. Lilly. I do.
    The Chairman. Ms. Long?
    Ms. Long. I do.
    The Chairman. Thank you. Please be seated.
    I do want to remind the witnesses and my colleagues that 
the witnesses are prohibited from disclosing confidential 
taxpayer information which is protected under Internal Revenue 
Code Section 6103.
    Mr. Strauss, we will start with you.

             STATEMENT OF BRUCE A. STRAUSS, FLORIDA

    Mr. Strauss. Thank you, Mr. Chairman. I do have a larger, 
more in-depth presentation or document for the record if you do 
not mind, Senator.
    The Chairman. I would say to each of you, your full 
statements will be included as if read.
    Mr. Strauss. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Strauss appears in the 
appendix.]
    Mr. Strauss. My name is Bruce A. Strauss. I am currently an 
enrolled agent licensed to represent taxpayers before the IRS. 
I have been president of the enrolled agents in our five-county 
area in Florida for the past 3 fiscal years.
    I retired from the Internal Revenue Service after 31 years, 
the last 18 years of which I held the position of division 
chief within the Collection Division. I also received nine 
consecutive performance awards from 1983 through 1991. At the 
time of my retirement, which was April 1992, I was senior 
division chief in the collection function.
    I tell you this, trusting that you will accept the fact 
that I have considerable expertise regarding the operations of 
the IRS. This includes its history, its authorities, its 
personnel practices, and also its problems.
    Just beginning my practice representing the public as an 
enrolled agent, I have been increasingly concerned about the 
ability of the IRS to be fair and objective in dealing with the 
American public. I am also concerned with the public's fear of 
the IRS. This environment of fear must change. This is why I 
sit, primarily, before you today.
    The IRS has been very successful in its primary mission of 
collecting taxes, bringing in over $1.5 trillion in fiscal year 
1996 as a role model for other countries to follow and has 
played no small role in the economic success of this Nation. 
Obviously, I do not believe that the system is broken.
    However, my experience and the feedback I received in my 
work tell me that the public's confidence in the IRS is being 
eroded by the perception that it is losing its ability to apply 
the Internal Revenue Code and the resulting morass of 
regulations in a fair and objective manner.
    When a dispute with the IRS arises, the current systems in 
place to deal with the dispute are cumbersome, expensive, time-
consuming, and oftentimes ineffective. The result is that the 
fear of the IRS continues to grow, and this is an unacceptable 
condition.
    In a democracy, the first condition that must be met is 
that the government must respect the citizens it serves. I am 
not sure that condition exists today within the IRS. My purpose 
today is to assist in restoring the confidence of the American 
public in the Internal Revenue Service.
    One of the problems which affect the way the IRS personnel 
interact with the taxpayer is the drive to achieve statistical 
operational objectives. One of the primary drives, if not the 
primary drive, for the examination function is dollars 
recommended for assessment.
    The statistic does not measure how much money was actually 
collected, nor does it measure how much additional tax was 
actually assessed by the examination process. It only measures 
what the examination function proposes to assess against a 
taxpayer with their 30-day letter.
    The examination function made this measurement one of the 
operational objectives for branch managers and above, as I 
recall, in fiscal year 1990. About the same time, the formal 
quality review cases being issued 30-day letters was ceased.
    A fundamental principle of any organization is that 
employees will give their managers what their managers tell 
them what is important. Or, expressed in a different manner, an 
organization is driven by the objectives on which the managers 
are evaluated.
    As a result, an environment or culture has emerged within 
the IRS that has made its employees often callous to the rights 
and concerns of taxpayers. Statistical objectives for any 
agency with the power of the IRS are inappropriate. But when 
one considers the IRS has a measurement of what is recommended 
for assessment, this drive to achieve specific objectives 
becomes untenable.
    I have significant compassion for the IRS employees in 
their most delicate responsibility of ensuring that each 
citizen files and pays their fair share of taxes. But, based on 
my knowledge, the primary problem lies with the ineffectiveness 
of the top management of the IRS. Instead of assessing the 
current problems and taking appropriate steps to ensure 
correction of these problems, what I see taking place is a 
``circle the wagons'' mentality.
    This management approach has led to significant problems 
which include denial of mistakes which then lead to integrity 
issues, using a sledgehammer to resolve compliance problems, 
for example, IRS files are returned to the taxpayer with the 
tax is significantly overstated, use of Bureau of Labor 
Statistics to assign additional income or to arrive at 
additional income, and not applying Internal Revenue Code 
sections which benefit the taxpayer. There is a mentality in 
the IRS that mistakes are rare. Those that do gain notice are 
blown out of proportion.
    In fact, I would not be surprised if, as a result of this 
hearing, you hear that any complaints by a taxpayer that may 
arise, while unfortunate, is statistically irrelevant due to 
the 200 million returns that are successfully processed each 
year.
    Based on my knowledge, such a statement would not be 
factual. The truth of that is, in the examination function 
cases that I have seen as a representative of the taxpayer, the 
IRS often does not operate within its proper authorities.
    When called on these matters, the IRS response is often a 
denial or a spin is put on the issue in an attempt to protect 
their position. Such conduct shows a complete disregard for the 
taxpayer and their fundamental rights as citizens. The concept 
shown above that the IRS now has the authority to assign 
additional income to a taxpayer at its discretion, without any 
basis in fact, is frightening and absolutely unacceptable.
    I admire the current efforts of Congress, such as the 
Commission on Restructuring the IRS, to encourage the IRS to 
become more responsive to the public.
    I also appreciate the opportunity to contribute to this 
process by testifying at this important hearing, and I commend 
you, Mr. Chairman, for the courage to engage in this effort.
    But I do believe that Congress must share some of the blame 
for what has happened. Funding must be consistent, with a long-
term philosophy. The oversight of the IRS must be significantly 
improved. This hearing today is a great start, but long 
overdue.
    For each of you dealing with your constituents, I would 
offer the fact that the ability of any single congressional 
staff to resolve a taxpayer issue with the IRS is extremely 
remote.
    I can testify on a personal basis on that on some client 
issues. I will suggest forming a single staff of highly-trained 
and skilled individuals that could be a central clearinghouse 
for all taxpayer complaints received by Congress.
    This would also provide a database of problems that one 
noticed to be widespread, could be used to take certain system-
wide corrective actions. It is only in this way that the 
management of IRS could be held accountable to the Congress and 
to the American people.
    I know in numerous cases where the IRS has specifically 
exceeded its authority. One of the most egregious examples, the 
IRS collections apparently predetermined that 637 taxpayer were 
liable for employment tax.
    They did not conduct legitimate investigations. Instead, 
they used extortion tactics to have taxpayers sign returns 
which the IRS prepared. They did not use any Internal Revenue 
Code sections which benefitted the taxpayer, and disregarded 
established law, authorities, and procedures. And 630 taxpayers 
were also denied their due process rights.
    When I brought this matter to their attention, instead of 
taking corrective action, they circled the wagons. After 3 
years, Mr. Chairman, 3 years of my pursuing a resolution in 
this matter, the IRS has boxed itself into a position with 
significant integrity issues in question. The current status, 
is that I have been unable to obtain a legitimate response from 
the regional commissioner.
    Another example is the tactic of assessing a tax twice for 
the same 1040. This tactic involves accepting a Schedule C 
income, but disallowing all the related business expenses.
    When the taxpayer requests the case to be reopened, in this 
case I am using as an example, the deductions were allowed. But 
then the IRS reopened the income issue, which was in direct 
contrast with the Code, and assesses additional taxes based on 
the Bureau of Labor Statistics information to boost the income 
of taxpayers. Then the taxpayer was informed he had no appeal 
rights to contest the additional resulting tax.
    I am submitting a more comprehensive statement for the 
record which includes some of my recommendations to remove the 
fear of the public when dealing with the IRS. I sincerely hope 
that my 31 years of experience with the IRS has helped in some 
small way to create a clearer picture of the agency. The many 
good people at the IRS who perform a difficult task every day 
and the taxpaying public deserve your best efforts by cleaning 
up this important national asset.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Mr. Strauss. We do, 
indeed, appreciate your testimony today.
    Next, I would like to call on you, Ms. Larsen.

             STATEMENT OF DARREN LARSEN, CALIFORNIA

    Ms. Larsen. Good afternoon. Thank you for the opportunity 
to allow me to address the committee today.
    I began working for the Office of Chief Counsel for IRS in 
1981 and I was there until 1994. During that time I dealt with 
all of the different functions of the IRS, examination, 
collection, criminal investigation, and disclosure.
    I also served as a special assistant United States attorney 
representing the IRS in bankruptcy court. I was a nationwide 
instructor for attorneys, and I also instructed IRS at their 
continuing education. Because I specialized in collection 
matters, I did spend a lot of time with collection groups in 
various places and I really developed a good relationship with 
the collection agents, for the most part.
    I come to the committee today as a tax professional who has 
spent many years representing the IRS in court, not only 
bankruptcy court but Tax Court, and I was involved in District 
Court actions as well. I worked with and advised IRS personnel 
on many cases and on many issues.
    Then over the past 2\1/2\ years I have had the opportunity 
to represent taxpayers and deal with the IRS as an adversary in 
some cases, but generally as a representative of taxpayers who 
have problems that need to be resolved.
    Overall, from my experience I have to say that my feelings 
toward the IRS as an institution are mixed. It is sometimes 
very easy to express frustration and outrage at IRS conduct. 
But I have to state at the outset that there are many 
individuals whom I have dealt with over the years who are 
currently employed there, and some who are no longer employed 
there. But they have, I would have to say, superior technical 
knowledge. They are devoted to their jobs, they work hard, and 
they really are committed to fairness.
    But at the other end of the spectrum there are employees 
who do not really possess these qualities. I have encountered 
them both when I was a government attorney, and also now as a 
practitioner.
    Some of these people, I would say, lack technical skills 
that I think are necessary. They really are not concerned with 
justice or fairness, they are bureaucratic in every sense of 
the word and are focused primarily at just maintaining their 
jobs and collecting their paycheck.
    But, having said that, I would like to move on to some more 
specific areas or some examples of problems within the IRS that 
I have seen.
    As an attorney for IRS I was often appalled by the lack of 
basic technical knowledge on the part of the front-line 
collection managers that I dealt with.
    Now, that is not to say that they were all in that 
situation, because I knew some group managers who were 
excellent. They used their own initiative to gain knowledge and 
to make sure they kept up with the law, and they wanted to make 
sure they knew that their revenue officers were doing, that 
they were doing it correctly.
    However, I did know group managers who really did not 
understand the basic requirements for such things even as 
issuing summonses, the service requirements or content 
requirements for summonses.
    I knew one manager I ran across who really did not 
understand the distinction between a lien and a levy and 
basically said, well, lien, levy, whatever, which in some 
instances can cause problems.
    The revenue officers who worked for these managers usually 
knew that the managers were deficient. The result of that was 
that the revenue officers would either choose not to consult 
the managers for assistance, or the revenue officers who were 
not experienced enough to realize that their managers did not 
know this would still consult them, then they would be possibly 
led astray.
    Also, within the Collection Division they often use on-the-
job instructors to help the newer revenue officers, and some of 
the on-the-job instructors were also missing some of the basic 
understanding of some of the basic elements of tax law, 
especially in the tax collection area.
    The problem with the on-the-job instructors having this 
deficiency is that they then passed their techniques or their 
beliefs onto the new revenue officers, and some of these 
problems are perpetuated.
    In addition to simple lack of knowledge, I also ran across 
revenue officers who understood the legal and procedural 
requirements, but they chose not to follow them, or they 
consciously bypassed some of these things.
    I have known of revenue officers who, on more than one 
occasion, would issue nominee or alter ego liens without going 
through the procedures that are set up in their manual for 
review.
    Typically, this revenue officer would end up receiving 
payment of the tax, would close the file, and that would be the 
end of it. If there was a problem, only then would this revenue 
officer go through the required steps.
    He was considered to be a good revenue officer in that he 
collected a lot of tax and closed a lot of cases. Consequently, 
he was given a lot of latitude in how he worked his cases. He 
felt justified in taking shortcuts because he felt that he had 
good instincts and he got what he felt were the right results, 
meaning that the taxpayer pays the tax.
    Later on, this person was promoted to a group manager and 
it was my feeling that the revenue officers in his group sort 
of had the same attitude, that they were allowed to work their 
cases in this manner as long as they did not make any mistakes.
    I felt that there was a prevailing notion in some of these 
groups that if a particular procedure was not exactly followed 
to the letter, that first of all, the taxpayer probably would 
not know the difference.
    Second of all, the manager might not even know the 
difference. As long as everything turned out all right, as long 
as the tax was collected, then there was really no harm done.
    In fact, the revenue officer would probably feel they were 
doing a good job because they were collecting the tax without 
using a lot of resources. They were getting the right result. 
In essence, it was a matter of the ends justifying the means.
    In one district in California, I became aware that some IRS 
managers blatantly disregarded the law, even though I believe 
they understood it. This had to do with the ownership of 
personal residences in California.
    In California, if married people hold title to property as 
joint tenants it is presumed under State law that they mean to 
have it be joint tenants, so that if only one spouse owes tax 
the IRS is only entitled to seize half of the house.
    This presumption of joint tenancy can be overcome by a 
factual showing that, in reality, it was held as community 
property. If the house is held as community property, the IRS 
can seize the whole house.
    In this particular district the IRS took the position that 
all joint tenancy property would be presumed to be community, 
even though this was not what State law prescribed. They set up 
a procedure where it was up to the taxpayer to prove otherwise.
    The result was that the IRS was treating 100 percent of the 
residents as being subject to the tax lien and subject to 
seizure and sale rather than one-half. The reality is, I 
believe, that most taxpayers do not know really the difference 
between joint tenancy and community property and they rely on 
the IRS in this case to do the right thing.
    The IRS, on the other hand, in this situation was really 
taking advantage of the fact that most taxpayers do not know 
the difference and that the general public is ignorant on what 
may be considered a technical legal issue. This would be to the 
detriment of the non-owing spouse, the spouse that did not owe 
the tax.
    Now, these people that I spoke with in IRS admitted that 
they knew that the law was otherwise, but they justified this 
policy by saying, well, we believe that most people, even if 
they hold their property as joint tenancy, they really believe 
it is community anyway so this is just more expedient for us to 
do it this way. It is this mind-set of IRS that really concerns 
me.
    I also found that in the bankruptcy area I was privileged 
to work on a national task force involving IRS procedures in 
handling bankruptcy cases, and I had the opportunity visit 
several different districts around the country and interview 
people in and out of IRS regarding bankruptcy.
    We found that in some offices in the country the IRS was 
basically ignoring the bankruptcy law regarding the IRS 
obligations regarding bankruptcy discharge, the automatic stay, 
and they justified it based on the fact that they really did 
not have the staffing to do it, and since it was not exactly a 
program area that they were directed to follow, they just did 
not do it, they used their resources for other things.
    I should add also though the fact that the IRS did not 
really tend to these basic tasks also was detrimental to the 
IRS. In some cases they were unable to collect taxes that they 
rightfully had, or should have been, collecting.
    As a taxpayer representative in my current position, I am 
now even more aware of how important it is for the IRS 
representatives to follow the procedures that are set up by the 
IRS manual and the Internal Revenue Code in collecting taxes.
    I found that for the most part taxpayers are intimidated by 
the IRS and they will do whatever is asked of them. Because 
most taxpayers do not know much about tax law, they rely on the 
IRS with respect to many issues and they put their trust in 
them as public servants. After today, maybe not so many of them 
will.
    But even if the taxpayer feels that the IRS is not acting 
properly in their case, it is often too costly for the taxpayer 
to hire representation to fight the IRS. The end result is that 
many taxpayers are paying more tax than they rightfully should, 
and some individuals are paying tax that they are not 
personally liable to pay.
    I do believe, based on my experience, that if a taxpayer is 
right and a taxpayer presses an issue and takes it up through 
the system, that ultimately the taxpayer will prevail.
    However, the process is very costly in terms of fees, time, 
aggravation. Because of this, it is very important for the IRS 
to avoid taking procedural shortcuts, and the IRS should treat 
the taxpayers fairly up front so that mistakes are not make and 
taxpayers are not put in the position of choosing whether to 
pay the wrong amount of tax or to pay for assistance to fight 
it out, because either way the taxpayer loses.
    As an organization, the IRS has excellent technical 
resources which it really does not use to its best advantage. 
Tax collection is a complex process, given the number of 
Federal laws and regulations that apply. Revenue officers can 
be expected to require assistance in some cases.
    The special procedures function is set up within the 
Collection Division of the IRS to provide technical assistance 
to the tax collectors in the field. I found that in those 
districts where special procedures is given the staffing and 
the funding it needs, it has proven to be very valuable.
    But each district is given the discretion to decide how 
much funding and how much emphasis it wants to put on special 
procedures, and how they will staff it and how it will operate.
    I found that in some districts special procedures is not 
effective at all. In fact, the people who are assigned there 
are inexperienced. They are put there because possibly they 
have other problems in their jobs. That is even true for some 
of the managers who end up there.
    In those cases, the field revenue officers have little 
confidence in special procedures and they do not really rely on 
the advisors for technical assistance.
    On the other hand, the districts with excellent special 
procedures staffs have advisors who have worked in their 
program areas for many years, they work well together, they 
learn from each other, they work closely with district counsel 
and they are respected by the field officers and they do 
provide assistance to them so that they do not make as many 
mistakes.
    The IRS would be well served by requiring all districts to 
step up the level of their special procedure staffs so that the 
IRS nationwide can more effectively and justly collect the 
taxes owed.
    In conclusion, the IRS, in my view, has much room for 
improvement in the way it deals with taxpayers and in 
collecting delinquent accounts. While there are many positive, 
productive forces and individuals at work within the IRS who 
are constantly trying to make improvements, some of the chronic 
problems remain.
    The IRS is there to enforce the tax laws. However, it is 
also there to ensure that the law is applied fairly and 
consistently. The IRS representatives wear two hats. When 
dealing with willfully non-compliant taxpayers they are 
adversaries, but at the same time they are public servants. 
There is no excuse for cutting procedural corners or legal 
corners or establishing presumptions which place citizens at a 
practical or economic disadvantage.
    Better training of revenue officers, as well as their 
managers, and in tolerance of blatant violations of the law, 
would go a long way toward improving the overall quality of tax 
collection and improving the level of public trust in the IRS.
    The Chairman. Thank you very much, Ms. Larsen, for your 
helpful testimony.
    [The prepared statement of Ms. Larsen appears in the 
appendix.]
    The Chairman. Mr. Patnoe?

             STATEMENT OF DAVID PATNOE, CAMARIO, CA

    Mr. Patnoe. Good afternoon, Mr. Chairman and members of the 
Senate Finance Committee.
    My name is David Patnoe. I am currently an enrolled agent 
in Camario, CA, representing taxpayers before the Collection 
Divisions of the Internal Revenue Service for over 7 years.
    Prior to this I was a revenue officer for the Internal 
Revenue Service for over 10 years. During my tenure with the 
IRS I was a revenue officer, and on-the-job instructor for 
trainee revenue officers, an instructor for revenue officer 
training schools, Phase I and Phase II sessions, and an offer 
and compromise specialist and an advisor in the special 
procedures function.
    I have worked in the Anchorage, Alaska, Shreveport, 
Louisiana, and Brooklyn, New York IRS offices, which provided 
me with a great opportunity to see how collection worked in 
different areas of the country.
    Now working as a taxpayer's advocate I have had the 
opportunity to see things from the other side. It is from this 
wide range of experience that I speak to you today. Despite 
what I believe to be a rather unique background, I have found 
dealing with the IRS personnel to be quite disturbing in a few 
cases, and downright maddening in others.
    In particular, I have had my worst experiences with people 
I believe had insufficient training to be performing the jobs 
they were assigned. In some instances, these actions were 
outright illegal and highly abusive. The trouble with 
discussing abusive tax collection is that there is no line 
drawn between regular tax collection and abusive tax 
collection.
    When you consider that the very act of a revenue officer 
imposing their will on a taxpayer by the use of a levy on wages 
or retirement funds, or the seizure of assets such as a 
personal residence will probably be considered by a lot of 
people, and surely by the taxpayer themselves.
    My definition of abusive tax collection is the illegal use 
of certain collection tools, or when the collection tool used 
is not warranted in that given situation. Let me give you an 
example that I think will demonstrate what I believe is 
occurring far more frequently than people may realize.
    I was hired to assist in a matter involving the improper 
use of a levy. A levy is generally the seizure of a money in 
some form. The IRS had issued a levy on one of my client's 
receivables owed to his business, a sole proprietorship. But 
the tax that the IRS was trying to collect on the levy was not 
owed by my client, but was in fact owed by a company that my 
client had worked for at one time as an employee with no 
ownership interest whatsoever.
    The revenue officer, who at the time was acting as an on-
the-job instructor for another revenue officer, went to my 
client's business with seizure papers in hand. The client, 
being faced with a seizure of his new business, became very 
afraid and paid a payment of $7,000 to forestall the seizure.
    Now, he paid this despite the fact that he did not owe any 
tax. The IRS basically scared this person, or extorted him, 
into paying money that he did not owe with the threat of 
seizing his business for the debt of a company that he had at 
one time worked for.
    After the initial payment of $7,000, the same revenue 
officer issued a levy on one of the client's accounts 
receivables for roughly $21,000. That money was going to be 
used to pay the client's payroll, and the seizure of those 
funds would have effectively put the client out of business.
    The levy itself was an amazing flight of fancy by that 
revenue officer. Remember, there was no relationship nor common 
ownership between these companies. The client simply had been 
an employee of the company that owed the tax.
    The IRS was well aware of these facts. Despite having the 
explanation laid out in black and white, the revenue officer 
would not release the levy nor refund the $7,000 she had 
collected illegally by scaring the taxpayer when she first 
showed up at his door.
    In fairness, let me add there are instances when a tax can 
be collected from someone other than the taxpayer. A third 
party can become liable if there was a transfer of assets for 
less than fair consideration or if a party is holding property 
in their name simply to evade the seizure of these assets for 
taxes due.
    However, prior to collecting from a transferee or nominee, 
the IRS must go through a number of steps involving a group 
called special procedures in the Office of District Counsel.
    In this particular instance, none of this had been done. I 
informed the revenue officer that she had not taken any of the 
required steps and had acted without benefit of legal counsel. 
I added that her actions were not just abusive, but blatantly 
illegal. The revenue officer responded with one word, ``and?''
    Only when the revenue officer realize that we would make 
every effort possible to expose this action did she come back 
with a release of the levy. When you consider that this was an 
experienced revenue officer acting with her group manager's 
approval, and not to mention also trains other revenue 
officers, her actions were absolutely beyond comprehension.
    It is this type of action that is designed to intimidate 
and instill such fear that the IRS's actions can succeed 
without question. I would also like to say that this type of 
action did not occur while I was a revenue officer. 
Unfortunately, it did. I know of seasoned tax collectors who 
were well aware of the law and took actions that were out of 
the realm of legal tax collection.
    In one instance, a revenue officer who made up a seizure 
document titled ``Nominee Levy on the Spot,'' prior to seizing 
assets from someone who was not the taxpayer was soon after 
made a group manager.
    In another case I dealt with, a revenue officer who had 
access to the IRS computer system to get information on a case 
I was assigned. When I questioned the revenue officer why he 
was accessing information on my case he stated, my wife works 
for this company, and if I can help her straighten this out, 
the company problem, it will be a real feather in her cap. I 
told the revenue officer, put the print-outs away. That revenue 
officer also became a group manager.
    These actions were particularly annoying because I believe 
both these revenue officers knew what they were doing was 
outside the scope of correct tax collection.
    When I left the IRS in December 1989, I considered writing 
my own thesis about tax collection. I wanted to suggest that 
IRS tax collectors be held to some standards of training prior 
to promotion.
    Not only should they be held to standards of training, but 
they should also demonstrate their knowledge on proficiency 
tests. No revenue officer should be promoted or allowed to 
train others until they are able to pass increasingly difficult 
proficiency test.
    While I was working at IRS I was seriously concerned about 
the agency's escalating tendency to place unskilled collectors 
into management positions. I used to call these people the 90-
day wonders, 90 days being the span of time they spent during 
revenue officer work between Phase I and Phase II revenue 
officer training classes.
    Basically, I found that people hired as revenue officers 
would be detailed to do special projects. Usually these 
projects were thought up by either first-line managers or by 
upper level managers. More often than not, the project was to 
justify some type of statistic related to cases closed or money 
collected.
    The projects were administrative work that did not lead to 
a knowledge of collection procedures or requirements put on a 
revenue officer by the laws and regulations. Because management 
had put these revenue officers on these projects, these same 
managers would not hold them back when it came time to be 
considered for promotion.
    Many times, someone who had only attended the two phases of 
revenue officer training was promoted, even though that 
individual may never have actually knocked on a door, collected 
tax, or worked with others in the process of collecting taxes.
    This led to people being promoted who, in turn, qualified 
to be management based solely on the fact that they were at the 
right grade level. I cannot remember the number of times I 
heard, you do not have to know how to collect taxes to be a 
manager, you just have to know how to manage.
    It is amazing that someone who does not know much about 
collection is put in charge of people who are sent out to 
collect. The person the revenue officer is supposed to depend 
on for their first level of advice for difficult cases only 
needs to know how to manage, but not how to collect taxes.
    It is especially frightening because these managers are 
required to review and approve certain actions of revenue 
officers based on their own understandings of what action is 
appropriate under the IRS policies, as well as the law.
    As a result of this training and promotion practice, new 
revenue officers have become less and less effective, while 
many of the current managers do not know what the revenue 
officers are supposed to do.
    Additionally, many of these managers are basing day-to-day 
decisions on whatever they determine important to their own 
supervisors in order to look good. What were these managers 
judged on? Sheer numbers. How many dollars collected, how many 
cases are closed? That is the bottom line.
    Make no mistake about it, there are goals, quotas, that may 
be unstated but well-known to the agent or revenue officer that 
are driving many of the actions you will hear about today. So 
what we have now are managers who are not thoroughly schooled 
in the collection of taxes, but making decisions based on how 
they can get their numbers up.
    Now the cycle is complete. Managers knowing little about 
what their employees are supposed to be doing are evaluating 
their employees on how they could collect more tax or close 
more cases. Since these managers do not know enough about tax 
collection, they have a tendency to require the revenue officer 
to take actions that might not be correct, but which the 
manager feels would lead to a higher closing rate or a higher 
dollar collection.
    Sometimes the action might even be illegal, but the 
managers did not know it, simply recognizing that a particular 
action resulted in more closures. The newer revenue officers 
might not know a particular action is illegal because they have 
not been around long enough or are simply not sufficiently 
trained.
    The new revenue officers who have been taking direction 
from these managers get promoted and are now placed in the 
position of an on-the-job instructor. So you see, the cycle 
continues and the quality of tax collection gets worse. As it 
gets worse, Congress gets more complaints from irate taxpayers.
    In closing, I would like to add one thing. I know too many 
people who collect taxes for the IRS that are fine, hardworking 
honest people to paint the IRS tax collection with a broad 
brush.
    To a great number of employees at IRS these abuses are not 
more tolerable than they are to this committee. It is a shame 
that these abuses can cast a cloud over these same people. The 
number of abuses compared to the number of cases is still 
small. It nonetheless is way too large to be acceptable. No 
abuse is acceptable.
    There are many people with great technical knowledge and 
skill whose talent would better be utilized teaching and aiding 
others. The managers who did not have the knowledge or skill to 
direct tax collection could learn a great deal from some of 
these people. They might not learn anything about management, 
but they need to learn about tax collection.
    This may mean a reduction in production as far as closures 
or dollars collected for a few months, or even a year. But over 
the course of one to 2 years it should result in an increase in 
collection of revenues and less complaints for the members of 
Congress to address.
    The Office of the Ombudsman and the Office of Problem 
Resolution Program should be manned with highly-skilled tax 
collectors who are capable of resolving these issues before 
they become highly contentious issues argued at higher levels.
    I want to thank you, Mr. Chairman and members of the 
committee, for allowing me to speak here today about a few 
things that have been on my mind for the last several years.
    The Chairman. Thank you, Mr. Patnoe.
    [The prepared statement of Mr. Patnoe appears in the 
appendix.]
    The Chairman. Mr. Lilly?

       STATEMENT OF LAWRENCE G. LILLY, ST. AUGUSTINE, FL

    Mr. Lilly. Mr. Chairman and committee members, my name is 
Lawrence G. Lilly. I am a tax attorney living in St. Augustine, 
FL at this time.
    I have been a tax attorney for more than 30 years. For 28 
years I was an employee of the Internal Revenue Service. For 
the first 4 years of my employment I was a special agent, which 
is, as you know, a criminal investigator. I then went on and 
became an attorney in the Office of District Counsel in 
Atlanta.
    Ultimately, I progressed up through the chain of command in 
the counsel's office, became a special attorney for criminal 
tax, an assistant district counsel, and ultimately the district 
counsel in one of our larger districts, that being in San Jose, 
California.
    A fair and efficient tax collection agency is recognized by 
everyone as being vital to the future of this country. Although 
no one likes to pay taxes, all reasonable people know that our 
taxes are the price that we pay for our liberty. No one can 
properly voice a legitimate complaint about shouldering a fair 
share of paying for our system of government.
    Now, I strongly believe in honesty in government, as I 
think each of us here does. In that vein, I make a 
recommendation to the committee at this time. That is, that you 
rename the agency which collects our taxes. You should add an 
``A'' at the end of its title and drop the word ``Service,'' 
because they render no service. You should rename the agency 
the Internal Revenue Statistical Agency. That summarizes the 
problem, lack of service and too much statistics.
    My purpose today is to present constructive criticism of 
the IRS for consideration by the committee. It is my hope that, 
with your guidance, the credibility of the service can be 
restored to the high level which prevailed at earlier times. It 
is vital to our system of taxation that the citizens who are 
paying the taxes have trust and confidence in the fairness of 
the system.
    I personally was extremely proud to be an employee of the 
Internal Revenue Service for the major portion of my career. I 
worked with good people.
    During the 1980's, however, I began to note what I 
considered to be significant deterioration of the service and 
its concern for serving the public. It appeared to me that the 
Internal Revenue Service had consciously or unconsciously 
dropped the service aspect of their job in order to focus 
exclusively on making upper management look good statistically.
    This, I fear, has led to undermining the culture of the 
organization, lowered the self-esteem of many employees, and 
caused the organization to become unfair and oppressive in its 
treatment of some taxpayers.
    Before proceeding, I want to make it clear to you that I 
was not technically an employee of the Internal Revenue Service 
for most of my career. Organizationally, the attorneys who work 
with the IRS are not subordinate to the district directors, or 
even to the commissioner of the Internal Revenue Service.
    Attorneys work within a parallel organizational structure 
which reports to the chief counsel and to the general counsel 
of the Treasury Department. This is intended so that the 
attorneys will be able to render objective opinions and give 
good advice to the functional people on the commissioner's 
staff. Certainly, that separation of powers is very good.
    In view of this distinctive organizational structure, I had 
the opportunity to see the IRS from a viewpoint that is quite 
different than that of most former IRS employees, or indeed 
most present IRS employees.
    Whereas most employees, present or past, worked within a 
particular area such as examination, collection, or criminal 
investigation, I, as a manager of attorneys, was involved with 
each and every one of those functional areas.
    From this perspective, I had the opportunity to make 
detailed observations about the service's operations and also 
had the time to develop what I hope are a few solid 
recommendations for its improvement.
    I do not intend to tell you any horror stories as I 
progress. I could do so, but I think other witnesses have 
served that purpose. Certainly, I have seen many.
    I believe there is far too much focus set on achieving 
statistical goals set by upper management. These are generally 
known as the SES, or senior executive service, goals.
    Now, I want to make it clear that goals are important and 
necessary in the management of any organization. The problem is 
not in having goals, the problem is how you define your goals. 
The goals, as currently drafted by management, focus on how 
many levies you make, how much tax you assess, how many returns 
you examine, things which are readily measurable. They are 
taking the easy way out.
    Those goals should be rearticulated to measure quality. 
What is the quality of the service they are rendering? That is 
what they have forgotten. The goals which they now have are 
generally not sensitive to the perceptions of the average 
American taxpayer at all.
    The organizational structure of the IRS is still too 
decentralized. Directives from the top are implemented or not 
implemented in the manner decided upon locally. Directives with 
which local employees or managers disagree take considerable 
time before they are implemented.
    As just a single example, some time ago Peggy Richardson, 
the commissioner at that time, announced publicly with great 
fanfare that there was going to be a newer and fresher, more 
taxpayer-sensitive approach to offers and compromise. They 
welcomed offers and compromise, they encouraged people to 
apply.
    The district in which I reside did not favor that policy, 
evidently, for several months later they were still applying 
the old procedures and were being very hard-nosed about offers 
and compromise.
    I had one which I submitted for review and it met all of 
the criteria. I got it back from a revenue officer in the SPF 
staff saying, simply, we will not consider this offer and 
compromise. They did not even look at it. It was just rejected 
out of hand.
    I wrote a letter to the district director personally and 
stated that it appeared to me from this experience that the 
commissioner of the Internal Revenue Service apparently had no 
jurisdiction over the management of that district, since that 
district could do what they wished to do in spite of the 
commissioner's direction.
    The regional offices of the Internal Revenue Service, or at 
least the regional offices of the chief counsel with which I am 
most familiar, serve little or no purpose except to dilute the 
authority of the national office and to delay the 
implementation of national directives.
    I recommend that consideration be given to eliminating 
these last four regional offices or, if there is some reason 
why they cannot be eliminated, move them to Washington. Let 
them sit in the same building as the commissioner where the 
commissioner can control what they do. If the span of control 
is such that regional organization is necessary, it could be 
accomplished in that manner.
    Right now, and during all of my experience with the 
service, the regions were functioning as fiefdoms, where the 
person in charge, the regional commissioner or the regional 
counsel in the appropriate case, was considered a prince, 
whereas the commissioner or the chief counsel was the king. 
They were like royalty. They decided what they wanted to do, 
and they did it.
    Now, selections for managerial positions is another problem 
area. They are made based solely upon whether the employee has 
performed well in his current position. Was the person being 
considered for promotion a good attorney, was he, 
theoretically, a good revenue officer, or was he a good agent? 
It is my opinion that they give little or no consideration to 
whether the person has people skills which would enable them to 
be good managers.
    Being a good revenue officer does not mean you will be a 
good manager of revenue officers. What you do, is you take your 
better technical people and you promote them into management 
positions. By doing that, you have lost a good technical person 
and you have not necessarily obtained a good manager. We need a 
way to identify people with management skills.
    Now, I share the opinion which I heard from the gentlemen 
who spoke before me that it is important that the managers of 
the revenue officers be technically knowledgeable. It is 
absolutely essential at that level. The higher up you go, 
however, the less important is it they have that technical 
knowledge and the more important it becomes that they have 
management skills. But that is not the way the organization 
runs at this time.
    The IRS organization is too insular. It has little infusion 
of new blood. Traditionally, everybody is promoted from within. 
While that is good, it is very good that management is loyal to 
its employees, it leads to the situations where, as I heard one 
of the Senators say, people go along to get along. You wind up 
that you are elevating people based upon their willingness to 
go along with the entrenched views. Innovation and imagination 
are frowned upon within the Internal Revenue Service.
    I would like to indicate at this time that it has been my 
feeling for approximately as long as I have been an attorney 
that the American Bar Association has much, too much influence 
over determining who the commissioner of the Internal Revenue 
Service is.
    I am very pleased to see that we are hopefully going to 
have a commissioner in the near future who does not come from 
that background. You can be a very fine attorney and not be a 
good manager. The commissioner should be a manager more so than 
a good attorney.
    You do not even need to be, at the commissioner's level, an 
expert in taxation. You have all kinds of advisors to give you 
advice on tax. If you can manage your assets and use them 
fairly, that is what a commissioner should do.
    Employee satisfaction with the IRS has been on a downward 
spiral due, at least in part, to the slavish attention to the 
numerical goals. Employees are given mandates by management to 
take positions known to be incorrect in order to obtain 
preordained results.
    I know many people who have retired from the Internal 
Revenue Service or who have left before retirement, but I do 
not know a single one of them who regrets that they no longer 
work for the organization. I personally left the organization 8 
or 9 years before I had intended to leave because I found that 
the management was so deplorable at that time.
    It is my considered opinion that a few of the problems 
which I have addressed can be readily resolved. As I indicated, 
the four remaining regional offices should be completely 
eliminated, if possible. If not, they should be relocated to 
Washington. What that will do, is it will permit the 
commissioner to more readily make any needed changes in the 
direction of the organization.
    With the condition of the organization at this time, 
whatever changes are implemented will need to be implemented 
quickly and the existence of those regional offices will not 
assist in that.
    IRS management or this committee can take action to ensure 
that the goals in the future place greater focus on the quality 
of performance by IRS managers and employees. This should cause 
all IRS employees down to the lowest level to become more 
cognizant of the sensitivity of their work and result in fair 
and equal treatment of all taxpayers.
    Selection boards for all positions above the first-line 
management level, above the group manager level, should include 
at least one representative skilled in management outside the 
IRS. They should learn how real organizations manage assets and 
employees. This will result in a greater focus on management 
skills and at the same time be a step in opening the 
organization to an infusion of new blood.
    I personally commend the many dedicated and responsible 
employees of the Internal Revenue Service for their valiant 
attempt to fairly administer the laws in an even-handed manner.
    The culture of the IRS organization, however, has eroded to 
the point where the dedicated employees are leaving the agency 
as fast as possible. You will find very few employees who are 
eligible for retirement who remain within the agency. They 
leave. They go on to different things. The management of the 
IRS must stop sacrificing the employees in order to make 
themselves look good.
    One last thing that is not in my prepared statement but 
which I would like to call to your attention, is that one of 
the problems I have noted within the IRS is that there is 
nobody under the district director who has any cross-functional 
authority to resolve problems.
    You have somebody who knows examination, you have somebody 
who knows collection, but it seems like there is nobody who has 
the authority to really solve problems. You need somebody who 
can resolve a problem in any function.
    When I was a district counsel it was my practice to have 
all disgruntled taxpayers referred to me personally. I found 
that as long as I was willing to put it in writing I could 
accomplish most anything, so I was able to resolve a lot of 
problems. But I do not know of many, or any, other managers 
within the Internal Revenue Service who have that same 
approach.
    Mr. Chairman, thank you for this opportunity to appear 
before you and this committee. I greatly appreciate being able 
to offer what I hope are constructive and positive comments 
regarding the future role of the IRS.
    The Chairman. Well, thank you, Mr. Lilly, for your very 
helpful suggestions and comments.
    [The prepared statement of Mr. Lilly appears in the 
appendix.]
    The Chairman. Now it is my pleasure to turn to Ms. Long, 
who I would point out is a current employee of the IRS. I want 
to thank her for appearing here today. I know that doing so, at 
least in many people's judgment, puts a future career at great 
risk. But I admire her courage and willingness to come here 
because of her dedication to the IRS.
    Ms. Long?

 STATEMENT OF JENNIFER LONG, CURRENT EMPLOYEE OF THE INTERNAL 
                        REVENUE SERVICE

    Ms. Long. Thank you. Mr. Chairman, Senators, thank you for 
allowing me to come before you this afternoon to provide an 
accounting of activities within the Internal Revenue Service.
    As you know, my name is Jennifer Long and I am currently a 
revenue agent. Please be assured that I do not take any 
pleasure in what I am about to say. I regret that the untenable 
conditions permeating the IRS have compelled me to this point.
    I am here today, along with my colleagues who will be 
speaking tomorrow, in hopes that by exposing some of the 
unauthorized but tolerated procedures that I personally have 
witnessed by members of the IRS management, congressional 
oversight will bring a positive change.
    I can personally attest to the use of egregious tactics 
used by IRS revenue agents which are encouraged by members of 
the IRS management. These tactics which appear nowhere in the 
IRS manual are used to extract unfairly assessed taxes from 
taxpayers, literally ruining families lives and businesses, all 
unnecessarily and sometimes illegally.
    The IRS will often pursue a taxpayer who is viewed to be 
vulnerable. To the IRS, vulnerabilities can be based on a 
perception that the taxpayer has limited formal education, has 
suffered a personal tragedy, is having a financial crisis, or 
may not necessarily have a solid grasp of their legal rights.
    Please understand, many agents are encouraged by management 
to pursue tax assessments that have no basis in tax law from 
individuals who simply cannot fight back. However, if that 
taxpayer does object or complain, every effort will be made by 
the IRS to run up their tax assessment, deplete their financial 
resources, and force them to capitulate to IRS demands.
    The IRS's mission of examination states: ``Reduce non-
compliance by identifying and cost effectively allocating 
resources to those returns most in need of examination and 
taxpayer contact.''
    As of late, we seem to be auditing only poor people. The 
current IRS management does not believe anyone in this country 
can possibly live on less than $20,000 per year, insisting 
anyone below that level must be cheating by under-stating their 
true income.
    Currently, in a typical case assigned for audit there are 
no assets, no signs of wealth, no evidence that would support a 
suspicion of higher unreported income. So when the IRS does 
initiate and audit on these people, these individuals are 
already only one short step away from being on the street.
    Clearly, such actions do not encourage or promote voluntary 
compliance, even in legitimate cases. Before we began to ruin 
their lives, these people were at least paying something. 
However, because of the tactics used in auditing and condoned 
by the IRS management, abject fear compels many of these 
individuals to go completely underground and, as a direct 
result, pay nothing at all.
    In other cases, IRS management can determine that a 
particular taxpayer is simply ``someone to get.'' In other 
words, they become a target of the IRS. Management will go 
about fabricating evidence against that taxpayer to demonstrate 
that he or she owes more taxes than was originally claimed.
    Clearly, it goes without saying that evidence should never, 
ever be fabricated. It also goes without saying that any 
evidence used against a taxpayer should be examined first 
before guilt or innocence is established, not the other way 
around.
    In certain instances, the IRS management has even employed 
its authority to intimidate the actual taxpayers into 
fabricating evidence against its own IRS employees. In return 
for their compliance, the taxpayer may be offered a reduction 
in their taxes or a no change case.
    I also know that management uses this same power to extort 
fabricated evidence from IRS employees against their own 
colleagues by offering cash awards, promotions, and lightened 
work loads as rewards for their compliance.
    The unfavorable information assembled by management against 
its own employees is used against those whom the IRS has 
identified as someone who is unsupportive of its unwieldy 
methods of collection.
    The IRS Inspection Division, which is somewhat akin to 
Internal Affairs in a police department, has also been used as 
tool by management to harass and intimidate its employees. 
However, complaints to the IRS Inspection Division about 
possible management misconduct are routinely ignored, but often 
result in retaliation against the IRS employee reporting the 
problem. This is due to the fact that employees' identities are 
disclosed when the Inspection Division reports the infraction 
to management.
    The IRS mission statement states, ``The purpose of the 
Internal Revenue Service is to collect the proper amount of tax 
revenue at the least cost, serve the public by continually 
improving the quality of our products and services, and perform 
in a manner warranting the highest degree of public confidence 
in our integrity, efficiency, and fairness.''
    I have actually witnessed IRS management manipulate income 
tax return figures just to increase their office collection or 
division collection statistics. It did this through various 
means, including not permitting valid changes in a tax return 
that would favor a taxpayer.
    To allow those changes would wipe out the assessment placed 
by the IRS and run counter to the management's collection 
numbers. For those who choose to fight, it automatically 
guarantees a significant financial and emotional toll.
    Mr. Chairman, the American taxpayers are not stupid. They 
clearly recognize unfairness. Under present IRS management it 
has become so distorted that, when reviewing a tax case, it is 
now our job to ``stick it'' to the taxpayer rather than 
determine a substantially correct tax assessment for that 
taxpayer.
    In the past, the latter was our job. If our present task 
has changed, then the IRS mission statement needs to be 
revamped to reflect what the service's current mission really 
is, and God help the taxpayers.
    The IRS mission statement of the IRS Examination Division 
states, ``Examination supports the mission of the service by 
encouraging the correct reporting by taxpayers of income.'' 
Yet, in reality, when valid changes could be made by the IRS on 
a taxpayer's return that favored that taxpayer, we are 
instructed not to make those changes.
    However, on the other hand I know of certain IRS employees 
that have been instructed by IRS management not to conduct 
audits of particular taxpayers who happened to be personal 
friends of someone in management.
    Far too often, the IRS management automatically assumes 
that everyone is a criminal. When a taxpayer comes to the IRS 
office to negotiate a tax payment issue in good faith, they are 
subjected to provocative behavior on the part of the IRS in 
order to set them off. Management will then use the taxpayer's 
response as proof that they are, in fact, a reactionary, 
saying, see, this person is a troublemaker, a real hot-head.
    Based on this pretext, the IRS can then justify taking 
severe action contrary to the law in order to pursue the 
collection. The immediate and direct consequences of these 
actions is the deprivation of the taxpayer's lawful rights.
    I look forward to your questions, and I hope that in some 
way I will have assisted you in restoring the IRS to a level of 
integrity that will regain the respect of the American people.
    The Chairman. Thank you very much, Ms. Long.
    [The prepared statement of Ms. Long appears in the 
appendix.]
    The Chairman. I have to say to each of you, your testimony 
is certainly indicative of a troubled agency. It is a matter of 
real concern to this committee that the agency be seen by the 
American people as serving them.
    I have a series of questions I would like to ask each one 
of you to answer. I would ask that you try to be as brief as 
possible because the hour is growing late.
    One of my concerns is the IRS' use of goals and statistics. 
Any number of you have indicated that that is the practice. 
Now, by use of goals, quotas, statistics, I am talking about 
employees being evaluated on the number of dollars assessed or 
collected, the number of cases closed, the number of liens and 
levies imposed. How widespread is this practice? Mr. Strauss.
    Mr. Strauss. Senator, it has already been testified to that 
that specific action does not occur. What is occurring is that 
this culture drives the organization in determining what is 
important.
    The question is, how do you get promoted or how do you 
retain your job? If the managers are being evaluated on 
specific operational objective goals or statistical goals, then 
that is what dictates the issues. I have never seen, from all 
my years, any specific employee evaluated on achieving specific 
statistical objectives. That does not mean the influence is not 
there, Senator.
    The Chairman. Ms. Larsen?
    Ms. Larsen. As Mr. Lilly stated earlier, I was an employee 
in the Office of Chief Counsel, so I was never actually an 
employee of the Internal Revenue Service. So my impressions and 
my beliefs about how the Internal Revenue Service operates 
really comes sort of indirectly, either from people I have 
known that have worked for IRS or my conversations with other 
managers and such.
    But my understanding is, at least with respect to the 
Collection Division, is that individual employees are not 
evaluated based on the number of seizures that they make or the 
number of dollars they collect. I do not even believe that they 
keep those statistics by employee.
    However, my understanding is that the managers themselves 
as you go up the line, they are evaluated based on overall 
efficiency of their group or their division, and then they do 
look at total number of cases closed, the total number of 
dollars per staff year, that kind of thing.
    So even though each individual employee is not told, go out 
and collect $10,000 today, there is always this pressure, their 
job as a revenue officer is to collect taxes, close cases, and 
move things along. So, there is always that pressure to do 
that.
    But I do not have any specific examples of where they have 
told people to go do certain things, to meet a certain 
statistical goal.
    The Chairman. Mr. Patnoe?
    Mr. Patnoe. Senator, having been evaluated many times as an 
employee, I was never evaluated on how many seizures I did, 
although I did plenty. I was never evaluated on the basis of, 
well, you closed so many cases per hour.
    But what was interesting were the group meetings when the 
quarterly or the monthly reports would come out, and it would 
be pointed out to the employees of the group where that group 
stood in relation to other groups in the district and where 
that branch stood in relation to other branches, and you would 
see where you sat on this chart that showed you are the last 
one.
    The manager would say, nobody wants to be the last one 
because it does not look good. So I never knew of anybody that 
was just pulled aside and said, you really need to get your 
numbers up. It was not that way.
    Basically, Congress itself has got to evaluate the IRS on 
something. One of the things it evaluates the IRS on is, hey, 
we have so many dollars uncollected, we have so many cases 
open; what are you going to do to improve this?
    That is a direct statement to the IRS saying, we want you 
to produce, we want you to do something. You have got to find a 
way to get the very bottom employee to produce and they cannot 
really say, boy, we want you to go out and close 20 cases 
today. But our group sits right here, and we cannot stay there. 
We have got to do something. That is the way it is done.
    The Chairman. Mr. Lilly?
    Mr. Lilly. I think the prior speakers have put their finger 
on the way it is done. The lower ranking agents, revenue 
officers, and attorneys do not receive goals, per se. Their 
higher managers receive quite definite goals of what to 
accomplish. Then when they talk to their subordinates, they 
talk to them in the terms of what their goal is.
    Now, if I am a manager and I have a goal to obtain 10 of a 
certain item and I have 10 agents working for me, I think you 
know what I am going to do, I am going to tell each of my 
subordinates that I want them to do one of these actions. If 
one of them does three, then I am going to praise that person. 
So what is happening, is that the goals are being used 
indirectly because it is forbidden to use them directly.
    The Chairman. Ms. Long?
    Ms. Long. Well, just in the last month I was told I would 
be getting a cash award because I had closed and collected the 
third-highest amount of tax in cases in the group. In the last 
meeting I was in, it just seems like every meeting with upper 
management all we are talking about is hours per case, dollars 
collected. I do feel like the statistics are definitely kept on 
all the agents and that they are used in evaluating the agents.
    Mr. Patnoe. Senator, may I say one additional thing, 
please.
    The Chairman. Yes.
    Mr. Patnoe. The RD issue, the accounts receive delinquency 
inventory that has been around between Congress and the 
Internal Revenue Service since the early 1980's and the 
continuing growing of that delinquency or the growing of that 
inventory, which was stated earlier was $216 billion currently, 
if you include the interest and the penalties.
    That has been a major drive for the IRS. They have been 
very defensive about it and have not been able to solve it, 
obviously. So we may have to think about what kind of issues we 
bring up from the congressional side.
    The Chairman. I have put up a chart, and I am asking that 
it be passed around to all the people on the panel. This is a 
chart that I requested from the IRS. The document pertains to 
the San Francisco district and certainly appears to suggest 
quotas and goals. Now, we have a revenue agent here, although 
she is not from San Francisco. I wonder if you could explain 
what this chart appears to mean.
    [Chart appears in appendix on p. 325.]
    Ms. Long. Well, it just tells you what the dollars per hour 
are, the average dollar per hour on 1040 cases, individual tax 
cases. It tells you what the average dollar per hour is on 1120 
corporate cases. It is from the revenue agent's side, then it 
tells also what the tax examiner's 1040 individual dollars per 
hour are. It tells what the goal is and what the average 
collections were.
    The Chairman. Let me make sure that I understand what this 
is saying. On the left-hand side it says, ``Category RA.'' That 
is revenue agent?
    Ms. Long. Yes, RA is revenue agent.
    The Chairman. 1040 dollars per hour. It says, ``Goal: 
$1,000.'' Now, what does that mean, $1,000 goal?
    Ms. Long. That means that the goal is to collect $1,000 per 
hour.
    The Chairman. At what level is a revenue agent?
    Ms. Long. I guess Grade 5. You start out as a Grade 5, 
Grade 7, Grade 9, probably up to a Grade 13.
    The Chairman. So is it fair to say that this is setting a 
goal as to how much revenue agents should assess?
    Ms. Long. Well, we talk about this in our district and I 
certainly try to beat the goal. To me, that is the way to be 
considered a good performer or doing a good job.
    The Chairman. And you have the same thing, it says ``TA.'' 
You say that is tax auditor?
    Ms. Long. Tax auditor.
    The Chairman. The goal is for them to collect $1,012 per 
hour.
    Ms. Long. Yes.
    The Chairman. Below that it says, ``For both RA and TA 1040 
dollars per hour, a general improvement is needed. A large 
improvement can be made by bringing down hours per return.''
    Mr. Lilly, I think you spoke about quality, or one of you 
gentlemen talked about quality. Does creating goals, incentives 
of this type make for quality treatment of the taxpayer, or 
does it provide other incentives?
    Mr. Lilly. No, Senator, this would not provide quality. 
What you are saying is, spend less time with each taxpayer, 
produce more dollars. That means that you have to look quicker 
at what the taxpayer has to offer. You may not have time to 
consider it fully.
    Now, they are setting goals here measured in dollars. I 
again remind the committee that I believe similar goals to 
measure quality can be established. That is what is needed.
    The Chairman. Well, does the emphasis on quota and 
statistics for employee evaluations put pressure on IRS 
employees to artificially inflate taxpayer income or to focus 
on taxpayers whose cases will not take much time? Mr. Strauss?
    Mr. Strauss. Well, certainly that has to be the result of 
this type of approach to managing the employee. This is the 
first time I have seen something like this, quite honestly. 
Again, I have been gone for 5 years so I do not know what is 
currently going on in the organization, per se. But this is 
wholly unacceptable. I do not know how this is being used, but 
if it is being used and given to the first-line employee, that 
is wholly unacceptable and we see the results in the 
testimonies.
    The Chairman. Ms. Larsen?
    Ms. Larsen. Well, I think that if the goal of the IRS is to 
become more efficient, and by setting up these figures they are 
telling their employees, we want you to work smarter, I mean, 
they have some kind of a sense of how productive an examiner 
should be and they have come up with this $1,000 an hour as 
being a goal to reach, I think that it could be worked out 
where if the work is reviewed by the manager and they see that 
they are not artificially creating numbers but they actually 
are working more efficiently, they are more skilled at what 
they are doing, they are able to review returns quicker without 
sacrificing anything, then I think this could work. But again, 
I have never seen this either, so this is something that may be 
relatively new.
    The Chairman. Mr. Patnoe?
    Mr. Patnoe. Indirectly, it could be a way to put pressure 
on employees. I mean, I did not deal with the exam side that 
much, I just dealt with collection all the time I was there. 
When it came out that other people were closing cases at a 
certain rate, then it would be nice if the group I was in 
closed cases at that rate.
    It just turned out, if the revenue officers got out there 
and closed cases over that rate they seemed to do a little 
better than revenue officers that seemed not to be working.
    The Chairman. Mr. Lilly?
    Mr. Lilly. Mr. Chairman, if I may, I do think this puts 
undue pressure on the agents. The best place to resolve tax 
issues is at the agent level. The agent has more discretion 
basically in determining issues than anybody else in the whole 
process.
    But by having such a goal as this, what you are doing is 
you are saying, agent, do not resolve it, set it up as a 
deficiency, let us make the assessment and get our statistics 
up. It works directly contrary to providing service and quality 
to the taxpayers.
    The goal of the Internal Revenue Service is to collect 
every penny to which the government is entitled, but they 
forget the other aspect of it: not a cent more.
    The Chairman. Ms. Long?
    Ms. Long. Well, I think in doing these goals, and I agree 
that you do need some idea of what you are supposed to be 
collecting and the mission statement of examination says that 
we are going to cost effectively allocate resources to those 
returns most in need of examination. But the problem is, as a 
revenue agent I do not have that much control any more about a 
choice of cases.
    Before, I did have a much wider choice of cases that I 
could choose from and I could do that. Now I do not know how 
the cases are being chosen, but the quality of the cases, like 
I said, I feel like there are a lot of poor people that are 
being chosen, or lower income people.
    Just because someone does not report a high level of income 
does not mean that there is not something there, but the type 
of people I am auditing are not people I would think would have 
anything. It would not be cost effectively allocating resources 
to audit the type of people I have been sent out to audit.
    The Chairman. I have a number of separate questions.
    Mr. Strauss, in your prepared statement are you stating 
that on its own initiative the IRS can simply inflate a 
taxpayer's stated income based solely on Bureau of Labor 
Statistics figures?
    Mr. Strauss. I have one case in progress where that 
specifically happened, and I know of at least two other cases 
where that specifically has happened. So my answer to you is, 
yes.
    The Chairman. If you impose a stated income on BLS, how 
does the taxpayer defend himself, prove to the IRS that he or 
she did not earn that much?
    Mr. Strauss. Well, obviously he cannot, certainly not to 
the satisfaction of the IRS. The fundamental concept of 
taxation when it goes to an examination issue should be that 
the taxpayer has the responsibility to prove the deductions and 
the IRS should have the primary responsibility to prove any 
additional income. Obviously, that appears to be no longer the 
case regarding the income issue.
    The Chairman. Let me ask you this. I have heard vocabulary 
I never expected to hear, words like blue sky, or box car 
assessments, water, whipsaw. What do they mean; are they 
commonly used among IRS employees?
    Mr. Strauss. Whipsaw I am not fully familiar with. Blue 
sky, box car, water, I am. They have been around the agency for 
years.
    The Chairman. What do these terms mean?
    Mr. Strauss. It goes to the issue of inflating taxes, 
proposed taxes, what I testified about, Senator, taxes which 
they know are not owed. The motivation is primarily to try to 
have the taxpayer come in. That is one of the motivations if, 
in fact, a taxpayer is uncooperative or has not filed.
    The other issue is, what we testified about regarding what 
drives the organization--the statistical figures and 
operational goals. I have several examples. If you have got 
time, let me just cite a couple of examples.
    There is a process that has been going on for years in the 
service center called Substitute for Return. These are prepared 
for folks who have not filed 1040's per the records of the IRS, 
and include data as to wages, 1099 data, interest, whatever.
    The program was set up in the early 1980's. The concept has 
been for years that, we will go ahead and prepare returns for 
the taxpayer. But if we have a joint return being filed with 
four or five exemptions, we will file the taxpayer as married 
filing single, with no other exemptions and no dependents, and 
then they go ahead and send those out to the taxpayers. Most of 
those wind up not being signed and it goes into the collection 
process, and very, very few of those are ever collected.
    The Chairman. Do any of you others have any comment on 
those terms, are they fairly commonly used? Mr. Lilly.
    Mr. Lilly. Mr. Chairman, those terms are quite common. 
There is always water in every statutory notice. I have never 
seen one which correctly stated the amount of tax due. As an 
attorney who was involved in managing a great deal of 
litigation before the Tax Court, I can tell you that it was 
indeed a rare situation where we were able to prevail 100 
percent if we had to settle the case out for lower numbers. We 
did win some, of course, 100 percent. But there is water in all 
assessments, for the most part.
    Ms. Larsen. I would like to add though that often the 
reason why there is water is because, at the previous levels, 
at the revenue agent level, that the taxpayer has not been 
totally forthcoming with their own information because the 
taxpayer ultimately does have the best information about his or 
her own income.
    Where that information is not there, the IRS will proceed 
to set up the tax based on the best information it has. In the 
substitute for return situation especially, the IRS really does 
not have any option if the taxpayer is not cooperating. If the 
taxpayer does provide the information, obviously that is a 
different story.
    Mr. Strauss. Let me debate the issue just briefly with my 
colleague. If, in fact, a taxpayer has historically filed 
married with four dependents, for example, and for whatever 
reason he has not filed for a given year, there is absolutely 
in my mind no reason and no authority to take a position that 
we are going to water this case and over-assess a tax. That, to 
me, is wholly unacceptable.
    Ms. Long. I would like to say something on that, too.
    The Chairman. Yes.
    Ms. Long. The taxpayer does not know that this is 
inflating, that in this part of the process we are inflating 
the adjustment. It is very frightening to them because they 
think, my gosh, I can never pay this. I never even made this 
much. So that does happen, even when the taxpayer is 
cooperative. I feel like now, with the problem with the lack of 
response to legitimate complaints, it is really happening a 
lot.
    The Chairman. Any further comment? Mr. Lilly.
    Mr. Lilly. Could I relate a horror story which exemplifies 
the problem. I am currently representing a taxpayer who was 
subjected to an examination that took approximately 5 years, 
which is inexcusable. It started out as a criminal 
investigation because this taxpayer had not filed tax returns, 
so he was wrong in that respect.
    He pleaded the 5th amendment and declined to furnish his 
records to the Internal Revenue Service. Of course, that was 
his constitutional right to do that while he was under such 
criminal investigation. The criminal investigation was 
concluded because it was determined that he had not willfully 
violated the tax laws.
    The records which had been accumulated by the internal 
revenue agent were then transferred to yet another revenue 
agent, who set up the deficiency for civil purposes. The civil 
agent set up the gross income. This happened to be a restaurant 
operator, and all the money taken in and deposited is treated 
as gross income.
    While this agent had, or at least the service had, the 
records indicating the expenditures, there was no money allowed 
for food. No deduction for food in a restaurant. This was based 
upon information before the agent.
    That is a situation where you have water in a statutory 
notice of deficiency. The service knew that the man was selling 
prepared meals. The service knew that he had to buy food, but 
allowed no deduction for food. They had the records with which 
to do it.
    The Chairman. Let me ask you this question, Mr. Lilly. Do 
you believe that regions and districts determine their own 
directives and ignore those from the national office if they 
prefer not to implement?
    Mr. Lilly. I do not want to say they will basically ignore 
it. They will be dilatory in implementing. They determine how 
much manpower they will give to these things and how quickly 
they will do them. I do not want to say that they would flat 
violate a directive, but they might not be very aggressive 
about doing it.
    The Chairman. Let me ask you this, Ms. Long. You stated 
that some managers actually use their position to influence 
subordinates into fabricating evidence against fellow employees 
who have been targeted for dismissal. Have you witnessed such 
behavior?
    Ms. Long. I have been asked to do that against fellow 
employees.
    The Chairman. You yourself have been asked to do that 
against fellow employees.
    Ms. Long. Yes.
    The Chairman. Have you any idea, is this a common practice?
    Ms. Long. It has been my observation that it is being done, 
that people are promoted for doing this.
    The Chairman. Senator Grassley.
    Senator Grassley. I was thinking as you were talking about 
water, Mr. Chairman, is it not ironic that your constituent, 
Mr. Purdue, has the water that he can put in his chickens 
regulated by the USDA, but we do not have any government 
regulation in the amount of water that the IRS can put into a 
tax assessment.
    The Chairman. That is ironic.
    Senator Grassley. I am not going to take a lot of time 
because there are a lot of other people who want to go here. So 
I am just going to ask Ms. Long not really some in-depth 
questions, but I have got some observations and basically I am 
just asking you to say whether or not I have got this figured 
out right or wrong.
    But first of all, I think we have to acknowledge your 
courage in coming forward today at a very great risk to your 
career to help us understand the questionable practices of IRS 
management.
    I know this is a very anxious moment for you. But I would 
like to put you somewhat at ease this way, because often when 
people like you show the courage to come forward, their 
agencies retaliate. I have been dealing with people who have 
been willing to talk like you are for a long period of time in 
other agencies, and I know that is true.
    Now, I am not alleging that the IRS will retaliate against 
you, but I also was not born yesterday when it comes to 
understanding how the government operates. So I want you to 
know that, as a witness of this committee, we will not tolerate 
retaliation by the IRS, and you can be sure that if it happens 
we will take action. In fact, not only that, we have a 
responsibility to take action. There are codes protecting 
people like you who are willing to talk to the Congress of the 
United States.
    You have described, in essence, a system of incentives that 
might explain IRS managers' behavior. As you describe it, they 
are motivated to pursue the collection, as you said. In the 
process of pursuing the collection, I get the impression that 
the taxpayers' rights are trampled on.
    In other words, a citizen's rights which he or she enjoy 
vis-a-vis other law enforcement agencies like the FBI or your 
typical police department are simply in the way of the 
collection process, and that is why there is allegedly so much 
abuse by the IRS. Is that a fair description of your testimony?
    Ms. Long. I do feel like taxpayers' rights are being 
violated. I think, to speak in defense of employees, we are 
terrified by what is going on. It is terrifying. We are afraid 
to turn in a case that we cannot find an adjustment on.
    The chart that you have up here, I mean, this is shown to 
us frequently and you feel that pressure to turn in cases with 
more than what the goal is. You try to find technical ways that 
are correct to do it, but you are evaluated poorly if you spend 
time reading IRS manuals or reading the Code to try to find 
legitimate adjustments to make.
    Senator Grassley. In other words, there are certain rights 
that a person has if they come in contact with the FBI that 
they obviously do not have with the IRS. To me, this is the 
real key to our understanding of why things work as they do at 
the IRS.
    There is a parallel that we have found with the FBI. You 
may have read about problems with the FBI crime lab, as an 
example. The lab managers were getting careless about the use 
of good science in the laboratory, and instead they would 
pursue a conviction rather than just pursuing the truth.
    They would often cut corners with science and with the 
truth just to get a conviction, and that is an abuse of power 
and obviously of civil liberties. Is that FBI parallel not 
somewhat what we are talking about here as it relates to the 
things that have been described on this panel?
    Ms. Long. I see many, many similarities with that case and 
with the IRS. When I was reading the articles about that I 
thought about the work situation where I am.
    Senator Grassley. Yes. Now, you have made some very serious 
statements and charges in your opening statement. I would like 
to ask you if you are prepared to document and back up these 
charges. That is, for instance, the fabrication of evidence, 
the manipulation of collection numbers, the incentive to pursue 
collections, and there are others. Could you help us with 
documents in regard to this?
    Ms. Long. Now, some of this information, I would have to 
have the proper disclosure release to help you with.
    Senator Grassley. Yes. Well, I know what you are talking 
about there.
    The Chairman. I think it is important that everyone 
understand that.
    Senator Grassley. That is a 6103 situation.
    The Chairman. That is correct.
    Senator Grassley. But, Mr. Chairman, I think then this is 
something that I should ask you. It is a problem and we have 
got to make sure that the privacy rights of the taxpayers are 
protected, I understand that.
    The Chairman. That is correct.
    Senator Grassley. I would not argue otherwise. But could I 
ask you, if under the proper people with the proper credentials 
that could pursue this, if we as a committee should not be 
pursuing these documents so we get a chance to look these over, 
it seems to me that that is what we should do.
    Ms. Long. I wanted to say something else just on an issue 
basis. But one of my problems with what they are doing is they 
are making these assessments on these people that I feel like 
are not honest and are unfair, and this money will never be 
collected. Then what happens, is these people are encouraged to 
file or do an offer and compromise.
    When the offer and compromise comes in, it is like, 
Collections does not want to deal with it, so they pass it to 
Exam. Exam does not want to deal with it, so they pass it back 
to Collections. Basically, they are going to have to write off 
the assessment and nobody wants to write off the assessment 
because it will hurt the statistics. It is just something that 
has gone on for a long time.
    Senator Grassley. Did you ever raise your concerns and the 
charges contained in your statement with the appropriate 
officials at the IRS?
    Ms. Long. Yes, I have.
    Senator Grassley. This is my last question. Why did you 
decide to come forward today with your identity known as 
opposed to coming forward tomorrow when your identity could be 
protected?
    Ms. Long. Well, on the advice of my attorney I decided to 
do it openly.
    Senator Grassley. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Grassley.
    Senator Grassley. I do hope you will think about what I 
said about 6103, because we need as many documents that we can 
legally have where the taxpayer can be protected to back up 
what has been said here today.
    The Chairman. Senator Gramm.
    Senator Gramm. Thank you, Mr. Chairman.
    Ms. Long, I want to join Senator Grassley in making it 
clear that we are not going to tolerate anybody retaliating 
against you. Now, obviously we expect you to be judged like any 
other employee, based on your performance and what you do, but 
I think it ought to be clear that when somebody is willing to 
come forward publicly and do what you have done today, that we 
are not going to tolerate people trying to take reprisal 
against them. I want to thank you for coming, and I want to 
thank all of our witnesses.
    Ms. Long, you say on page 4 of your testimony, ``I know of 
certain IRS employees that have been instructed by IRS 
management not to conduct audits of particular taxpayers who 
happen to be personal friends of someone in IRS management.''
    Now, that is a very, very serious charge, it seems to me, 
and I would think any IRS manager that issued such a directive 
ought to be fired, at a minimum, and probably ought to be 
prosecuted for obstructing justice.
    Let me go back to Senator Grassley's question. Is this one 
of the areas that you have shared with whatever internal 
mechanism IRS has in terms of self-policing?
    Ms. Long. I was not personally involved in this case, but 
it was reported to the Inspector's office and no action was 
taken against the manager who did this.
    Senator Gramm. Now, was this something that somebody heard 
or something someone was told?
    Ms. Long. The person that was told this made a very big 
scandal about it and it is very hard to be around these two 
people together because it is a very tense, unspeaking 
situation. You cannot be around them without asking someone, 
what is the problem here, what happened. It is commonly known 
that this happened.
    Senator Gramm. Well, one of the two of them ought not to be 
there. That would be the solution to that problem. I would like 
to just say, Mr. Chairman, I know somebody in this audience is 
from the IRS. I would like to ask that these accusations be 
looked at, that there be an investigation, that there be a 
report to this committee.
    If we have got somebody who is a supervisor in the IRS that 
is ordering people not to audit the tax returns of their 
friends, I think that is criminal activity and something ought 
to be done about it.
    I would like to ask the IRS officials that are present to 
look at this, to go through this testimony, to look at each and 
every one of the points raised and try over the next 30 days to 
at least give us a cursory review of what is going on here and 
is there substance to each of these charges, or any of these 
charges.
    I think, at an absolute minimum, that is what ought to be 
done. I would like to make the request to whoever is here that 
something be done, and 30 days from now I am going to follow up 
to find out what has been done.
    You talk about the types of people that are being audited. 
Now, let me make it clear, I think poor people, not-so-poor 
people, and rich people ought to all pay their fair share of 
taxes.
    Ms. Long. So do I.
    Senator Gramm. I have no sympathy for tax cheats of any 
kind.
    Ms. Long. I do not, either.
    Senator Gramm. But I want you to tell me, Ms. Long, more 
about this singling out low-income people. Do we do it based on 
somebody buying a Cadillac or something? How are these people 
singled out?
    Ms. Long. Well, Senator Gramm, the last, I would say, 6 
months to a year--and you are from around Houston. I have been 
going out to people's homes that do not have air conditioning. 
In my opinion, you are going to get air conditioning before you 
get the Rolls Royce in a city like Houston. I cannot see any 
signs of wealth.
    I cannot find any resource that would indicate that these 
people had assets that they would be hiding from me. If maybe I 
was sent out to one person like that I would think, well, maybe 
something has come to someone's attention, but it is common.
    Senator Gramm. Who sends you? Who makes this decision?
    Ms. Long. Well, the cases are assigned to you and you are 
told to work them. I do not know why there is this small amount 
of inventory, but I really do not have anything else to work on 
and I am not going to just charge my time to nothing. I have to 
account for my time, and this is all I have to work on. So, I 
go and work on it.
    Senator Gramm. Well, do you think that is an indication 
that we have got too many people, or what kind of agenda can 
you imagine anyone would have? God knows, if you live in the 
Houston area and you do not have air conditioning, it is hard 
to imagine that you have got any money for anything. I cannot 
think of anything----
    Ms. Long. Anything that would be before air conditioning.
    Senator Gramm [continuing]. Other than food and tickets to 
the Texas A&M football games, I cannot imagine what would be 
more important than air conditioning.
    Ms. Long. Yes.
    Senator Gramm. Do you have any theory as to why you get 
these assignments?
    Ms. Long. Comments have been made, and I have asked agents 
in other areas like in International. In the past, I would 
audit people that would hire, like, someone from a large 
accounting firm downtown or a well-known attorney to defend 
them. That is the type of people I would deal with. I do not 
see that anymore. I do not know what has happened to those 
people. It is like, they are afraid to audit people that can 
hire a big-name attorney or a big-name accountant to defend 
them.
    Senator Gramm. But you have no theory as to why you are 
auditing people who do not have air conditioning.
    Ms. Long. Well, I feel like it is because they are 
defenseless, they cannot fight back.
    The Chairman. Could I just interject a question there.
    Senator Gramm. Sure.
    The Chairman. Is that true of the other employees that hold 
the same position you do, is that common practice?
    Ms. Long. This is commonly being said all around the 
office.
    The Chairman. Thank you.
    Ms. Long. It is something that is hard for me to do this to 
somebody. I mean, this is not the kind of person that I am. I 
can be very tough on someone who is not following the tax law, 
but to go out to somebody who is in their 60's, who has worked 
very hard all their lives and they do not have air 
conditioning, they are old, their employees are like in their 
80's, they are providing jobs for people that would have a hard 
time getting a job someplace else, and to just harass this 
person, and I am encouraged to harass them, I do not like it. I 
do not think it is right, I do not think it is ethical.
    Senator Gramm. Not only do you not like it, but it just 
does not make any sense.
    Ms. Long. I agree.
    Senator Gramm. I mean, I have always assumed, and maybe I 
am naive, Mr. Chairman, that when you audit somebody, that you 
have got a reason. You have got somebody who is reporting 
$18,000 worth of income and they bought a Cadillac. I would say 
that is a good reason to audit, and they ought to be audited.
    Ms. Long. I assume that myself. But when I actually go out 
there and look at the books and records and look at the 
evidence, I am wondering why I am out there. But I am also 
getting an enormous amount of pressure not to bring that case 
back in without making some kind of an adjustment.
    Senator Gramm. Well, I do not get it. If the objective is 
to collect money, and I understand it----
    Ms. Long. And I have actually asked in training classes 
members of upper management, what are we looking for with 
someone who does not have air conditioning? I do not see a way. 
He said, well, there is a way, there is a way. I am like, well, 
where is it? Where are the procedures that we would use with 
somebody like this? And he just ignored me.
    Senator Gramm. Well, maybe we can find out.
    Ms. Long. Maybe so.
    Senator Gramm. My time is up Mr. Chairman.
    The Chairman. Senator Moseley-Braun.
    Senator Moseley-Braun. Thank you very much, Mr. Chairman. 
At the outset, I would like to thank the panel and the panels 
that have gone before for the courage that they have 
demonstrated and the public service nature in which you have 
come forward, because this really is a public service that you 
are performing today.
    Particularly, I was an assistant United States Attorney 
when I started off in my career, and I know the kind of sense 
of camaraderie and the closeness that you feel when you are 
engaged as a member of the service.
    It is kind of like a family. You almost feel hesitant. You 
generally would feel hesitant to say anything outside of the 
family. But the fact is, here the family is the American 
people. We are all in this together and we have to try to find 
and strike some balance here.
    The service feels a little beleaguered. I mean, you kind of 
get that from the sense in all the employees who are sitting 
there saying, I am working hard, trying to do my best, why are 
they picking on us like this. But the truth is that this 
testimony and this effort, I think, is a reality check for all 
of us. It is a reality check for the service in the first 
instance, but it is also a reality check for the Congress.
    Rather than seeing it as an assault on the IRS, I hope that 
we all see this as an opportunity to try to correct some of the 
abuses and to fix what is broken, particularly as it pertains 
to the administration.
    Quite frankly, we in the Congress tend to focus more on the 
global big picture issues of tax policy and the Tax Code and 
not on the administration. We do not focus in on the details. 
It is absolutely the truth, the devil is in the details and 
this may be where he is to be found.
    Because the testimony today, some of it--I was talking with 
one of the staffers, Senator, your staffer in fact, and she was 
saying how it almost brought tears to her eyes. I said, well, 
it did bring tears to mine and I had to leave the room for a 
minute because the horror stories are just heart-wrenching.
    Again, I hope that this is not only a reality check for the 
Congress, but that we will be vigilant in making certain that 
there is a conclusion to what we do, because the worst thing we 
could do here would be to open up this Pandora's Box, rummage 
around in it a little bit, then go away.
    I think there is more than a little suspicion that the 
politicians will hit on this issue and then move off and do 
something else, and the bureaucracy will still be there, the 
people will still be there, there will be hard feelings, there 
will be some anxiety, a little moving the deck chairs around, 
but essentially the ship will not have been radically 
refigured. There is no question but that we have to do some 
reform here. There is no question but that we need to take 
these stories as reality checks.
    There is no question but that we all have, I think, an 
investment in seeing to it that the true facts come out, the 
true facts with regard to the cases, the true facts with regard 
to practice and procedure as part of the administration.
    In fact, every time you look at something like your chart 
over there, Mr. Chairman, more questions get raised, and I will 
ask a couple of them. But I would just say to all of you, I 
very much appreciate your helping us.
    I believe that the Chairman and the members of this 
committee are trying to find common ground between a fair and 
honest effort to support the service on the one hand so that it 
can collect taxes where due, but then to make certain that the 
controls and the checks and the balances are there so that the 
service does not overbear, does not mistreat, and does not 
treat unfairly with any, any taxpayer of any sort.
    So, having said that, Mr. Chairman, again, I just hope that 
we make certain that not only that Ms. Long does not get drawn 
and quartered when she goes back to work, but also that any 
other Ms. Longs out there, any other people who are willing to 
help us, are not penalized by virtue of their public service.
    The Chairman. Let me say to my distinguished colleague and 
friend that this investigation is only a beginning. I intend to 
follow through. We have heard some facts and figures of 
discussions that are, indeed, troublesome. I think it is 
important that we shall continue to investigate.
    I want to emphasize that maybe there has not been any 
monitoring or oversight hearings in the past, that this is the 
first one, but I can assure you, we will make it a continuing 
practice. I think that is the one way we have that can 
effectively bring about change.
    I will not be satisfied until every American feels that 
they are going to get fair and civil treatment by the IRS, as 
well as other agencies.
    So your point is well taken and we will continue these 
hearings to ensure that. We want an IRS that operates like 
Congress and the President intends, and nothing short of that 
will be satisfactory.
    Senator Moseley-Braun. Well, I very much appreciate that, 
Mr. Chairman, again, because the transparency has to be 
achieved here so there can be some accountability. We have a 
bureaucracy, and what is coming out is nobody exactly knows how 
it works. I mean, that is kind of a fundamental problem, and 
particularly if you have got different pieces of it working 
different ways.
    I have got a few questions.
    The Chairman. Please proceed.
    Senator Moseley-Braun. This actually goes to the IRS, 
because I know they are going to testify tomorrow, but with 
regard to your chart I am interested to know, it says in the 
first paragraph, ``Below are the goals for fiscal year 1996.'' 
Where do these goals come from; is there some internal circular 
that goes to all the districts or is this just within this 
particular district? Mr. Strauss, you apparently have something 
to say.
    Mr. Strauss. Well, historically you had a functional 
program letter being issued which becomes part of each 
executive and upper level management officials' operational 
objectives for the year. That is traditionally how the goals 
are set, Senator.
    Senator Moseley-Braun. Which gets to my next question. The 
upper executives then, are they accountable for the horror 
stories that we have heard? If within a department some people 
get put out on the street, Ms. Long, to use your analogy, if 
they wind up being put out on the street, is that district 
director accountable for that? Who in the organization is 
accountable for the mistakes and the problems?
    Mr. Strauss. That is an excellent question. It is not quite 
that simple, as I recall the process.
    Ms. Long. I wanted to comment on that. I have known of 
employees who have been harassed and their rights violated by 
members of management. They have taken the case to court, won 
the case, got their jobs back, got something in writing that 
would say that management would not harass them or bother them 
again, and nothing changed. It continued.
    Nothing happened to those managers, nothing happened to the 
people that perpetrated the problem with the employee. The 
employee comes back to work and the same thing goes on and it 
continues, and it is just like with these taxpayers, that it 
goes on for years, and years, and years.
    It is my observation that several employees have died as a 
result of this treatment, either from a heart attack or 
committed suicide. I do not have any actual proof of that, but 
it just seemed like that is what happened. That is being said 
around the district.
    Mr. Patnoe. Senator, I would like to just say something 
about that. You are talking about assigning responsibility for 
these acts. Well, unfortunately some managers are insulated by 
silence. For instance, upper level management, in many cases, 
will never hear what happened. They never know that an illegal 
act or an abusive act has occurred because the taxpayer will 
not come forward.
    The reason a taxpayer will not come forward, is if you just 
had somebody harass you, take away half your live savings, but 
you still owed tax and it was still in the hands of that 
person, are you going to come forward knowing what that person 
just did and was capable of? So you will find managers who are 
totally ignorant of what has happened at the lower levels.
    This fear by the taxpayers, some of it rightly earned 
because people have done things that are outrageous, some of it 
has been earned just by rumor, keeps the taxpayer silent. For 
every case you hear today and you have been reported, there are 
hundreds that have not come forward. Upper management, a lot of 
times, they do not know it has even gone on, and they will not 
know. All they know is, the numbers have improved.
    Ms. Long. Well, I disagree with that because I think that 
they do know. My personal experience is that there is a total 
lack of response to legitimate complaints. I have observed it 
and I have personal experience with it.
    No matter what proof you bring to them, no matter what you 
do, there is just no response. If they are forced into a 
situation where they have to answer for their mistake, I just 
cannot think of any other description but cowardly. They have a 
cowardly way to address their own mistakes.
    I cannot understand it. They have more power than any other 
entity in our society. They have a fiduciary responsibility and 
a higher level of responsibility to admit and correct their 
mistakes in an honorable and professional way.
    My experience is that, instead of doing it in an honorable 
and professional way, they try to discredit and harm the 
unfortunate person who accidently gets involved in one of their 
mistakes.
    Mr. Strauss. Senator, could I just add one last thought. 
The answer to your question is, yes, upper level management is 
responsible ultimately, and they ought to be understanding and 
knowing what is taking place if they are actually engaged as to 
what is taking place at the lower levels, and that is part of 
their responsibility.
    If you read my statement, you find that I cite in several 
examples where they have been alerted to the issues and they 
are still stonewalling the issues. So I am just looking for the 
resolution.
    Mr. Patnoe. My experience has been, if I may, that lower 
level managers, sometimes if they find a mistake that has been 
made, they will do their best to sweep it under the carpet. 
They do not want to report it because, heaven knows, you do not 
want to report that inside your group you have got an employee 
causing problems. It does not make you look good.
    Senator Moseley-Braun. Again, I did not mean to cut you 
off, but I do not want to run out of time either, Mr. Chairman, 
unless you want to indulge me my questions in this area.
    But I guess my question to the service is, what happens if 
an employee, for example, takes a complaint to the 
commissioner? What happens to it? Or is there some intermediate 
to whom a complaint will be taken; what happens to it? Does 
that get tracked and evaluated?
    Ms. Long. When I have had a problem I went to every single 
level, and I never got a single response until I went to 
Congressman Bill Archer.
    Senator Moseley-Braun. Well, that will be a campaign ad for 
him, I am sure. [Laughter.]
    Ms. Long. But, I mean, you could have gone to any 
Congressman. But I have known taxpayers that have gone to every 
single level and they never got a response. When they went to 
their Congressman they might get a response that was just for 
show, and then calls were stopped.
    Sometimes they would not even call back the Congressman 
anymore. They had clear evidence that a mistake was being made 
and nobody would acknowledge the mistake on the record. What 
these taxpayers said today, it is true.
    Senator Moseley-Braun. It is a reality check, that is 
right.
    Well, Mr. Chairman, I know I am running out of time here. I 
just have a couple of questions that I hope we can get answers 
to when the service testifies tomorrow. Part of it touched on 
in these witnesses' testimony and other parts touched on it 
before.
    As to this chart, it would be very helpful to know, again, 
what goals are they referring to, what categories in the last 
paragraph it mentions, or the penultimate paragraph, ``The 
percent above delineates the district's effectiveness rating in 
the categories.'' What categories, is this standardized or is 
it just for this district?
    The second, is does the calculation include all the time 
that is devoted to a given 1040, a given person's filing? That 
is to say, are there investigators involved or is this just the 
agent who is being evaluated as to this thing? I mean, I would 
like to know specifically with regard to this form if it exists 
in other districts and how the calculation is arrived at.
    Then finally, an issue raised by Ms. Long when she talked 
about the cases, how cases are chosen, the exercise of 
discretion in the first instance in terms of what goes forward.
    Everything I have heard suggests that more than a computer 
is involved. But if it is just a computer involved, if it is 
all kind of randomly cranking out the names, then what are the 
determinants that go into that computer? I mean, people program 
computers.
    What are we asking the computers to tell us? Are those 
recommendations reviewed once the case has been burped out by 
the computer? Where are they reviewed and the decision made, 
does the discretion to go forward with a case simply reside 
with the agent? I thank you for your indulgence, Mr. Chairman.
    The Chairman. I would urge you to be here tomorrow.
    Senator Moseley-Braun. I will.
    The Chairman. We will have a representative from the IRS, 
and I think a number of those questions would be very 
appropriate to propound then.
    Senator Moseley-Braun. Well, I thought if they got the 
questions now then they could not just sit there and say, well, 
we will get back to you.
    The Chairman. Thank you very much, Senator Moseley-Braun.
    Senator Moseley-Braun. Thank you.
    The Chairman. Again, I want to express my appreciation to 
each of you. I know that there is significant risk for any of 
you to appear here under these circumstances, but I think it is 
critically important.
    I want to underscore what Senator Grassley and others said 
to you, Ms. Long, that you are only doing your civic duty by 
being here today and we will watch with interest your future 
opportunities and career.
    Ms. Long. Well, I thank you very much for your assurances.
    The Chairman. I thank all of you again. We undoubtedly will 
be in contact with you later as we proceed with these hearings. 
Thank you very much.
    The committee is in recess.
    [Whereupon, at 3:27 p.m. the hearing was recessed, to 
reconvene at 9:00 a.m. on Thursday, September 25, 1997.]


        PRACTICES AND PROCEDURES OF THE INTERNAL REVENUE SERVICE

                              ----------                              


                      THURSDAY, SEPTEMBER 25, 1997

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to recess, at 9:06 a.m., 
in room SD-106, Dirksen Senate Office Building, Hon. William V. 
Roth, Jr. (chairman of the committee) presiding.
    Also present: Senators Chafee, Grassley, Hatch, D'Amato, 
Murkowski, Nickles, Gramm, Lott, Mack, Moynihan, Baucus, 
Rockefeller, Breaux, Conrad, Graham, Moseley-Braun, Bryan, and 
Kerrey.

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order. This 
is the third day of this set of hearings.
    And I want to say I was pleased to read this morning in a 
press release that Deputy Treasury Secretary, Larry Summers, in 
an interview Wednesday, agreed that there is a need for a 
cultural change in IRS.
    I am pleased to read that, because I think in order to 
bring about the kind of reform--the kind of change that is 
essential--it's going to be important for all bodies of concern 
to recognize the problem.
    And we are particularly pleased to welcome today our first 
panel which is made up of five current IRS employees and one 
former employee.
    These people have come before the committee to relate from 
their own experiences how the agency works, a view from the 
inside.
    In fairness, we recognize that these individuals speak only 
for themselves, not for the IRS, but what they bring to this 
hearing is a cross section of several different segments of the 
agency itself.
    You will hear from collection officers, auditors, lawyers, 
and even inspection personnel, the IRS' form of internal 
affairs.
    And another reason to listen well to the statements of 
these witnesses is that they range from 8 years of service to 
over 35 years of service with the majority of the witnesses 
having served the IRS for over 20 years.
    I am grateful for their cooperation and appearance today.
    These witnesses have asked for their identity to be 
protected, but have provided their credentials to a member of 
both the majority and minority staff.
    I want to say to each and every one of them how much I 
appreciate their being here today.
    I know it takes a great deal of courage to come here and 
testify. I want them to know that they will have our continued 
support for being here.
    What they are doing is discharging their public 
responsibility as a responsible civil servant.
    And to each one of you, thank you for your contribution.
    Now, because of the height of the screen, I would ask that 
you remain seated while I administer the oath.
    [Whereupon, the six witnesses were duly sworn.]
    The Chairman. Thank you.
    Now, we will proceed with the testimony.
    I do want to remind the witnesses, as well as my colleagues 
that the witnesses are prohibited from disclosing taxpayer 
information which is protected by Internal Revenue Code, 
section 6103.
    I just call that to your attention, to the members of the 
committee because it is a matter of concern in their questions.
    At this time, it is my pleasure to call on Witness No. 1.

                   STATEMENT OF WITNESS NO. 1

    Witness No. 1. Mr. Chairman, thank you for the opportunity 
to appear before you and this committee.
    The Chairman. Would you let me just interrupt?
    A number of witnesses have asked that we use a mechanism 
which also distorts the voice. And that's the reason that you 
will get the sound in certain instances.
    Please proceed.
    Witness No. 1. I spent the last 25 years either working for 
the Internal Revenue Service Collection Division or 
representing taxpayers before the IRS Collection Division.
    I have collected taxes for the IRS from thousands of 
taxpayers. And I have also represented hundreds of taxpayers 
with tax problem before the Collection Division.
    It is my sincere hope that my testimony today will serve to 
improve the operation of the IRS for the benefit of the 
taxpaying public.
    The Internal Revenue Code does not abuse taxpayers. A 
complicated tax code may result in some unfair taxation, but 
rarely is the cause of abuse while multi-page tax forms also do 
not in themselves cause abuse, frustration maybe, but not 
abuse. Even an audit while certainly stressful should not 
result in taxpayer abuse.
    What then has been the outcry of American citizens about 
the abuse from the IRS and the many media reports of the heavy 
hand used by the IRS?
    Abuse of the taxpaying public occurs when the IRS 
improperly and sometimes illegally uses its vast power in the 
process of implementing some type of enforcement of the tax 
laws.
    Enforcement is the levy of a paycheck or bank account, the 
seizure of a car, a home, or a business.
    It can also result in the forced liquidation of a 
taxpayer's life savings, IRA, or retirement account.
    There is only one small part of the IRS that implements all 
of these types of enforcement. And that is the IRS Collection 
Division.
    The Collection Division is charged with the collection of 
unpaid taxes and the securing of un-filed delinquent tax 
returns.
    The Collection Division serves wage and bank levies, files 
tax liens, seizes cars, homes, and businesses to enforce the 
collection of unpaid taxes.
    The Collection Division takes literally hundreds of 
enforcement actions every day. Yes, that's hundreds of actions 
against taxpayers every day.
    This results in some abuse of taxpayers on a daily basis.
    It is the Collection Division of the IRS that is 
responsible for the overwhelming majority of enforcements and 
actions.
    Enforced collection of unpaid taxes is a necessity. As a 
result, the danger of taxpayer abuse is both inherent and 
inevitable.
    Many taxpayers will feel they have been abused simply 
because they do not like the fact that they are being compelled 
to pay their fair share.
    We understand that that comes with the territory when 
enforced collection of taxes is part of one's every day job.
    So how does one fair out the true cases of taxpayer abuse? 
The answer to that question is the important issue to be 
addressed.
    First of all, does the IRS correct abuses when they become 
aware of them? Oftentimes, they do.
    However, the more important question is, does the IRS cover 
up abuses? The answer is, yes.
    If the true number of incidence of taxpayer abuse were ever 
known, the public would be appalled.
    If the public also ever knew the number of abuses covered 
up by the IRS, there could be a tax revolt.
    Why do we not know of these covered up abuses? The answer 
is simple. The IRS protects itself by management support of 
management actions whether those actions are right or wrong.
    This acceptance of abusive actions by management is the 
root cause of taxpayer abuse.
    The initial cause of taxpayer abuse is IRS employees who 
actually implement enforcement actions, many of which are 
approved by management in advance.
    The enforcement may be necessary. However, it is the 
improper or sometimes illegal enforcement that causes 
unnecessary abuse.
    Sadly, some employees repeatedly do not follow proper 
collection policies and procedures and thereby repeatedly abuse 
taxpayers.
    There are several reasons why this occurs. One, many IRS 
tax collectors, revenue officers, but more importantly, 
managers are not properly trained in IRS policies and Internal 
Revenue Manual procedures.
    Many revenue officers, but more importantly managers often 
respond that the Internal Revenue Manual policies and 
procedures are guidelines only and do not the carry the force 
of law.
    Three, many revenue officers learn the general perception 
from management that most tax debtors are trying to cheat the 
government, are crooks or flakes and are generally not willing 
to pay their fair share of taxes.
    Many revenue officers capitalize on the taxpayer's inherent 
fear of the IRS and the intimidation that they can inflict on 
taxpayers without any consequence for their improper 
enforcement.
    Five, revenue officers often with management approval use 
enforcement to punish taxpayers instead of trying to collect 
the most money for the government.
    There is an IRS policy statement on collecting principles, 
P-5-2 No. 7 which is the most often ignored.
    In part, it states ``We should help taxpayers who try to 
comply with the law and take appropriate enforcement actions 
when taxpayers resist complying.''
    Good judgment is needed in selecting the appropriate 
collecting tool.
    The key word here is ``resist'' complying. If this one 
policy statement were properly applied, it would eliminate most 
all taxpayer abuse, but it is IRS management that must lead the 
way.
    The most important factor in all the foregoing information 
is that occasional front-line employee errors in judgment, 
violations of the Internal Revenue Manual, and lack of 
understanding of policies statements are to be expected.
    However, what is not acceptable is front-line management's 
support of these mistakes.
    What is unconscionable is upper management's support or 
tolerance of front-line management abuse of taxpayers.
    The bottom line is that the abuse of taxpayers by the IRS 
is most often caused by the Collection Division. And the 
problem with the Collection Division is mismanagement.
    The following are some general scenarios of Internal 
Revenue Manual violations and taxpayer abuse that I have 
personally encountered.
    One, on far too many occasions when a taxpayer fails or 
forgets to supply one or two items of a long list requested by 
the revenue officer, the officer's response is the heavy hammer 
of a paycheck or bank levy.
    Two, even when a taxpayer is represented by a power of 
attorney, the representative is quite often treated more 
aggressively than the taxpayer.
    Revenue officers generally learn from management the 
perception that most representatives intentionally try to delay 
the resolution of a case.
    This attitude is what causes the greatest animosity between 
the tax representation community and the IRS.
    Disregarding the policy statement that I read to you 
earlier results in damaging the credibility of the IRS and the 
integrity of the revenue officer.
    Three, quite often, the revenue officer finds a specious 
reason to serve levies on the very source of income or assets 
that the taxpayer disclosed to the IRS.
    Again, this only serves to undermine the credibility and 
integrity of the IRS.
    It is no wonder that the taxpaying public has an aversion 
to providing any information to the IRS.
    It is an aversion created by the IRS' repeated misuse of 
information provided to them by the cooperative taxpayer.
    Four, when a levy is served in error or prematurely, even 
when the IRS admits that the levy was improperly served, the 
routine IRS response is that when the taxpayer provides 
additional information, the IRS will consider releasing the 
levy.
    When the information is provided, the IRS adds insult to 
injury by not releasing the levy.
    The IRS cannot seem to grasp the concept that when it makes 
a mistake, it should reverse the error immediately, no matter 
what the consequence to the IRS.
    Five, revenue officers routinely violate the relationship 
with the taxpayer representative by contacting the taxpayer 
directly.
    It is also a common practice of revenue officers and front-
line managers to try to intimidate a taxpayer representative 
into thinking that the IRS has the right, false though it may 
be, to interview the taxpayer personally.
    Six, I have heard of revenue officers trying to discourage 
taxpayers from hiring representatives and making disparaging 
and slanderous statements about representatives.
    Today, many taxpayer representatives know IRS collection 
procedures better than the revenue officers. And this becomes a 
threat to the revenue officer.
    In many instances, I have heard and experienced more harsh 
treatment of representatives simply because the representative 
was former IRS. And this leads to violating the rights of the 
taxpayer.
    Seven, the Internal Revenue Manual states that reasonable, 
necessary living expenses are always allowed.
    However, on more than one occasion, I have seen the IRS 
punish a taxpayer by not allowing reasonable, necessary living 
expenses, even current tax payments.
    Why? Because the revenue officer and the manager did not 
think the taxpayer obeyed their commands appropriately and 
simply felt that the taxpayer could somehow survive without 
reasonable, necessary living expenses.
    Eight, a revenue officer with the IRS District Counsel 
concurrence can serve what are termed ``nominee liens'' and 
levies against third parties whom the IRS believes are in 
possession of assets belonging to the taxpayer.
    The problem is that the IRS is not required to provide 
documentation to the taxpayer or the third party supporting the 
basis of their beliefs.
    The IRS basically has the attitude, sue us to prove that we 
are wrong.
    I have seen more violations of IRS procedures and policies 
than I can count.
    The most appalling aspect of the foregoing examples is that 
in most every instance, IRS management supported the erroneous 
actions of the revenue officer.
    The Problem Resolution Office or the taxpayer's advocate is 
responsible for protecting the taxpayer from IRS abuse.
    But having appealed many taxpayer abuses to the PRO, I 
found them to be useless.
    If the public thinks that the PRO is being objective in 
assisting with abuse cases, the public is being hoodwinked.
    What are the solutions to end this suffering of repeated 
abuses? I have two basic answers.
    First, require the IRS to follow its Internal Revenue 
Manual as though it were law.
    The IRS should be required to follow the manual to the 
letter.
    Taxpayers are required to follow complicated tax return 
instructions. So why shouldn't the IRS be required to follow 
their own procedures?
    Second, make the IRS and management responsible for 
violations of manual procedures. By that, I do not mean holding 
front-line employees responsible for accidental or 
unintentional mistakes.
    However, when upper management condones the violations 
which bring great detriment to taxpayers, then management 
should be held personally responsible.
    As only one taxpayer representative out of thousands across 
the country, I have seen dozens of taxpayers severely damaged 
and even made homeless by the IRS Collection Division.
    The true bottom line solution to resolving taxpayer abuses 
is IRS management.
    Restitution by an administrative claim as opposed to court 
action for erroneous or improper actions would be a giant step 
in the right direction.
    But who will decide when the action is improper? If left in 
the hands of the IRS, you will have an IRS proud of the fact 
that they paid out a minimal amount of restitution funds over 
the course of the year.
    The culture of the IRS must change. And it will not change 
on its own.
    Thank you.
    The Chairman. Thank you very much.
    I now turn to Witness No. 2. Please proceed.
    [The prepared statement of Witness No. 1 appears in the 
appendix.]

                   STATEMENT OF WITNESS NO. 2

    Witness No. 2. Mr. Chairman and respective members of the 
Finance Committee----
    The Chairman. Would you pull the microphone a little 
closer, please?
    Witness No. 2. It's a pleasure to be able to address you 
here today. Currently, I am a Criminal Investigator for the 
Internal Revenue Service's Internal Security Division.
    IRS' Internal Security Division has a multi-functional 
purpose. In a broad sense, we're like a Federal office of 
Inspector General or a local police department's internal 
affairs unit.
    Our main responsibilities conducting investigations into 
allegations of IRS employee misconduct, outside attempts to 
correct the administration of Internal Revenue laws, and 
employee safety.
     I am here to speak about some of the problems I have 
observed in performing my work for the Internal Security 
Division.
    By the nature of our mission, it is imperative that we be 
unencumbered in opening and investigating violations of the law 
within the scope of our office.
    However, the culture and climate of the Internal Revenue 
Service often prevents Internal Security from fulfilling our 
responsibilities.
    In addition, the distrustful and secretive nature of the 
IRS often hinders an investigation.
    A lack of independence from district and regional forces 
intent on not tarnishing IRS' image has reduced administrative 
sanctions against employees to a point where they have no 
effect on controlling employee conduct.
    IRS does not want bad press on employee conduct at a time 
when the agency's public image is at a low point.
    This has affected who we investigate and what happens after 
an investigation has been completed.
    Allegations against Internal Revenue Service managers and 
National Treasury Employee Union officials have not been 
investigated.
    The IRS is aware of the administration's favorable view of 
the unions. The NTEU greatly benefits from this.
    High-level internal security employees do not want to take 
on a case involving union or union officials.
    Allegations against IRS managers, including Criminal 
Investigation Division managers are only worked when an 
allegation is serious and internal management cannot find a way 
out of assigning a case, as when it has made the newspaper or 
other people are aware of it.
    Some internal security managers believe that there is a 
bond between IRS managers that should be maintained in the name 
of working relations.
    There have been violations concerning the taxpayer's 
attorney/client privilege. IRS management often knows of these 
violations for months before reporting them to Internal 
Security. These types of cases can involve compromises of 
privileged communications.
    Investigation into serious allegations are shortened by 
nature of a 180-day baseline.
    Six months is insufficient time to conduct a complex 
investigation, especially when new allegations are developed 
during the investigation.
    After 180 days, the investigator and the immediate manager 
start to feel pressure on closing a case.
    This is where the IRS' bean counter mentality hurts us. And 
employee cases are considered an actionable case.
    That means prove it or not, opening the case earns the 
agent credit or a stat.
    A case not involving an employee only gets a stat if there 
is judicial action.
    In other words, hypothetically, a case involving armed 
militia or anti-government forces get less credit for the 
Inspection Division than a case involving the misuse of a 
government car by an IRS employee.
    Management feels that since the stat is obtained just by 
opening an employee case, there is no justification to have any 
case older than 180 days.
    Proven violations of criminal misconduct against an 
employee have been whitewashed by Internal Revenue Service 
managers and labor relations. Serious violations, such as 
browsing, unauthorized access to taxpayer's records, and 
unauthorized release of taxpayer's information have received 
nothing more than counseling letters.
    These letters are often removed from the employee's 
personnel file after a year. This kind of action does not serve 
as a deterrent for misconduct.
    The IRS can and does investigate its own employees when it 
is suspected that an employee has acted improperly or 
illegally.
    However, Internal Security management has improperly 
notified and kept the IRS district management officials abreast 
of these investigations.
    Such investigations are supposed to be kept confidential. 
However, more often than not, if these investigations target 
employees who are friends of management, they will be informed 
of the probe in time to quit the agency before adverse personal 
action can be initiated against them.
    Another example would be someone who is a rising star that 
is favored by management. When they are notified, they can take 
steps to minimize the consequence of their actions.
    Once an employee resigns, it's rare that a U.S. attorney 
will accept the case for prosecution.
    At the same time there is outside interference on the 
Internal Security's mission, there are internal pressures that 
correct our ethical standards and place morale at low levels.
    Internal Security managers exhibit arrogance while they 
themselves violate laws and commit prohibitive personal 
practices.
    Investigators have been told by Internal Security managers 
to record conversations of other IRS employees without the 
Attorney General's approval.
    In other words, we have been directed to make non-
consentual recordings of other employees without filling 
Justice Department requirements.
    Investigators are often not able to share taxpayer 
information on a multi-agency investigation.
    Yet, Internal Security managers have unofficially provided 
taxpayer information to managers at other agencies.
    IRS Internal Security managers are notorious for committing 
prohibitive personnel practices. After an employee litigates, 
settles out of court or obtains a favorable grievance or a 
Merit System Protection Board ruling, the agency takes the 
corrective action without consequence to the offending manager.
    In other words, a manager violates an employee's rights. 
The employee seeks and obtains redress from the agency. But the 
manager is never sanctioned for violating the employee's rights 
in the first place.
    There is no consequence of the offending manager's action.
    Internal Security managers are aware of how difficult it is 
for an employee to litigate against the agency.
    After all, the agency and their managers do not pay for 
legal representation. If a manager does not like an employee 
for personal reasons, there is nothing to stop the manager from 
violating the employee's rights.
    This is an ``us versus them'' mentality that is more 
flagrant at this agency than anywhere else that I've seen.
    The corporate culture at 1111 Constitution Avenue is not 
conducive towards independent, well-worked criminal 
investigations.
    In general, IRS pushes employees to open and close a tax or 
collection matter as quickly as they can.
    Often getting the proper tax is secondary to reducing 
overall case load as quickly as possible.
    For Internal Security, this ``bean counter'' mentality 
means numbers, numbers, numbers, cases opened, cases closed. 
Let's count them up so we can report at the end of the year 
what a good job we've done.
    Quality, where is that found in the accountant's book?
    Matters that were never investigated before because they 
did not warrant investigation are now opened as cases just so 
we have more numbers to report.
    In a way, this has created an atmosphere that has given us 
many of our employee misconduct cases.
    However, criminal law does not afford us the opportunity to 
work an investigation in the same manner.
    As long as Internal Security is part of the IRS, there can 
be no real oversight or independence. We are just part of the 
greater problem.
    Over my 20 years of service, I've become painfully aware of 
the ability of IRS to retaliate against employees who dare to 
speak out.
    Many of the witnesses you will have before you in this 
hearing could be retaliated against for their testimony before 
this committee.
    At times, I have been assigned an employee case and been 
told that management does not like that employee.
    I've been told I need to find something that they can use 
to terminate their employment.
    In the IRS, retaliation is swift and severe. I know of 
three cases off the top of my head where employees have spoken 
out.
    During prior reorganizations, the IRS eliminated a prior 
manager's job. He had to fight, litigate to some sort of a 
safety net for him to continue to retirement.
    Another manager that spoke out and asked questions 
inappropriately was counseled to go to an employee assistance 
program for counseling because he dared to rock the boat.
    Another person complained to their Congressman. And it was 
held the against the employee during promotion and advancement.
    I hope you will respect the risk that these witnesses took 
to appear before you and protect them from any act of revenge 
by IRS management. We all have families.
    I came here today not to harm this agency, but to help it 
heal. You must decide the best method to accomplish the goal.
    The IRS cannot heal itself, so others and I have taken the 
chance that you are serious about changing and improving this 
agency.
    I thank you for the opportunity to participate in the 
healing process.
    The Chairman. Well, I want to thank you for your testimony 
today. I recognize that you have served 20 years in the service 
of the IRS.
    I can assure you that I and this committee will do 
everything in our power to protect those of you who have had 
the courage and public sense of duty to come here and testify. 
And I appreciate your testimony.
    Witness No. 2. Thank you.
    [The prepared statement of Witness No. 2 appears in the 
appendix.]
    The Chairman. I will now call upon Witness No. 3.

                   STATEMENT OF WITNESS NO. 3

    Witness No. 3. Good morning Mr. Chairman and members of the 
Finance Committee. I am presently a grade 12 Revenue Officer 
which is also identified----
    The Chairman. Would you move the microphone a little 
closer, please?
    Witness No. 3. Which is also identified as a Field 
Collection Officer with the Internal Revenue Service.
    I have worked as a Revenue Officer for over 35 years, 
having begun my career with the IRS when John Kennedy was 
President.
    I am here this morning to cite numerous incidents that I 
have observed in the course of my career as a Collection 
Officer with the IRS.
    I hope to use these examples to assist you and the 
committee in making our agency a better place and ensure 
greater fairness for the American people.
    Over the last few months, you have heard a great deal about 
browsing of taxpayer files. Allow me to focus on this problem 
for a moment and describe to you specific situations that I 
have personally observed in the IRS work place which I once 
considered commonplace.
    Tax data being accessed by IRS employees to check on 
prospective boyfriends.
    Tax data being accessed by IRS employees to check ex-
husbands for increasing income in order to receive increased 
child support payments.
    Tax data being accessed on people with whom IRS employees 
were having some kind of personal disagreement.
    Tax data being accessed on locally prominent or newsworthy 
individuals, public figures, even team coaches.
    Tax data being accessed out of simple curiosity about a 
friend, a relative or an employee's neighbor.
    Tax data being accessed on individuals who are perceived as 
critical of the IRS, such as people labeled tax protestors or, 
as in one case, a person who had simply written a letter to the 
editor.
    The following instances, which I consider to be 
institutional misuse of taxpayer information, are cases in 
which the IRS has tacitly sanctioned looking up data on 
citizens who are not the subject of any investigation being 
conducted.
    Tax data being accessed on relatives and acquaintances of 
the subject taxpayer, such as cases where the taxpayer is 
suspected of using friends and relatives to hide income or 
assets.
    Tax data being accessed on potential witnesses in 
government tax cases.
    Tax data being accessed on jurors sitting on government tax 
cases.
    Senators, there is no excuse for this type of action.
    Until recent years, the agency had an almost casual 
attitude about privacy and misuse of taxpayer records.
    It has tightened up now to the point that good employees, 
who never think of browsing or gaining illicit tax accesses, 
are fearful that they may be subjected to investigation for an 
innocent error.
    I have witnessed other serious abuses by the IRS. While 
these are separate incidents, they are indicative of a 
pervasive disregard of law and regulations designed to achieve 
production goals for either management or the individual agent.
    One particular incident that occurred in 1994 shows how at 
least some managers figure they can get away with almost 
anything.
    A listening device was discovered to exist in our IRS 
office. Its ostensible purpose was a public address system, but 
the users--managers and secretaries, had a receiving capability 
as well.
    With the receiving capability in place, they could press a 
button and overhear conversations taking place in the employee 
break room.
    While I have no personal information of the existence of 
similar devices, I understand from others that some indeed 
existed in conference rooms used by taxpayers and their 
representatives.
    A co-worker and I found the device in the break room and 
learned how it worked.
    Learning of our discovery, higher-level officials 
immediately had the devices removed and attempted a reprisal by 
initiating an investigation of those who brought the matter to 
light.
    Another instance involved what would be called fraud if it 
were perpetuated by any other institution.
    And I still cannot believe it was done in the face of my 
objection. This was the case of a fake tax lien.
    While I made the matter known to superiors, they did not 
even seem to want to hear about it.
    When a taxpayer gets a notice a tax due from the IRS, a 
lien on the taxpayer's property arises under the Internal 
Revenue Service Code.
    To be effective against third parties and lenders, a notice 
of lien must be filed in the local court house.
    The public accepts that the IRS files only legitimate 
notices, but this is the case a notice was filed by the IRS 
when there was no assessment and no legitimate lien.
    Mr. Chairman, there must be an assessment of tax due in 
order to file a lien. That is the law.
    And if that wasn't bad enough, the IRS asserted its 
seemingly correct lien against a third party. And that third 
party, a bank, had no way of knowing that the lien was not 
legitimate.
    The amount involved was not large, only a few thousand 
dollars, but the collection employees were motivated to close 
the case rather than take the correct and legal action and lift 
the false lien.
    In this case, the Service acted illegally by collecting 
money from the taxpayer and quietly closing the case.
    I believe this instance is indicative of a systematic 
problem plaguing the agency.
    It's original mission of collecting tax revenues has now 
become incidental to the production of statistics.
    A case that is written off as uncollectible, a Form 53, is 
counted as a closed case just the same as if it were fully 
collected.
    When I started with the IRS in the early 1960's, warning 
flags went up if uncollectible accounts amounted to more than 
15 percent.
    I have now seen months in which over 60 percent of case 
closures were ``53'd'' closed as uncollectible.
    Senators, I have voluntarily come before you today to 
relate to you some of the deep concerns I have regarding the 
current mind-set of the IRS.
    I have been in a position to watch the gradual changes 
taking place among IRS management and agency attitude.
    These are not positive changes. And I'm very concerned 
about the Service's future role.
    Although my comments today may appear negative and anti-
agency, it is my sincerest hope that they will help to bring 
about the opposite result.
    I hope you will come to the aid of the IRS with the 
positive and forthright oversight it so badly needs.
    The IRS needs help. It needs careful attention it cannot 
possibly provide itself.
    The help must come from the outside through effective and 
forthright oversight of an ailing system.
    It is my deepest hope that this hearing will initiate these 
badly needed steps.
    The Chairman. Thank you very much.
    Again, I would remind the members of the panel of the 
committee that this witness has had over 35 years of experience 
with the agency.
    And I can assure him that what we seek to do is to bring 
about reform that will be fair to the taxpayers and fair to the 
IRS employees.
    [The prepared statement of Witness No. 3 appears in the 
appendix.]
    The Chairman. It is now my pleasure to call on Witness No. 
4.

                   STATEMENT OF WITNESS NO. 4

    Witness No. 4. Mr. Chairman, Senators, thank you for 
allowing me to appear before you today and share with you some 
personal observations I have made during the more than 25 years 
I have been employed by the Internal Revenue Service.
    For the majority of these years, I have served as a Revenue 
Officer in the IRS Collection Division.
    Until very recently, I felt a great sense of pride in my 
job. I actually looked forward to going to work.
    Over this past year, however, I have seen dramatic changes 
take place in this organization. And in my opinion, most were 
not for the good of the Service or the public that we are 
supposed to serve.
    In the past, with few exceptions, I felt that management 
truly cared for its employees.
    I find this no longer to be the case. I have never seen 
overall morale in the IRS as low as it is right now.
    Many of my fellow colleagues have expressed to me recently 
that they no longer feel motivated. And many are feeling the 
physical and emotional effects of constant stress.
    Management fails to acknowledge employee concerns as 
evidenced by the fact that they refuse to hear grievances or 
address work-place concerns.
    Managers fail to realize that if the employees are under 
stress or disillusioned with the Service, their attitude will 
surely flow to the taxpayers, the people we are paid to serve.
    I have recently seen many abuses by IRS managers, as well 
as first-line employees. These abuses range from the deception 
of taxpayers to gross misuse of travel funds.
    I could write a book on the subject of IRS abuse of both 
its employees and of the American taxpayers. Please allow me to 
provide some brief examples.
    But before doing so, allow me to point out that I have 
never had a performance problem during my employment with the 
IRS.
    To the contrary, I have received numerous annual 
performance awards. So I am not here today because I have an ax 
to grind.
    I truly hope that by appearing before you that I can 
contribute positively to restore pride in our organization and 
reestablish the confidence of taxpayers.
    The area that causes me significant concern is the widely 
varied treatment that taxpayers can and do receive.
    The IRS approach for the taxpayer can vary dramatically, 
depending upon the IRS group manager, whose group is assigned 
the case, depending on the employee working the case, and/or 
depending on the Collection Division policy in effect at the 
time the case is received.
    For example, you may have one business owner who is allowed 
to make monthly payments on delinquent employment taxes, while 
another business owner with the same set of circumstances is 
put out of business or forced into bankruptcy.
    One taxpayer may have their taxes written off as 
uncollectible, while another taxpayer under the identical 
conditions may be forced to pay their taxes in full or risk 
losing a home or business.
    Taxpayers deserve a consistent and fair policy when it 
involves the survival of their businesses.
    Another concern I have is based on the fact that the 
collection initiatives change regularly.
    It appears that management is more concerned about 
maintaining high statistics than the quality of work being 
performed or even whether the taxes are collected are simply 
written off.
    Whenever there is pressure to maintain high statistics and 
the performance levels of the different departments within the 
organization are a source of constant comparison, you can be 
certain that someone is going to suffer the consequences of 
such an explosive situation. And it's usually going to be the 
taxpayer.
    Recently, a revenue officer planned an elaborate sale to 
dispose of assets seized from a taxpayer. Many IRS employees 
were invited to help in the effort. The group manager was also 
present.
    Even though the revenue officer failed to achieve the 
minimum bid, as required by law, before selling the assets, he 
went ahead and sold the property at a significant loss to the 
taxpayer.
    Property which had a minimum bid of at least $40,000 was 
sold for roughly $7,000.
    Although this wrongdoing was found out and the revenue 
officer now faces possible disciplinary action, the real victim 
is the uncompensated taxpayer.
    In terms of travel abuse, I know of situations where 
managers arrange travel to outlying IRS offices simply to 
accommodate their own personal travel.
    They charge the government mileage and occasionally even a 
night's lodging in their effort to get to their final vacation 
destination.
    A previous district director who had a condo at the beach 
would frequently make brief appearances at the outlying IRS 
offices while his family waited for him in the car.
    When his visit was over, he and his family would simply 
continue their drive to the beach.
    All of this was done at the taxpayer's expense while 
management was telling employees that they had to conserve on 
official travel and that overnight lodging was not permitted.
    While this may seem minor compared to many other things 
that you will hear in this hearing, trust me when I say that 
these activities by management have a devastating effect on 
morale.
    In another abuse of travel funds, a Collection Division 
chief assigned a revenue officer in their office to travel out 
of state in an effort to check up on the work habits of other 
IRS employees.
    Extensive travel was involved. And the secret investigation 
of one of our agents caused significant confusion among 
taxpayers and IRS employees alike.
    When contacted by this IRS employee who was following up 
behind the work of the real case agent, some taxpayers called 
their local IRS offices.
    Some local officials initially thought that an impostor was 
at work.
    In fact, a taxpayer with whom I had been working with was 
contacted by this spy employee and contacted me wanting to know 
what was going on.
    Fortunately, in this case, nothing detrimental occurred to 
effect my taxpayer's case.
    But the manner in which this secret study was conducted was 
underhanded and humiliating to the rest of the employees 
involved.
    In addition, if this information was determined to be of 
such importance to this out-of-state Collection Division chief, 
why not inquire about such information in a professional, 
above-board manner, not deceptively behind employees' back.
    The effort undoubtedly would have been far more effective, 
less disruptive, and certainly far less costly to everyone 
involved, taxpayers and IRS employees alike.
    Mr. Chairman, I greatly appreciate being afforded this 
opportunity to inform this committee of what I have observed 
while working with the IRS, and the great disservice the 
actions of some of my colleagues have brought upon unsuspecting 
and undeserving taxpayers, not to mention each other.
    When the American taxpayer is defrauded of their due 
rights, we all stand to suffer.
    It is not a pleasure for me to share such stories with you. 
These stories are about my colleagues, those with whom I work.
    But my intention to do so is simple. I, too, am an American 
taxpayer. And I'm asking this committee to return the Service's 
management and operational standards to the level that will 
again earn my own trust, as well as all the trust of the 
taxpaying American.
    Thank you very much.
    The Chairman. I appreciate very much your testimony today.
    Again, I would point out that you have served in the IRS 
for 25 years. And we take very seriously what you have to say 
today.
    [The prepared statement of Witness No. 4 appears in the 
appendix.]
    The Chairman. Now, I will call upon Witness No. 5.

                   STATEMENT OF WITNESS NO. 5

    Witness No. 5. Good morning. I am a long-term employee of 
the Internal Revenue Service, employed as a Revenue Officer.
    I am appearing before you today to bring to your attention 
concerns shared by many of the employees in my district.
    In the past 2 years, all of the standards of ethics by 
which we have been led to believe were an integral part of our 
job and responsibility in dealing fairly with both taxpayers 
and employees have been replaced with practices that were 
widely viewed as not only unethical, but often illegal.
    To elaborate on this statement, let me refer you to IRS 
policy statement P-1-20 which essentially states that employees 
will not be evaluated on statistics.
    This mandate was made in an effort to ensure that taxpayers 
would be treated fairly by the Internal Revenue Service so as 
to curtail the IRS from being overly zealous in their 
collection activity.
    However, our office has taken to disregarding this policy 
and has unfairly targeted long-term, good employees in an 
effort to motivate others into making more seizures.
    We are told that if we are to justify our jobs, we must 
prove that we are willing to take strong enforcement action.
    I would like to point out to you that my evaluations over 
the years have always been very high.
    I am considered to be one of the most effective collection 
officers in my district.
    However, I find it disturbing to learn that even though I 
collect more money with a substantially high number of my cases 
paying in full that I am now evaluated on my number of seizures 
rather than my overall effectiveness.
    The message we are receiving from upper management is let's 
take the action that will get us noticed. Don't worry about 
whether it's the right thing to do or not.
    Many other issues have come to my attention over the course 
of time that have created a threatening environment for myself 
and many other employees.
    Examples of these issues are: managers are targeted for 
termination on the basis of who their friends are.
    Statistics are manipulated to make it appear that our 
office is producing much higher statistics than what is 
factual.
    Selected employees are encouraged to file EEO complaints on 
the basis of trumped up charges with the promise that their 
claim will be settled so they can then be promoted unfairly 
without having to compete for the job against more qualified 
employees.
    Revenue officers have been directed to release seized 
assets because management personally feels indebted to the 
taxpayer's representative, a former IRS employee and a friend 
of management.
    The list of code and ethics violations is too long and 
cumbersome for me to further elaborate on at this time.
    I will be happy to provide the committee with further 
documentation and information under proper disclosure 
guidelines.
    However, I am willing to answer any questions you may have.
    I am not revealing my identity here today for fear I would 
run the risk of retaliation, not only for myself, but for my 
colleagues with whom I work.
    However, I am thankful that you permitted me this 
opportunity to come before you to make my concerns for the 
agency known to you.
    If I did not believe in this agency, I would not have 
dedicated many years of my life working for it.
    However, motivation to execute one's responsibility should 
not be based on statistics at the expense of quality, nor 
should motivation be based on unfair competition among 
colleagues for promotion, nor for any other reason I sadly 
offered to you today.
    I hope you can bring integrity back to the IRS and allow 
the good and ethical employees to do their jobs well while 
serving the American taxpayers with a fairness they deserve.
    You have an opportunity to take an action which would 
improve the integrity of the Service, relieve stress on 
employees who are already in a position classified as one of 
the most stressful in the country, provide for more fair and 
equitable treatment of the taxpaying public, while encouraging 
more efficient collection of outstanding taxes to support our 
country.
    I thank you for your efforts to address this issue.
    The Chairman. Thank you for your testimony.
    Again, we are much concerned and interested in ensuring the 
employees of IRS of working in a fair and equitable 
environment.
    [The prepared statement of Witness No. 5 appears in the 
appendix.]
    The Chairman. Finally, it is my pleasure to call on Witness 
No. 6.

                   STATEMENT OF WITNESS NO. 6

    Witness No. 6. Mr. Chairman and honorable members of this 
committee, I thank this committee for the light of day it is 
attempting to shed at the IRS.
    I am a Criminal Investigator in the Inspection Division of 
the IRS which is responsible for investigating among other 
things allegations of IRS employee misconduct and responding to 
and investigating threats and assaults perpetrated against IRS 
employees.
    I have over 24 years of law enforcement experience. I am 
appearing here today at great personal risk to my career with 
the IRS.
    But given the current climate in the IRS, I feel a need to 
bring to light and express my concerns.
    I have personally seen how vindictive IRS management can be 
in retaliating against those who express conflicting opinions, 
different to their own or do not conform and blindly follow and 
agree with the corporate mentality and attitude.
    I know only too well how IRS management has tried to kill 
the messenger while ignoring the message.
    I am not here today to hurt or bash this agency or the vast 
majority of hard working, dedicated, career public servants who 
staff IRS services and serve the public well.
    But I have seen the efforts by IRS management to try and 
heal itself. And they are just window dressing to appease you 
in Congress, while behind the shield of taxpayer secrecy, they 
shun public accountability and oversight. And so it's business 
as usual.
    The IRS and the public need and deserve no less than a 
strong independent, fully staffed and fully funded inspection 
division, able to carry out its investigative mission 
independent of interference or manipulation, subtle or 
otherwise, from within or without.
    A track record of falsehood and misrepresentation, poor or 
nonexisting communication, and a service-wide distrust of 
management has taken its toll in the IRS and perpetuates from 
the top down.
    The current atmosphere of impunity or arrogance and 
indifference, three generations of nationwide surveys of IRS 
employees bears this out.
    For example, during IRS all manager training conducted in 
the late 1980's, one of the blocks of instructions dealing with 
employees stated that it was acceptable and permissible to lie 
or mislead as long as it accomplished the goals and missions of 
the agency.
    This was told to me by a former manager who attended this 
training and could not believe the IRS condoned and instructed 
its managers to do this.
    He very vocally questioned the ethics and appearance of 
such a course of action. And subsequently, his position with 
the IRS, coincidentally or not, was later eliminated in one of 
the IRS' reorganizations.
    These reorganizations did no more than change job titles 
and upgrade middle and first-line managers' salary levels.
    It did nothing to improve conditions or staffing for the 
field agents.
    The current proposed office closures and RIFS being 
proposed for field personnel with Inspection are in stark 
contrast to the apparently super human, gerrymandering efforts 
employed to retain displaced inspection managers' positions 
whose positions were abolished in the 1992 and 1995 
reorganization and restructuring.
    Ad hoc and previously nonexisting positions were created, 
as well as extended, long-term acting assignments on full per 
diem as golden parachutes to reward these managers when viable 
candidates existed to immediately fill any vacancies without 
undue taxpayer expense.
    No such efforts or special dispensation is now being 
offered for field personnel who since February have been put on 
notice that their positions are targeted for elimination and 
their offices being shut down.
    With the closure of these offices, the nearest investigator 
could be hundreds of miles or states away.
    Three members of this committee are having Inspection 
offices in their areas closed or severely gutted, losing 
valuable liaison with local law enforcement and other Federal 
law enforcement agencies.
    Criminal investigations cannot be conducted in the same 
methodology and goals as audits. In criminal investigations, 
many factors outside the agent's control dictate and affect--
I'm sorry. I've missed a page.
    A track record of falsehood--in criminal investigations, 
many factors outside the agent's control dictate and affect 
duration and scope of the investigative process, such as the 
availability of witnesses, documents, the United States 
attorney's office, vacations, training, etcetera.
    By ascribing artificial time constraint to criminal 
investigations as is now the practice has a chilling effect on 
creativity and depth of an investigation and sends out the 
message to the investigator to open and close cases as soon as 
possible.
    The message received by the investigator is that quality is 
sacrificed for quantity, numbers, and stats.
    The attitude is ``big cases, big problems, little cases, 
little problems.'' This atmospheres fosters mediocrity.
    For example, in a long-term investigation, a manager told 
the case agent to close out the current case and reopen it with 
a new case number so it wouldn't hurt the group or the region 
average and get it off the over-age case list.
    Senior special agents in the Criminal Investigation 
Division have told me that CID management encourages and 
emphasizes opening and closing traditional tax cases what they 
refer to as ``mom and pop'' cases which are easy stats and can 
be opened and closed quickly in order to bolster CID's open 
case day's average and numbers rather than investing time in 
the large cases which require more time and resources to prove.
    Big cases are often put off or overlooked in deference to 
small, quick ones.
    The agents complain that their experience and expertise is 
being wasted in playing this statistics game.
    And many become frustrated with this bean counter mentality 
and leave the Service for more traditional, Federal law 
enforcement jobs. The tail is wagging the dog.
    Morale among inspection and CID investigators is at its 
worse level I have ever experienced in my 24 years in law 
enforcement.
    Inspection is losing trained, veteran investigators who are 
frustrated and disgusted and not waiting around for the RIF 
hammer to fall again at the same time that managers' jobs are 
being insulated and protected and are taking positions in other 
law enforcement agencies.
    Ironically, the Inspection Service will probably have to 
hire and train at great expense new investigators to replace 
those who have left or are riffed at a cost to taxpayers far 
greater than retaining experience personnel and keeping field 
offices open to provide service to IRS employees and the 
public.
    Another issue is the independence of Inspection from IRS 
management. The Inspection Division's budget is directly 
controlled by IRS.
    By depleting or denying budget dollars, subtle limitations 
are placed on who and what is investigated, as well as what 
resources we get.
    To give you an example, the last 2 months, August and 
September, field investigators have been told there are no 
travel funds to perform investigations that require overnight 
travel.
    Yet, not a week ago, all inspection managers met in a 
resort in St. Simon's Island for one week at great taxpayer 
expense.
    Field agents believe that Inspection management is too 
close and cozy with IRS management to effectively investigate 
without subtle interference or pressure or the potential for 
compromising an investigation.
    Investigation into allegations of misconduct by IRS 
management or a union official are not encouraged or pursued. 
Management takes care of management.
    By detaching the Inspection Division's criminal 
investigative function, Internal Security, from Internal Audit 
and realigning our function either under the Treasury Office of 
Inspector General or the Office of the Under Secretary of the 
Treasury for Enforcement or by remaining within IRS, but 
reporting to an independent board and permanently fencing our 
budget, this trend can be reversed.
    An example of this manipulation was related to me about an 
IRS commissioner who did not get the desired answer from 
inspection last year and retaliated by threatening to cut the 
funding for Inspection's forensic crime laboratory.
    At a time when most other Federal law enforcement agencies 
are expanding, why then IRS Inspection one of the only Federal 
law enforcement agencies downsizing, closing field offices, and 
proposing RIFS?
    This is especially troubling to the field personnel when 
case loads are increasing. Militia and tax protester activity 
is at a violent, all-time high.
    And new, anti-browsing legislation, out-sourcing of IRS 
functions, and credit card tax payments promise to generate 
additional work load nationwide.
    A recent Chief Inspector's memo reports that although 
fiscal year 98 budget funds 1,214 full-time positions, 
Inspections is still planning to close field offices and do a 
RIF to get down to 1,150 FTEs.
    In fiscal year 99, this figure goes down to 1,035. This is 
directly due to IRS rating the Inspection budget to bolster and 
support the failed TSM Project and Year 2000 Project.
    In a conversation with a member of Congress, it was his 
opinion that Congress' mandate to the IRS was to streamline its 
bloated management structure, not reducing service to the 
public by reducing field positions and closing IRS field 
offices.
    The proposed Inspection restructuring targets only 
experienced field personnel positions, while only one 
management position in the entire Nation is slated for 
elimination.
    The field investigators ask, how can 105 field investigator 
positions be eliminated without a corresponding reduction of 
management positions?
    This was simply accomplished by adjusting the span of 
control in order to jealously horde and retain Inspection 
management positions at the expense of field personnel and 
offices and service to the public.
    The issues which this committee and the public find most 
distressing are the very focus of the Inspection Division: 
unauthorized browsing and disclosure of taxpayer information 
and egregious misconduct by IRS employees.
    A reduction of field investigator personnel can only 
negatively impact the IRS' ability to combat these problems.
    An atmosphere of lack of consequences and non-
accountability contributes to escalating or instigating many of 
the threats, assaults, resistance, and lack of cooperation 
experienced by many IRS employees in their interaction with the 
public.
    I do not tolerate or condone resorting to the use of 
threats or violence directed towards any government employee 
who is doing the job we citizens empower them to do.
    However, I have an understanding on how someone can be 
driven to the edge with feelings of anger and frustration and 
hopelessness when trying to deal with inflexible, indifferent, 
impersonal bureaucracy.
    As an IRS employee, I've experienced some of these 
frustrations. I have observed a lack of ``meet and greet'' 
skills necessary for dealing with the public.
    I have observed little or no accountability for misconduct, 
for mistakes, and/or errors whether innocent or intentional.
    And seldom, if ever, does the IRS or the responsible 
employee apologize to the taxpayer for errors that are the 
fault of the IRS, thus, again displaying an attitude to the 
citizen of aloof indifference or plain arrogance.
    Only recently, with all the media attention and scrutiny 
have I heard an IRS employee apologize for a mistake.
    Most of the complaints from taxpayers regarding abuse or 
misconduct on the part of IRS employees do not arise to the 
level of criminality or egregiousness at which my section would 
normally get involved.
    Such cases should be swiftly handled by the management of 
the involved employee.
    However, a desire to look good and meet dollar and time 
ratio goals and a lack of resolve and initiative by management 
create difficulty in disciplining abusive employees beyond much 
more than a reprimand or a slap on the wrist.
    Inspection is many times used as a tool by local IRS 
management to get a troublesome employee, relieving that 
employee's manager of their responsibility of having to deal 
with this employee.
    This another example of the bedfellows, cozy relationship 
between Inspection management and local IRS management and 
appearances of the lack of independence.
    Mr. Chairman, I thank you for the opportunity to testify 
before you today. As employees, we are the IRS.
    And unless you get views and input from the field, relying 
entirely upon information supplied from 1111 Constitution, you 
cannot possibly get a true picture of the problems or 
atmosphere that exists and what needs to be changed.
    I am grateful that you sought out the feelings, opinions, 
and experience of the field personnel for this hearing.
    As I stated when I began, it is not my desire to injure the 
IRS in any way.
    However, for the record, I am not a disgruntled or bitter 
employee, but rather by informing you of some of the problems 
that exist, you and this committee hopefully will provide the 
IRS with the necessary tools, means, and much more importantly 
the motivation to correct them.
    Thank you.
    The Chairman. Thank you for being here today.
    [The prepared statement of Witness 6 appears in the 
appendix.]
    The Chairman. I think we have a good cross section of the 
agency and number of witnesses from different regions.
    The one thing that is impressive is the number of years 
that each of you have served with the government.
    I would first like to ask each of you some general 
questions. And then, I have a few individual questions that I 
will propose.
    I would say to the members of the committee, when you 
direct a question to a particular witness, will you please make 
it clear so that those behind the screen know who's being 
questioned.
    My first question is, how prevalent is the use of 
retaliation by the IRS against its employees?
    Witness No. 1.
    Witness No. 1. Senator, I've been gone quite a long time. 
And I don't know what they're doing on the inside at this 
point.
    The Chairman. Okay. No. 2.
    Witness No. 2. I would say very.
    The Chairman. Very?
    Witness No. 2. Very prevalent.
    The Chairman. Witness No. 3.
    Witness No. 3. It is almost a knee-jerk reaction.
    The Chairman. Witness No. 4.
    Witness No. 4. It's very prevalent.
    The Chairman. No. 5. Do you want to pass that other one 
down so the three of you can use it?
    Witness No. 5. The retaliation that occurs in our office is 
almost on a daily basis, depending upon your individual 
relationship with upper management.
    The Chairman. Witness No. 6.
    Witness No. 6. It is very prevalent. And it depends on 
whether you're liked by management.
    I would like to just read you a short paragraph from the 
Treasury Inspector General's Semi-Annual Report that was just 
issued recently.
    ``At the request of the former Under Secretary for 
Enforcement, the Office of Inspector General, Office of 
Oversight initiated a review of allegations involving the IRS 
Mid-Atlantic Region, Office of Internal Security. The 
allegations concern possible unethical, unprofessional 
discriminatory practices by management officials. The 
complainant also maintained that he had been fired in 
retaliation for reporting the allegations. The review disclosed 
there was merit to these allegations.''
    That is very prevalent, sir.
    The Chairman. My next question is, how widespread is the 
use of goals, quotas, and statistics for the evaluation of IRS 
employees?
    And let me further ask the question, how does the use of 
statistics adversely affect the taxpayer?
    Witness No. 1.
    Witness No. 1. It appears that statistics have become very 
important based on the fact that we see more and more levies 
and seizures made that should not have been made and the 
numbers of releases of those levies and seizures that we are 
pushed into asking the IRS for.
    So there's got to be pressure coming from somewhere just to 
achieve these statistics.
    It hurts the taxpayers across the board, as I said, on a 
daily basis. I literally see taxpayer abuse by levies and 
seizures on a daily or weekly basis.
    The Chairman. Witness No. 2.
    Witness No. 2. We're driven by numbers. And it's picked up 
over the last couple of years. Our evaluations are directly 
tied in.
    It adversely affects the public in general because our 
evaluation equates to money awards, and pats on the backs.
    The average employee tries to do his job well. The carrot 
is stuck out there. Here is what you have to do to get the 
carrot. Go, get it.
    And it puts an extra dollar in their pocket or an extra 
award and recognition. If you're doing good, your manager has a 
hands-off approach in managing you.
    So for the most part, you try to give them what they want.
    The Chairman. No. 3.
    Witness No. 3. Not long after I came to work, the Service 
established a policy that said that you would not use 
production statistics to evaluate employees.
    And I think it was in 1972--62. That was routinely ignored.
    When they passed the Taxpayer Bill of Rights I, I remember 
how it was introduced at the meeting that we had. The branch 
chief said it was not as bad as it could have been.
    The written material put out by the National Office stated 
that under the new Taxpayer Bill of Rights, this is the first 
one, there would not even be a suggestion to first-line 
managers or their employees about statistics and production 
statistics, number of seizures and what have you.
    And they are very careful to keep it out of the record. You 
will not find them writing down in an evaluation that you did 
so many seizures, that you collected so much money.
    It's done on a one-to-one basis. And all levels of 
management know who their best producers are.
    Some of these best producers are good people.
    Some of them are the people we are having trouble with. 
They make too many seizures. They are what we call cowboys. And 
you just have trouble with some of them.
    As to the effect on taxpayers, it can be devastating. I 
mean, you take away their homes, their cars, and their jobs.
    But it also has an effect on the government. The revenue 
that government collects because--while this is not exactly 
taxpayer abuse, except in that it treats taxpayers in a 
disparate manner, the pressure for statistics leads to lots of 
accounts being written off as uncollectible. That means you 
don't get any money.
    But writing off the account as uncollectible gets the 
revenue officer, the collection officer just as much credit as 
if he had collected it.
    The Chairman. Witness No. 4.
    Witness No. 4. Numbers are extremely important. It really 
doesn't matter how you close the case, whether it's a full pay 
or whether you simply write it off. What matters is that you 
close the case.
    I know at group meetings, we are regularly given a sheet 
which shows the statistics in all the different areas.
    And they are broken down by groups throughout the different 
states in our district.
    And notes are written in the margin by the branch chief 
where they say, ``very good,'' or ``needs improvement.''
    But they are constantly comparing one group to the other 
group and one employee to another employee.
    This type of behavior leads to very reckless collection 
practices. And so therefore, the taxpayers are adversely 
affected.
    The Chairman. No. 5.
    Witness No. 5. Senator, in my office, seizures are looked 
at as being all important for a revenue officer in order to 
prove their value to the Service.
    As a result, the taxpayer suffers from a heavy hand that is 
often unnecessary. We have premature seizures.
    We are instructed that even if we're aware that the 
taxpayer will pay us in full within a short time and they have 
an asset that has sufficient equity, we are to go out, seize 
that asset, and demand payment at that time, following seizure, 
not before, in order to ensure that we secure a statistic to 
increase our report of number of seizures for our district.
    The Chairman. Witness No. 6.
    Witness No. 6. Again, statistics are what drive the 
organization. The tail wags the dog, Senator.
    We are very well made aware of what our statistics 
individually, not as a group or as a region.
    We are told how many products are produced per FTE. We are 
also in our evaluation told how many cases you open, how many 
cases you close, and how many arrests you've made.
    And you cannot be fully successful unless you have made an 
arrest.
    As far as how does this impact the taxpayer, quantity is 
being sacrificed for quality.
    The Chairman. Let me ask you this question, can the 
problems that you have addressed in your testimony be resolved 
simply with a more modern or sophisticated computer system?
    Witness No. 1.
    Witness No. 1. I can't see how a computer system is going 
to help.
    The Chairman. Pull the microphone closer, please.
    Witness No. 1. I don't know how a new computer system is 
going to help teach IRS employees how to treat the taxpaying 
public.
    The Chairman. No. 2.
    Witness No. 2. The only way that can help would be if it 
was such a simple tax system where there would be no discretion 
or subjectivity.
    You would send the form in. It would be scanned in. The 
computer would compute the tax. And you would pay it.
    Once you interject a subjectivity and somebody reviewing, 
that computer is only as good as how somebody is going to 
interrupt the results.
    The Chairman. No. 3.
    Witness No. 3. With respect to browsing, a better computer 
system or reprogramming of the current system could help out if 
by the simple expedient of programming the equipment so that 
people could not pull up accounts, except those that were 
assigned to them.
    The other problems are going to have to be taken care of by 
more supervision, better supervision.
    I did not say more supervisors. We need more supervision.
    The Chairman. No. 4.
    Witness No. 4. I believe that the problem starts with 
management at the very top. I believe we need a complete 
overhaul of managers. We need a new way of selecting our 
managers.
    Right now, if you don't follow the program, if you're not a 
numbers person, it just really doesn't matter. They don't want 
you as a manager.
    So I think the problem starts with management.
    The Chairman. No. 5.
    Witness No. 5. The current computer system is very 
antiquated and behind the times, resulting in burdensome--a 
very burdensome process for the revenue officer to conduct 
their functions and their responsibilities and carry out their 
jobs.
    How--whether or not a new computer system would help us to 
deal more fairly with the taxpayers, no, that would not impact 
the taxpayers in that way whatsoever, other than it would free 
up a lot more time per officer or agent to individually help 
taxpayers when they are faced with a tax problem that requires 
a lot of time, to look into and correct.
    As it stands, right now, we are so pressed to turn numbers 
that when we deal with a complex issue, we tend to just move it 
aside and tell ourselves we will get to it later and never have 
the time.
    The Chairman. No. 6.
    Witness No. 6. The current computer system that's in place 
is so antiquated as almost to obviate its use.
    The only advantage to a new computer system would be to 
give the employee that's dealing with the taxpayer more updated 
information on the person he's dealing with. And that does 
cause problems currently.
    But as far as would that solve the problems, no, sir.
    The Chairman. I would like to ask Witness No. 1, have you 
ever witnessed situations where a revenue officer has played on 
the taxpayer's fear to collect revenues that were not owed? Is 
this common?
    Witness No. 1. I don't see as it common, but I've seen it 
done, yes.
    The Chairman. With any regularity or just very rarely?
    Witness No. 1. Not to collect taxes that are not owed.
    The Chairman. Why do you believe that revenue officers 
often feel most taxpayers are trying to cheat the government?
    And how does that attitude by the revenue officers 
translate to treatment of taxpayers?
    No. 1.
    Witness No. 1. It's taught in training when the revenue 
officers are first trained. And then, it's fostered by 
management throughout the system.
    The result is that this attitude treats--forces revenue 
officers to treat all taxpayers alike.
    They are not looking at a taxpayer's individual financial 
situation. It seems like every revenue officer I deal with 
thinks that every taxpayer is hiding a small fortune. And it's 
ridiculous.
    It doesn't take a brain surgeon to see when a taxpayer is 
in financial hardship.
    The Chairman. Witness No. 2, in your statement, you spoke 
about IRS management impeding internal investigations of 
employees.
    Have you ever personally experienced IRS superiors 
interfering or attempting to stop an internal investigation 
while you were investigating internal violations within the 
IRS?
    Witness No. 2. Yes, I have one of two ways. One way would 
be when Internal Security management goes to the district and 
asks the district, should we--here are the allegations. Here is 
what we have. Do you want us to continue looking into this?
    And the district management says, no, let's let it drop. 
And we're told--I'm told to let it drop.
    The other way is when my management would go to district 
management to notify them of an ongoing case.
    And before I know it, the employee being investigated knows 
about the investigation.
    And they take various steps. If it's an ongoing violation 
they're doing, they stop if they have any smarts or they are 
able to cover up what they've done at times.
    So the answer is, yes. And it's not only against employees. 
We've been--it's happened where we've have criminal allegations 
against managers and union officials.
    The Chairman. Witness No. 3, you talked about tax data 
being assessed on jurors.
    Are you personally aware of jurors or government witnesses 
being compromised by IRS employees using threats of possible 
audits?
    Witness No. 3. No. I'm not personally aware of that. The 
only thing I saw was the access. I don't know what it was used 
for or if it was used at all, except to satisfy maybe the 
curiosity about a juror or a witness.
    The Chairman. Does that occur often or----
    Witness No. 3. I've seen it several times.
    The Chairman. Several times where a--would you spell it 
out, what happened?
    Witness No. 3. The criminal agents would come to our 
Collection Division and ask the people to access accounts. They 
really don't give reasons most of the time. They just give the 
taxpayer's Social Security number and name.
    And some employees will pull it up for them. These people 
don't have direct access to the computers with one exception.
    I knew of one who did. And probably, that person was more 
vocal about what she was doing and who she was looking up. She 
was a special agent herself.
    The Chairman. Witness No. 4, are you aware of IRS revenue 
officers using false identification when dealing with the 
taxpayer?
    Witness No. 4. No, sir, I'm not.
    The Chairman. No. 5, are you?
    Witness No. 5. When dealing with the taxpayer, no, sir.
    The Chairman. Witness No. 5, you mentioned a list of code 
and ethics violations that are too long to further elaborate at 
this time. That was your testimony.
    Witness No. 5. Yes, sir.
    The Chairman. Could you cite some examples of such without 
identifying the specific taxpayers?
    Witness No. 5. Yes, sir. I'm sure all of you are aware of 
the Taxpayer Bill of Rights 2. Under this bill of rights, the 
taxpayer is required to receive notice of default on an 
installment if he has entered into payment agreement with the 
Internal Revenue Service and then fails to meet the terms of 
his agreement.
    Once the agreement defaults, we are required by law to send 
him a notice of the default prior to taking enforcement action.
    However, in our district, we were instructed by our 
division chief that he was going to waive this mandate.
    We were to ask taxpayers upfront at the signing of the 
payment agreement to sign a waiver, waiving their right to this 
notice in the event that their installment agreement defaulted.
    As a result, we could then take immediate enforcement 
action without notice to them.
    This was often unfair to a taxpayer who subsequently failed 
to get his payment correctly applied or had a subsequent 
assessment that had been pending and was meant to be included 
in the payment agreement.
    It would create a default of the installment agreement. And 
then, we would go out and enforce without justification.
    The Chairman. Finally, I would like to ask you, Witness No. 
6, we have heard from another witness that the IRS will target 
what it determines to be a vulnerable taxpayer.
    You've stated that the Criminal Investigation Division of 
the IRS will pursue taxpayer cases that are pursued to be easy 
hits in order to bolster its numbers.
    Are the smaller cases generally considered easy because the 
taxpayers are less able to defend themselves?
    Witness No. 6. Senators, they have less resources at their 
disposal as far as attorneys or accountants. And they are 
intimidated by the IRS.
    And for this reason, those cases are opened and closed 
quicker. And they are able to bring days open average way down.
    Agents told them that if a case is going to take a year or 
more, they don't even want them to pursue them.
    The Chairman. My final question is, do you feel--Witness 
No. 6, do you feel that by granting greater independence to the 
Inspection Division and that by having it report only to the 
Commissioner, you could perform your job of investigating 
questionable employee conduct to a fuller and fairer degree 
than you can under the present arrangement?
    Witness No. 6. Well, the present arrangement is supposedly 
that we report only to the Commissioner.
    But unfortunately, because of inbreeding and coziness with 
local management, that is not the reality.
    Possibly, by removing the function from under the 
Commissioner and either move it to the Inspector General or the 
Under Secretary of the Treasury for Enforcement which are more 
law enforcement oriented, we could possibly reverse that 
coziness.
    The Chairman. Senator Moynihan.
    Senator Moynihan. Thank you, Mr. Chairman. And I want to 
thank our witnesses individually and collectively. They have 
been hugely informative.
    I find myself a little puzzled about the performance of the 
Internal Revenue Service over the last 35 years.
    And I would direct my first question to Witness No. 3 and 
then to anybody who might want to add to it.
    You mentioned, sir, that you became a revenue officer over 
35 years ago, having begun your career at the IRS when John F. 
Kennedy was President.
    And at that time, I was in the Labor Department. And we had 
a--there was a big issue in the labor field which was 
automation. Would automation put everybody out of work?
    And we were beginning to see computers down here on 
Pennsylvania Avenue. The IBM Company, IBM had a little street 
level display of what you could do with these things.
    Now, in 1962, there were 60,000 employees in the IRS. And 
today, there are 102,000 which is an increase of 70 percent.
    In that time, our population has only increased 43 percent.
    And yet in 1962, I would say to my friends on the committee 
and colleagues, it's pretty serious. I think this is a subject 
we need to get an answer to.
    In 1962, 97 percent of taxes were paid voluntarily by self-
assessed taxpayers, almost perfect compliance.
    Today, it's 83 percent. That's not very--that's good, but 
not very good. It sounds to me like the French might come up 
with something like that.
    And yet, we've----
    Senator Conrad. Voluntary compliance in some countries is 
about 40 percent.
    Senator Moynihan. Okay. It says that you would know better.
    Somewhere maybe between where the French are and where we 
were. And we're heading back in the French direction.
    And yet, the number of employees has increased. The 
computers have come on-line.
    Could you help? Do you have a sense of why this might have 
happened, why compliance has dropped even as employees have 
increased very considerably?
    Witness No. 3. I do, yes. We know more about the public and 
taxpayers now than we did in 1962. We have a lot more 
information documents.
    And even in 1962, they processed very few information 
documents, if they got it, if any at all. That's the first 
year, the '62 year that we went on the computer.
    So we find ourselves now dealing with lots and lots of 
lower income and low middle income people who may not be 
complying and who may not have been complying in 1962, only we 
didn't know about it.
    Now, I don't know if that's the explanation or not, but we 
are certainly dealing with lots more taxpayers.
    Back then, we could go out--accounts were issued for 
collection if the taxpayer owed $10. Now, in our district, 
before an account comes out for full collection, generally, 
they can pull them out.
    But before they are issued, generally, our cut-off score is 
I believe $40,000.
    Senator Moynihan. You are saying, sir, that when you 
started out, the Internal Revenue Service would go after a 
taxpayer for $10, but today it has to be a much larger sum?
    Witness No. 3. It must be much larger. Accounts do come out 
for less than $40,000, but they have established what they call 
the queue for a delinquent account.
    And trying to match work load with staffing, then they hold 
accounts in the queue.
    And I don't think that's been good for either the Service 
or the taxpayer because their thing is to allow these to sit 
there.
    You may have a taxpayer who would have owed $5,000 if you 
could have gotten to him a quarter or two after he became 
delinquent.
    But they let those accounts sit there, stagnate, grow for a 
long period of time. When you go to contact the taxpayer----
    Senator Moynihan. The growth is interest rate?
    Witness No. 3. It's more tax. They've incurred another 
quarter, another quarter, another quarter.
    Senator Moynihan. Okay.
    Witness No. 3. The taxes are huge.
    But we deal--the people that we deal with in collection are 
generally people who are not capable of properly managing.
    They are not crooks. They don't study the code. They have 
no idea of our procedures. That's what enables the Service to 
get away with abuses.
    Their abuses sometimes are illegal. This is kind of off 
your subject, but I heard this yesterday, the huge assessments 
that are made against taxpayers by exam.
    They will charge them income tax, such as the restaurant 
owner you heard about on his gross income. They can do this 
with low and middle income taxpayers because they cannot afford 
professional help.
    And they are--some of them are terrified of the Service. 
I've seen them where they are afraid to open their mail.
    And if they don't reply, then the tax goes up. It may never 
be collected, but it will hang over their head encumbering 
their property and their jobs for years. I've had lots of these 
accounts.
    Senator Moynihan. I would just like to see if we could 
leave this unresolved, but it's a matter that Senator Kerrey 
and Senator Grassley I know would be concerned with.
    Why has the voluntary compliance rate declined so?
    Now, we just heard that there was a time--and it would 
appear from what you say is that taxpayers are being treated 
more leniently today than they were a generation ago.
    If $10 would bring you an IRS action, but today it has to 
be 5,000 or whatever, then that suggests that we are not 
collecting. Maybe, that's why we're at 83 percent. I don't know 
the answer.
    Mr. Chairman, there is a question. We have brought in the 
computers. We have almost doubled the size of the work force. 
And the compliance level declined.
    Is that something to do with the culture of the IRS, as our 
Witness No. 1 said?
    Or does it have something to do with the culture of the 
United States and citizenry?
    I don't know the answer. I put the question. I think our 
inquiry should persist in it. We will no doubt ask Mr. Dolan.
    So I thank you, sir.
    The Chairman. Thank you, Senator Moynihan.
    Senator Grassley.
    Senator Grassley. I'm going to--I want you folks to reflect 
on 6103. But before I ask a specific question, I would like to 
set a little bit of background, but most importantly let you 
know that without your being here, unlike a lot of other 
agencies where there is an opportunity to get information, this 
is about the only way we can get information from the IRS. So 
you need to be complimented.
    One of the most important functions of Congress, of course, 
in bringing about reform is the oversight function that this 
committee is performing because that is the means by which we 
discover what is really going on.
    We have two methods for getting our information. One is 
through routine review of documents and reports, but that 
method has been virtually closed off as far as IRS is concerned 
because we heard yesterday that they don't keep records.
    Second, whatever records they keep, Congress cannot 
routinely see because of the 6103 restrictions that management 
often misuses to hide embarrassing or revealing information.
    I'm not sure how many people know this, but only two people 
in Congress have access and can use 6103 authority. And that's 
the chairman of this committee and the Chairman of the Ways and 
Means Committee in the House.
    And that simply is a unmanageable situation on a case-by-
case basis, the chairman can delegate authority to staff--some 
staff at least as he did for these hearings.
    But that's in really sharp contrast to how we handle even 
the Nation's top military secrets or security information.
    We have hundreds of staff and not to mention almost every 
member of Congress who has access to national security 
information.
    So our oversight function of the IRS is really hampered by 
our inability to get ready access to documents.
    So that's make the second method of information collection 
so much more necessary and important. And, of course, that is 
the function you do by willingly coming forward.
    And so obviously, we thank you for doing that.
    But people like you who do come forward, I want the public 
to know and I think it's been said very much by our chairman, 
you do so at great risk.
    And so we still need to get documents and records more 
readily available from the IRS so that we can exercise more 
vigilance.
    That's why Senator Kerrey and I have produced a bill to 
reform the IRS. And we included in that reviewing the 6103 
restrictions and also secondly making the IRS to keep records 
and archives.
    I didn't hear any of you discuss problems that you have 
experienced with abuse of 6103 authority or with records 
disappearing.
    Do any of you have any experiences in this area?
    Witness No. 1. Yes, sir. We routinely request a 
taxpayer's----
    Senator Grassley. This is Witness No. 1.
    Witness No. 1. We routinely request a taxpayer's file for 
the taxpayer so the taxpayer can see what's going on.
    And the IRS routinely blocks out large sections or large 
numbers of pages of documents, claiming it is protected under 
6103.
    It's the taxpayer's file. What can they not see that's in 
there? How can the IRS put something in there that can't be 
revealed to the taxpayer?
    And we're talking about a civil matter, not criminal.
    Why can't the taxpayer see every word that the IRS writes 
about them in their file?
    And we see this happen routinely by the disclosure office.
    Senator Grassley. Are any of the--Witness No. 6.
    Witness No. 6. From an investigator's standpoint, 6103 
prevents us from fully working the case with other agencies, 
whether state, local or Federal.
    And it really puts a chilling effect or bottleneck on the 
investigation.
    Several U.S. Attorneys have complained to me about the 
problems dealing with IRS.
    When they see an IRS investigator walking in the office to 
discuss a proposed case, they walk the other way because of the 
inherent problems with 6103.
    From my standpoint, 6103 would prevent me--if someone 
walked in our office and threatened to commit suicide, I've 
been told I cannot call the local police. I have to call the 
state police.
    The state I'm from does not have a state police. It has a 
highway patrol. I could not call the highway patrol and say 
that someone threatened to commit suicide.
    Senator Grassley. Does any of the other witnesses have 
experiences with 6103 being abused?
    Witness No. 3. I think that the Congress has furnished the 
agency a shield. If things go wrong in a case, they just say we 
can't talk about it.
    And maybe, that's a good idea. If you let them talk about 
that, perhaps you could talk about the case to anybody.
    But it has acted as a shield for the government to cover up 
its mistakes.
    Senator Grassley. Okay. That's what the Restructuring 
Commission heard so much in testimony about it being a shield.
    Do any of the other three of you who have not commented 
have any experience to back that up?
    [No response.]
    Senator Grassley. By that then, are you saying it's not 
abused?
    Witness 2, 4 or 5.
    Witness No. 2. No. The sentiments that Witness 6 expressed, 
I've had similar situations where I've worked a case with an 
AUSA that said don't ever bring me a case again because I won't 
work it.
    IRS is just a maze. It's too complicated. It's ridiculous.
    We have received different opinions from Inspection 
Disclosure, District Counsel, the various other bodies and 
divisions within the IRS.
    It's like calling up and getting different advice. You have 
an assistant calling and being given different legal advice.
    And we've had witnesses that have been injured, assaulted 
where because they weren't serious bodily injury, the U.S. 
attorney won't prosecute.
    And we've been precluded in the past from helping them deal 
with the state authorities because they would have to divulge 
to the state authorities that they were doing some sort of IRS 
business.
    And that would be disclosure because you're naming the 
taxpayer.
    Senator Grassley. I have a more general question. It's more 
to find out if there is a composite point of view.
    And that is that you have--you have listened to each 
other's testimony. And I assume that maybe you didn't have any 
contact before you came here.
    But either way, as you sit there listening to the testimony 
of your colleagues, do you all generally agree with the 
testimony of your other colleagues?
    Or do you any of you want to voice a point of disagreement 
with something you've heard from another person on the panel?
    We need to kind of know. I want to know.
    Witness No. 1.
    Witness No. 1. I heard what these folks have said for the 
past 25 years. And there's nothing new. It's been going on.
    Senator Grassley. That's----
    Witness No. 1. And nothing has been done about it.
    Senator Grassley. That's an even more sweeping statement 
than I intended to hear.
    Without speaking--if any of you voice disagreement with 
that, I would like to have you voice it.
    Otherwise, I would like to assume that all six of you 
agree.
    Witness No. 5.
    Witness No. 5. The only statement that I disagree with is 
when one of the Senators asked the question why it takes more 
agents to handle a smaller population than in 1962?
    And my response to that would be that the tax code is so 
complex that it takes us longer to deal with the issues.
    The other fact is that in 1962, the number of the 
population was a result of the baby-boomer era in which most--
well, a large number of the population was not yet income 
earning individuals.
    As a result, those people are now in the work force making 
money. And we now have to deal with them.
    So I submit that in the past, although the population 
percentwise may have been at a smaller ratio, now the wage-
earning population is truly at a greater ratio of wage earners 
to agents and revenue officers.
    Senator Grassley. Witness No. 3.
    Witness No. 3. I agree. There is nothing new about any of 
this. I've seen it ever since I've been here. And you would 
think periodically it was going to be attended to, but it has 
not been.
    Also, I think to clarify something that was asked awhile 
ago I think by Senator Roth, it was about using fictitious 
names.
    There are collection officers in particular who adopted 
what we call pseudonyms under which they operate.
    They have to register these names. You always know who they 
are. And there is some good reasons for allowing people to use 
pseudonyms.
    In one case I know of, one revenue officer had a very odd 
last name. The pronunciation of the name was easy if you 
converted it into an English word and hear about the pseudonym.
    In other cases, revenue officers have used pseudonyms 
because they have experienced the tax protesters filing liens 
against them and harassing them.
    And if they're using a pseudonym, the taxpayers cannot go 
to the telephone book and look them up.
    But they are fictitious names, but they are registered. And 
credentials are issued in the fictitious names.
    Also, there was something about collection initiatives. One 
of the latest is direct orders that came in our district.
    And in group meetings with revenue officers where revenue 
officers were directed to give taxpayers 30 days to pay up or 
close them down.
    If you ask Mike Dolan about that this afternoon, he will 
say, as they always do, they weighed their policy statements 
and their manual provisions and say we have a policy against 
that.
    And they do. P-5-133 I think is the number. And it says 
that before you close a going business, you will try everything 
before you close it down because when you close down a 
business, you're not just affecting the man who owns it, who 
ran up the tax, you're affecting the people who work for him 
who are thrown out of work.
    And in some areas, in the rural area where I work, when you 
close down particularly a sizable business, these people are 
just thrown on unemployment or welfare.
    But revenue officers now are not given the time to collect 
the tax. Sometimes, it takes months. Sometimes, it takes years.
    That's why you all gave us a 10-year statute. But we're 
told to go out there and collect in 30 days or shut them down.
    It's going to be impossible to do that. It's going to be 
impossible for the taxpayer to pay.
    In my experience, the people we contact for unpaid taxes 
are not flush with funds. If they had the money, they would 
have already paid their taxes.
    It's a situation where you're going to have work with the 
taxpayer over a period of time, keeping him current so that 
he's making his current deposits and let him pay up.
    And generally, that is what I have done for most of the 
time that I have worked, but the new collection initiative want 
seizures apparently.
    Also, with respect to collection initiatives, I think that 
sometimes they deploy the resources unwisely.
    For instance, they have decided that retired Federal 
employees and Federal employees have a much higher obligation 
to comply with tax laws than anybody else.
    I think everybody is supposed to comply with the tax laws 
equally. But they send out sometimes nominal accounts, people 
retired making $8,000 a year. And the collection initiative 
requires that you collect or close the account.
    Some of these people are in much worse financial shape than 
other taxpayers who get their accounts written off.
    Also, they will not follow the clear intent of the law in 
some cases. In our district, to save postage, they issue the 
directive that the notices that went to the taxpayer which we 
call final notices, this is the notice that Congress provided 
for.
    I don't remember the year. But it was so that we just 
didn't appear on somebody's steps and take their car which I 
have done.
    And this says you will send them a certified notice. It 
doesn't say just mail the notice. It says certified or 
registered.
    The Chairman. Would you bring your answer to a close 
because time is running out?
    Witness No. 3. Very well. And they began sending these 
notices uncertified. After I mentioned the law to them, I think 
they may have changed that.
    But they didn't notify those people to whom they had sent 
uncertified notices.
    The Chairman. We next have Senator Kerrey.
    Senator Kerrey. Let me first of all stipulate that it seems 
to me that you six as well as the individual, Jennifer Long, 
yesterday who testified are part of a group of outstanding 
employees who are here because they want to see the IRS become 
better, the integrity restored, and the operational procedures 
more consistent, both with the IRS' own manual and with U.S. 
values, that these are not anecdotes.
    They are not--this is not seven employees who have an ax to 
grind, who have employee-manager problem, nor were the 
taxpayers who were here before us yesterday.
    I would argue that one of the reasons that voluntary 
compliance has dropped is the way the IRS has been managed over 
the past 30 years.
    It is true that we have made it more difficult at times 
particularly by making our tax laws more complicated.
    It is true that there are times when we have not provided a 
sufficient amount of resources, but these issues that you have 
raised are not resource issues. They are not complexity issues.
    It's a question of, are we going to manage according to the 
law, according to your own manual, and according to U.S. 
values?
    And the answer today as I hear it is, no. And I would like 
to ask you individually. I've heard a couple of you in your 
testimony say this.
    But do you think the IRS and the current law as it's 
structured with the Deputy Secretary of the Treasury and the 
Treasury Secretary, do you think that the current law will 
enable the IRS to fix itself?
    I'll just ask--go down the line Witness 1, 2, 3, 4, all the 
way through.
    Witness No. 1. The IRS won't fix itself. It can't. In 
helping taxpayers, it has set up a Problem Resolution 
Organization, the Collection Appeals Program.
    None of that is going to work until the taxpayer can put 
his plight in front of an independent third party to make the 
decision as to whether the IRS is right or wrong.
    As long as you have IRS employees policing IRS employees, 
the IRS will not improve.
    Witness No. 2. The forces that exist to their benefit, they 
maintain the status. It's called people resist change in 
general.
    You have a lot of employees, management set in their ways. 
People who have been at the top so long, they don't understand 
what it's like working out in the field, how the people 
perceive you and how you have to deal with people daily.
    It's a monster.
    I assume that your question, lead it to a trough, it will 
drink. But I don't know how that is going to happen.
    Witness No. 3. No, sir, I do not believe that the Internal 
Revenue Service will substantially change.
    They put out directives all the time. And if you read the 
directives, if you read the policy statements, if you read the 
manual provision, and if they were followed, then you would not 
see these problems.
    But a whole lot of what is d1 day-to-day is done with a 
wink and a nod. And nobody is called to task for the things 
that they do wrong.
    Witness No. 4. No, sir, I don't believe the IRS can correct 
its own problems. I believe things have gotten too far out of 
control.
    As everyone has said today, it's really a numbers game now, 
the only thing that management cares about.
    And as long as you're interested only in statistics rather 
than how you're actually treating the taxpayer, then things are 
never going to change.
    Witness No. 5. I believe that if it's left up to the 
Service, you will get a lot of lip service, more training, and 
then business as usual.
    Witness No. 6. I feel that left to their own devices, there 
is no motivation for any change. They are self perpetuating.
    And unless given the impetus to change, they will not.
    Senator Kerrey. Well, let me just say in response, I hope 
that this committee is able to change the law relatively 
quickly.
    We have a choice here. We can either assume that these are 
just anecdotes and not emblematic of more serious problems at 
the IRS.
    I appreciate the IRS and the returns it does a year, 90 
million tax refunds. They've got 10 million contacts a year of 
some kind for compliance.
    They've got a lot of work. And it's very difficult work.
    But in our hearings and contacts with employees over the 
past year, we've just reached the conclusion that the current 
law won't allow the IRS to improve itself.
    And my hope is that we can reach--this committee can reach 
some conclusion sooner rather than later.
    The first witness indicated hundreds of new collections per 
day are going to be issued. There are 10 million contacts a 
year of audits or some other kind of compliance. That's nearly 
800,000 a month.
    I mean, every single day we wait, we're creating more of 
the problems we heard about yesterday of taxpayers who have not 
just legitimate complaints, but complaints that occur as a 
consequence of the way the IRS is managed and the way the IRS 
is organized.
    And it's going to create further taxpayer dissatisfaction 
and a further number of citizens concluding that government by 
and for the people doesn't work.
    My own conclusion on this, is that while the Department of 
Treasury wants to improve, I regret that they continue--for 
those who have made legislative proposals, they continue to 
misrepresent what we've proposed.
    It causes me to suspect that they are not really for 
change. I mean, we've got a legislative proposal out.
    The Treasury continues to say it puts private sector 
individuals in charge of the IRS.
    That's not true. It's not just inaccurate. It's not true.
    They say our bill puts private-sector people in charge of 
law enforcement. It's not true. We prohibit it. It goes on and 
on and on.
    I mean, Mr. Chairman, I think that this committee has got 
to decide. Do we think these are anecdotes? Do we think these 
are small problems? Or do we think they are big?
    I've concluded that they are big, not just in terms of our 
capacity to collect taxes, but in terms of our ability to be 
able to say to the people that we have government by and for 
the people.
    We are going to enforce the law as the law is written. We 
are going to carry out and implement the manual in a fair 
fashion.
    All of your courage in the statements you've made create I 
think an overwhelming conclusion, as well as Ms. Long's 
testimony yesterday.
    I mean, these are not the rantings of mad individuals, of 
angry individuals, of dissatisfied employees who didn't get a 
pay raise or who weren't advanced.
    These are people who want to make the IRS a better 
organization.
    And I will just say, Mr. Chairman, under current law, that 
is not likely to happen.
    So I'm hopeful that we can take action sooner than later.
    The Chairman. Senator Murkowski
    Senator Murkowski. Thank you, Mr. Chairman.
    Witness No. 1, you indicated that the Problem Resolution 
Office, the so-called PRO is, I think you used the word, 
utterly useless in protecting the taxpayers.
    And you indicated that there is a conflict of interest--
because the PRO employees are evaluated for promotions from the 
same Collection Division management they are supposed to police 
when they are assigned to PRO.
    So obviously, you have a conflict.
    I'm wondering if any of the witnesses, other than you would 
comment on that and if you care to comment because I totally 
agree that the solution is simply to separate the two?
    And then, you would get a functioning problem resolution 
office as opposed to the inability to get it under, as you say, 
an utterly useless system that doesn't protect the taxpayers.
    Witness No. 1. Problem Resolution is effective resolving 
cross-functional problems between audit and collection, CID and 
collections.
    But when it comes to protecting the taxpayers from abuse, 
when we take the case to the Problem Resolution Office, the 
first thing they do is pick up the phone and call the IRS 
manager that approved the enforcement and ask him what to do.
    They're not looking at it objectively.
    And these people go to Problem Resolution. And then, they 
go back to the Collection Division for promotion. So they go 
back and forth.
    Again, you've got IRS employees making decisions over other 
IRS employees.
    Senator Murkowski. They are coming from different areas of 
responsibility.
    Witness No. 1. Correct. If you took----
    Senator Murkowski. Well, why don't you separate them?
    Witness No. 1. Well, if you took the budget for the Problem 
Resolution Office and the Collection Appeals Program and set up 
a separate Administrative Law Judge who's trained in either 
audit or collection to hear these complaints from taxpayers.
    And this person doesn't have to be an employee of the IRS. 
They can be an employee of the Treasury. And they have to meet 
certain experience requirements.
    And let them rule as the third party so they don't have to 
go--depend on the IRS for anything.
    Senator Murkowski. Does anybody else want to comment on 
that particular area?
    Witness No. 2. I just want to say I concur wholeheartedly 
with Witness 1. And I hope it's not too strong a term, but 
probably Problem Resolution is a farce.
    It doesn't work. It rubber stamps decisions that have 
already been made.
    Senator Murkowski. Anybody else?
    [No response.]
    Senator Murkowski. Mr. Chairman, it seems to me that----
    The Chairman. Can I just make one comment?
    Senator Murkowski. Sure.
    The Chairman. If a witness wants to testify, please give 
your numbers so that people know who is talking.
    Please proceed.
    Senator Murkowski. Mr. Chairman, as we move on corrective 
action, I think the bottom line should be a simplification of 
the Tax Code as our objective goal.
    What you want to be very careful of though is you've got an 
industry built up out there, an industry of attorneys, an 
industry of accountants that depend on the complexities.
    And when and if we get, Mr. Chairman, down to the point of 
trying to simplify, you're going to find you're going to hear 
from this group. They are not worried right now.
    Senator Gramm. No, they are not worried at all.
    Senator Murkowski. And, you know, as we look at ourselves, 
I would venture to say that most of us don't do our own taxes 
for a couple of reasons.
    One of them is we want the protection of having the CPA 
sign on the line because of the exposure we have. And the other 
reason is it is too complex.
    But yet, we're expected to relate and take action to cure 
deficiencies in the IRS.
    We have certainly not done our job as far as simplification 
of the process is concerned.
    I can't recall how many pages are in the book and how many 
books are in the bookcase, but, you know, clearly this could be 
a challenge.
    And I think simplification, averaging out, would go a long 
way to reducing the difficulties of the IRS to function as an 
agency responsive to collecting revenue, as well as to the 
individual rights of the taxpayer.
    So I commend you for this process. We're on a long road, 
but I think that we've got to start somewhere.
    And I want to commend the witnesses for coming forth and 
giving us a better idea of just what's going on behind the IRS 
and, you know, what corrective action simply has to be taken.
    The Chairman. Senator Gramm.
    Senator Gramm. Mr. Chairman, let me first thank our 
witnesses. And I want to thank Jennifer Long yesterday.
    I think what you have done is very courageous. And I think 
you're giving government employees the good name that most of 
them deserve. And I want to thank you very much.
    I have to say, Mr. Chairman, that I started these hearings 
to some degree skeptical especially of people from the IRS who 
were going to be here.
    I read Jennifer Long's testimony. And I quite frankly 
didn't know what to expect.
    But I think in our business, part of what we do is judge 
credibility of people in arguments.
    And I want to begin by saying that, beginning yesterday 
with Jennifer Long and today with our witnesses, I have 
listened to everything that they have said and I have found 
them extremely credible.
    I think this problem is a very real problem. And I would 
like to pursue in the time I have a couple of avenues.
    Number one, our Witness No. 4 says, ``Over this past year, 
however, I have seen dramatic changes take place in this 
organization. And in my opinion, most were not for the good of 
the Service or the public that we are supposed to serve.''
    Witness No. 5 says, ``In the past 2 years, all the 
standards of ethics by which we have been lead to believe were 
an integral part of our job and responsibility in dealing 
fairly with both taxpayers and employees have been replaced 
with practices that were widely viewed as not only unethical, 
but often illegal.''
    And Witness No. 6 ad-libbed a lot. And I'm sorry I didn't 
have my pencil in my hand when you said it. But he in essence 
made the same point that the problem has gotten worse.
    Now, I would like to ask each one of the witnesses to say 
very briefly because I've only got a limited amount of time.
    Do you believe the problems we're talking about here today 
have gotten substantially worse in the last couple of years, 
have gotten worse in the last couple of years or just no 
different?
    Witness No. 1. They've gotten much worse over the past 
couple of years. And the reason is simple.
    Senator Gramm. I don't want the reason.
    Witness No. No. 2.
    Witness No. 2. The complexity has gotten much worse in the 
last few years.
    Senator Gramm. Witness No. 3.
    Witness No. 3. Yes, the problems are worse within the last 
year or two.
    Senator Gramm. Witness No. 4.
    Witness No. 4. Absolutely, it's much worse.
    Senator Gramm. Witness No. 5.
    Witness No. 5. I concur that it's much worse.
    Senator Gramm. Witness No. 6.
    Witness No. 6. I agree with my colleagues, much worse.
    Senator Gramm. Now, Witness No. 2, you say on page 2 of 
your testimony, ``The IRS is aware of the administration's 
favorable view of unions. National Treasury Employee Union 
officials greatly benefit from this. High level Internal 
Security officials do not want to take on a case involving the 
union or union officials.''
    I'd like to ask each one of you in this growing code of 
misconduct, this growth of what you perceive and I think the 
public would perceive is unethical or illegal activities, do 
you see this is an example of where politics is playing a role 
in it?
    Have our other witnesses seen examples where they believe 
political favoritism is being played in this process or is it a 
general process?
    Maybe, I should be more specific. Have you seen any 
incident in your service where you believe politics is playing 
a role in the policy of the IRS?
    Witness 1.
    Witness No. 1. Politics is always playing a role. It always 
has, depending on who the division chief is and what they want.
    If they want something than what the policy statements and 
the manual says, they'll just issue an edict, like the other 
witness said. It happens all the time.
    Senator Gramm. Witness No. 2.
    Witness No. 2. Beyond the reference to the union, it's the 
local people make the rules. They interpret things.
    And they find--you're asked a question. If you're not asked 
that specific question, you didn't get the answer the person 
wants to give.
    They interpret things to their benefit. And they find a 
loophole. And they exploit.
    Senator Gramm. Now, Witness No. 2, you've been with the 
agency how long?
    Witness No. 2. Since 1993.
    Senator Gramm. And you gave us your example about the 
public employee labor union.
    Witness No. 3, let me repose the question to you. Do you 
see the presence of politics in many of these problems we're 
talking about?
    Do you see a political sensitivity or favoritism being 
played by the IRS in anything you have personally witnessed?
    Witness No. 3. Oh, yes. But politics in the generic sense 
of politics within the agency, not a Democrat/Republican type 
thing.
    But it is these people have promoted each other all the way 
to the top. And you're not going to get them to address any 
problems with their high-level subordinates.
    Senator Gramm. Witness No. 4.
    Witness No. 4. I agree with Witness No. 3. Management 
definitely sticks together.
    Senator Gramm. Witness No. 4--no, 5.
    Witness No. 5. Internal politics is definitely prevalent in 
our district.
    NTEU, in recent years, in the past 2 years, has become very 
close with upper management, leaving the employees at their own 
device to deal with the unethical issues as they come up.
    Senator Gramm. Witness No. 6.
    Witness No. 6. Sir, it's strictly internal politics. 
Management clones other management like themselves. That's who 
gets promoted.
    Senator Gramm. Do each of you believe that there is--that 
there clearly is favoritism present in the promotion process?
    I think it was No. 5 who mentioned or maybe No. 4 that 
people were encouraged to file discrimination suits as a 
vehicle to get promoted.
    Is it generally your belief that there is a lot of 
political favoritism and promotion within the IRS?
    Let me go down the line on that, starting with 1.
    Witness No. 1. Yes. But like I say, the internal politics.
    Senator Gramm. No. 2.
    Witness No. 2. Almost exclusively using the promotion 
process. There's too many managers that aren't capable and 
experienced to do the job, but their inadequacies are covered 
up for.
    When their--when the employee files a grievance or a 
complaint and the employee wins the process, there is never 
retaliation to the manager because the other managers above 
them realize the person is their friend and a colleague of 
management.
    It's that us versus them. If you want to be part of the 
club, you've got to play ball.
    Senator Gramm. Witness No. 3.
    Witness No. 3. Of course, there is some politics in 
promotion within lower graded employees. I'm talking about 
people who are the field agents and work in the offices.
    It seems to be an almost exclusive way if you're dealing 
with managers. If you're not playing the game, you have no shot 
at getting into management.
    If you're outspoken, you don't have a prayer. They don't 
want to hear the thing that are going wrong.
    And I think they--it's a large part of our problem. They've 
promoted people who really don't know what they're doing.
    Senator Gramm. Witness No. 4.
    Witness No. 4. If you are an independent thinker and you 
won't go along with what they say, then you're not going to get 
promoted.
    On the other hand, I've seen them create positions where 
one was not needed in order to promote a friend.
    Senator Gramm. Witness No. 5.
    Witness No. 5. We have seen instances wherein when a first-
level manager gets into trouble, upper management, depending 
upon their comfort level or their friendship with the upper 
level, upper-level management will step in and often move them 
or promote them to bring them out of the trouble.
    Managers and employees that have been direct or outspoken 
about unethical practices, when faced with the same troublesome 
issue, find themselves in a position where these issues are 
used against them.
    So there is no equity in treatment.
    Senator Gramm. Witness No. 6.
    Witness No. 6. In case you couldn't tell, Senator, I'm very 
outspoken. And when putting in for a management position, I was 
told that if I wanted to be in management, you have to go along 
to get along.
    This agency has created ad hoc, nonexisting positions to 
take care of its management.
    Senator Gramm. Let me go back to Witness No. 2. I don't 
know how we could do this while preserving your anonymity, but 
I would like to see this accusation about protecting the 
National Treasury Employee Union from being subject to the same 
kind of review as everybody else investigated.
    Would you be willing to try find a way to see that we could 
get enough information to some authority at the IRS to give 
them an opportunity under our supervision to investigate these 
assertions?
    They seem to me to be very serious.
    Witness No. 2. The authorities at IRS know of it.
    Senator Gramm. Say that again.
    Witness No. 2. The authorities that eventually I answer to 
are aware of these accusations. It was a decision not to open 
the cases because they didn't want to take on the union.
    Senator Gramm. Well, it seems to me that this gets back to 
the point that was made yesterday, Mr. Chairman.
    And in the case yesterday, it was someone giving orders not 
to audit people who were buddies of the supervisor.
    In your case today, it is people because they are 
politically sensitive to the position of the administration 
giving orders not to audit individuals or unions.
    It seems to me that if that's not criminal behavior, it 
certainly borders on it.
    And we need to investigate not just the accusation, but the 
fact that people are actually playing politics in these 
decisions.
    And my view is that anybody who is doing that ought to be 
fired at a minimum and probably should be prosecuted.
    So what I'd like to try to do is when the hearing is over 
is to try to get in contact with you to see what we can do 
about it.
    The Chairman. Your time is up. Let's see.
    [Pause]
    The Chairman. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman. And I think really 
what we have heard over the past 3 days has been absolutely 
amazing, including what we've heard from this panel here this 
morning.
    The very essence of the survival of any democracy is that 
the people have faith in the fair and impartial treatment that 
they receive from their government.
    And after hearing the stories for 3 days, I'm reminded of 
the saying in Louisiana and I guess everywhere else about the 
three greatest lies ever told.
    I think after hearing everything today, I would add a 
fourth. And that is, I'm from the IRS. And I'm here to help 
you--because I think an awful lot of people in this country are 
really intimidated and are afraid of an agency of our own 
government and would like to know that someone is on their side 
and not have to think that the only way they can get help is 
through the Federal court system which goes on and on for years 
and generations and decades.
    I think that--I mean, I know as a member of the United 
States Senate and a member of the Senate Finance Committee that 
I feel a little intimidated myself when I've had constituents 
come to me about a problem that they are having with the IRS.
    I'm a little afraid to just find out who do I call because 
I'm afraid someone will say--would tell me, don't call me. This 
is an IRS problem.
    So I'm even fearful and intimidated myself to try and 
intervene in a case that is before the IRS when someone feels 
that they are mistreated.
    So if I'm intimidated as a member of the United States 
Senate, I know that others have even a greater fear in that 
regard of intimidation by people who work for all of us.
    And I know that there are literally thousands and thousands 
of outstanding Internal Revenue Service agents that work very 
hard and do their job.
    And in talking about the difference in the number of 
employees, 41 percent increase in population, 71 percent 
increase in employees at the Treasury Department.
    I would imagine that the tax code is probably 1,000 percent 
more complicated than it was when we had fewer employees. And 
that has got to be part of the problem as well.
    I'm really convinced that we need to have something on the 
nature of an ombudsman type of operation that people will know 
that there is a board or something that they can go to that 
really is on their side.
    An ombudsman types of operations are very common. I mean, 
the Washington Post and New York Times and papers have an 
ombudsman that's supposed to protect the rights of readers and 
ensure that everybody is being treated fairly.
    I think that the recommendations from the Kerrey Commission 
I think are appropriate and proper. I think we ought to give 
them a great deal of consideration.
    We need a commissioner. I mean, we don't have a 
commissioner.
    I mean, the administration has sent over the name of 
Charles Rossotti I guess to be the commissioner.
    And we haven't had the nomination that long. I think it 
came over at the end of July. And I think that we need to move 
expeditiously on getting a strong and tough commissioner who is 
aware of these complaints and these charges in order to take 
action.
    Whenever there is an agency of government that has to have 
the support and confidence of the people if it's going to work, 
it has to be the Treasury Department.
    And I think that that confidence, like I've tried to say, I 
think is dramatically lacking at this time.
    We had a leader in our committee, David Pryor, who worked 
very hard to get legislation passed.
    And I would want to ask a question of the panel. What 
effect do you all think that the adoption of the legislation 
that Congress passed, the Omnibus Taxpayer Bill of Rights and 
the Taxpayer Bill of Rights 2 have had on the operations 
overall of the IRS?
    I ask that question because the Kerrey Commission's 
findings in looking at the hearings that they had point out 
that the commission found that the passage of the Omnibus 
Taxpayer Bill of Rights and the Taxpayer Bill of Rights II had 
had an important effect on changing the culture of IRS.
    The agency spends significant resources educating personnel 
to treat taxpayers fairly.
    And the commission found very few examples of IRS personnel 
abusing power. And that was a finding of the commission.
    To a large extent, it's contrary to what you have presented 
to this committee today.
    And so my question is, we've tried to help by the bills 
we've passed. And I wish I could pass a bill that says thou 
shall be nice to people and that everybody would in treating 
taxpayers fairly and impartially.
    And obviously, we need to do more than that. We thought we 
had done that with the Omnibus Taxpayer Bill of Rights.
    So the question I would like each of you to comment on is 
what effect that legislation had on the conduct of the people 
you work for?
    No. 1.
    Witness No. 1. It's had very little effect on the conduct 
of the IRS. The Taxpayer Bill of Rights is very positive, both 
I and II, but who's going to enforce this for the taxpayer?
    If you're go to sue the IRS, it would take $30,000, 
$40,000, $50,000.
    And if you go to the IRS Problem Resolution or Collection 
Program----
    Senator Breaux. So there's not--number one, there is no 
outside organization or ombudsman or whatever to enforce what 
we passed?
    Witness No. 1. Absolutely not. That's why you need an 
independent third party to help rule on these things to let the 
common taxpayer go and say I've been mistreated.
    Senator Breaux. Witness No. 2, comment.
    Witness No. 2. There is no way I could add.
    Senator Breaux. Witness No. 3, has the bill changed the 
culture of the Internal Revenue Service?
    Witness No. 3. Well, somewhat it has, but the agency--I 
told you how they introduced the Taxpayer Bill of Rights 1 was 
it's not as bad as it could have been.
    They didn't like to see it. And they looked for ways around 
some of the provisions or they tried to ignore the provisions. 
They certainly never enforced the provisions.
    And on the Taxpayer Bill of Rights 2, in my district, we've 
not had any training, any significant training.
    A couple of the changes have been brought to light in 
meetings, but there has been no real training in the area.
    Senator Breaux. Witness No. 4.
    Witness No. 4. I really don't see improvement at all I 
think if all the witnesses have stated within the past year 
things have actually gotten worse.
    And also, in my district, we have not had training. They 
passed out a brochure for self-study.
    But that just shows you the lack of emphasis that is placed 
on this.
    Senator Breaux. Witness No. 5.
    Witness No. 5. I have nothing additional to add to what my 
colleagues have stated.
    Senator Breaux. Do you agree with them?
    Witness No. 5. I do.
    Senator Breaux. Witness No. 6.
    Witness No. 6. The two Taxpayer Bill of Rights bills 
affected public perception at least on the surface, the face 
they show to the public, I think they cleaned up their act.
    What hasn't changed is the corporate mentality and drive 
for figures, performance, and statistics. That has not changed.
    And so until you change that mentality, nothing is going to 
change.
    Senator Breaux. Well, I thank all of you very much for 
being here. And you do it at the risk of your job security and 
everything else.
    And I thank each and every one of you because I really do 
think you are making a very important contribution to the 
American public in trying to let us know what is happening.
    I know one witness talked about random looking at files. I 
bet you, if we found out that they were looking at the files of 
the members of the Finance Committee, we would probably pass a 
new law this afternoon.
    But we ought to take it as seriously as if we are 
personally affected because in a sense we are.
    And I commend the Chairman, the ranking member for 
conducting this hearing in the manner in which I think it has 
been conducted.
    We have a real challenge here. And, you know, you've heard 
the statements. And now, it's kind of upon us to try and find 
out a way to help solve the problem. And I appreciate your 
contribution.
    The Chairman. Senator Bryan.
    Senator Bryan. Thank you very much, Mr. Chairman. Let me 
say to each of the witnesses and those who have appeared before 
us over the last couple of days that this has been very, very 
helpful.
    I think in hearing firsthand from you what you experience 
day-to-day and the years of experience collectively that you 
bring to bear places each of us on notice that we have an 
obligation not only in terms of our oversight responsibilities, 
but we really have an obligation to the American public who we 
all represent to do whatever we possibly can to take corrective 
action.
    And so the focus of my questions are, first, and taking 
each of the witnesses in order, what specific things can we do?
    And I say that in the context that a lot of these problems 
that you've encountered on a day-to-day basis, as members of 
Congress, we're not able to address the day-to-day kinds of 
problems that you're talking about to the extent that the 
problems are structural.
    And I know Witness No. 1 has specific reference of a 
structural. And I want to give him a chance to comment on that.
    But what specifically can we do?
    And as you are frustrated and as the American people are 
frustrated, I think we are frustrated as well.
    Most of us are strong advocates and supporter of the 
Taxpayer Bill of Rights. We thought we were doing the right 
thing.
    It was passed in a bipartisan spirit with the expectation 
that we had done something to protect the American public and 
to establish a more level playing field as the American citizen 
interfaces with his or her tax collector.
    Your testimony is in essence that it really hasn't had much 
impact at all.
    So with that frame of reference in the background, Witness 
No. 1, I appreciate specifically your recommendation and 
comment with respect to a separation of the problem resolution 
system.
    That's a specific thing that we can do legislative. And I 
believe that is something that you would recommend that we do 
based upon your previous comment.
    Witness No. 1. That's correct. And, of course, as I said in 
my statement, no, Senator, you can't mandate that the IRS 
employees be polite, but the least they should do is follow 
their own procedures.
    If they do it the right way, you are going to eliminate 80 
percent of the abuse. You won't need problem resolution. You 
won't need the collection program.
    Senator Bryan. I don't mean to be argumentative there. They 
should do it the right way. And we can say give a sense to the 
Congress and direction everybody act responsibility, act 
ethically, follow the rules and procedures.
    I think all of you know that those pronouncements, if the 
Taxpayer Bill of Rights did not improve the culture or climate, 
that kind of statement is going to be in the wind.
    So I'm interested because you all have had a great deal of 
experience, specifically what can we do structurally?
    And the problem resolution thing, that is something 
specific. You're talking about separate. Give that a level of 
independence and adequacy of funding so it can't be subject to 
the whim and facisitude of the supervisor who in effect wants 
to reduce the effectiveness of that office.
    Witness No. 1. Some states have a system where they have an 
administrative law judge making decisions.
    The state has to put forth their position. The taxpayer 
puts forth their position. And an administrative law judge 
makes the decision, basically interpreting any violations of 
the code, the Bills of Right, and the Internal Revenue manual.
    And then, you require the IRS to pay penalties when they 
violate their procedures or the code.
    Senator Bryan. Okay. Witness No. 2, anything specifically 
from a structural point of view, something that we can enact in 
law, other than these feel good pronouncements which I don't 
think is going to solve the problem that you called to our 
attention or frankly improve the relationship?
    Witness No. 2. When the law is as complex as it is, the 
procedures are going to be complex. To get employees trying as 
best they can, being as knowledgeable as they can.
    Just like you can't know or anyone can know the whole tax 
code, you're not going to have an employee knowing all the 
procedures. It's just too complicated of the system.
    When a family of three or four making $30,000 or $40,000 a 
year gets a letter from the IRS and they are a wage earner, 
they can't come out, quit work, take off without pay, come 
down, and deal with us.
    Maybe, if you mandated that problems could be held--most of 
us like working days I guess, but if problems could be handled 
during the evening when taxpayers are home.
    Senator Bryan. Okay.
    Witness No. 2. At least the wage earner so they are not 
going to have a financial wage loss in dealing with us.
    Senator Bryan. You know, parenthetically, we do that at the 
municipal court in dealing with traffic citations and 
violations.
    I mean, that's a very helpful--again, it's not going to 
revolutionize the system, but it will make it more friendly to 
the taxpayer.
    Witness No. 3, specifically anything that you would call to 
our attention that we can do structurally by way of enactment 
or by the appropriation process?
    Witness No. 3. I agree with No. 2 in that you need an 
independent advocate, somebody outside the Service so someone 
who is not beholding to people within the Internal Revenue 
Service for his job, for his evaluation, for his budget.
    And I also agree that it's going to have to be something 
that is accessible to low and middle-income people who cannot 
afford representation. Even $500 or $1,000 is a lot of money.
    Senator Bryan. Sure it is.
    Witness No. 3. To people who have a middle income and a 
family to support. And these people have no idea really how to 
do it themselves.
    So this advocate is really going to have to be acting on 
behalf of these taxpayers.
    Senator Bryan. Does the concept that Senator Breaux just 
talked about, the ombudsman, is that what essentially you have 
in mind?
    Witness No. 3. That, yes.
    Senator Bryan. I appreciate that. Thank you very much.
    Witness No. 4.
    Witness No. 4. Initiatives change on a regular basis.
    Senator Bryan. Yes.
    Witness No. 4. And this makes it extremely difficult for 
agents to perform their duties and do a good job.
    So I think things need to be simplified. I think that would 
help a lot.
    Senator Bryan. Can you be a little bit more specific?
    I don't think there is a single member on this committee 
who would not agree with that proposition or a single American 
citizen.
    But simplification like beauty tends to be in the eye of 
the beholder. And although I am a strong supporter of the 
provisions that we enacted earlier this year, no one could 
contend that our actions earlier this year, bipartisan though 
they were in this committee under the capable leadership of the 
chairman of the ranking member, they have certainly not been 
simplifying the tax code.
    They have frankly made your job more difficult. If you got 
110 million calls last year, after what we did, I predict that 
you will have 150 million calls this year.
    So can you be more specific than just simplifying? I don't 
disagree with you.
    Witness No. 4. The way that we do business, I think we have 
so many different ways of getting the information out to the 
field.
    We have E-mail. We have memorandums. We have the manual. 
It's just it is no way you keep up with things.
    And I think you could ask six employees within the same 
office how to do something, and you would get a different 
answer from all of them. That's how rapidly the procedures 
change.
    Senator Bryan. I thank you.
    Witness No. 5.
    Witness No. 5. Most of the abuse that occurs against 
taxpayers occurs because of the initiative that upper 
management has taken to enforce their particular position or 
views as to how the tax laws are to be carried.
    If you were to establish a separate entity by which 
misconduct or ethics violations within management or at the 
employee level could be reported and then investigated without 
the influence of upper management, then I think that we would 
see a tremendous improvement toward the treatment of taxpayers.
    Senator Bryan. Now, I take it this is your Internal 
Security position. Is that currently the function that 
ostensibly performs that review?
    Witness No. 5. Yes.
    Senator Bryan. And that, as some of you have testified, is 
fatally flawed in your judgment because it's not truly 
independent. It's subject to the pressures of management, the 
same people.
    Witness No. 5. Correct.
    Senator Bryan. So in other words, if we could build in some 
kind of structure to provide a greater measure of independence 
and separation, and you believe that would be helpful.
    Witness No. 5. Yes, I do.
    Senator Bryan. That's a very helpful comment. Thank you 
very much.
    Witness No. 6.
    Witness No. 6. Senator Bryan, I would agree that separating 
and making the Inspection Division more independent would be 
very important.
    Separating the criminal and the civil tax divisions would 
also help public perception of the service. And----
    Senator Bryan. Could I get you to amplify on that, Witness 
No. 6?
    I am familiar as one-time lawyer, but--that there is a 
difference between the two divisions.
    But when you are talking about separating the divisions, 
can you be a little bit more specific as to what you would 
propose?
    Witness No. 6. What I would suggest is having--this country 
has to have a tax collection agency, no matter what you call 
it, whether you call it the IRS or the bureau of revenue.
    Senator Bryan. Correct.
    Witness No. 6. You have to have to have a tax collection 
agency, but make it a civil agency not a criminal agency.
    Canada is a civil agency. It is not a criminal agency. And 
then, have a division within the Treasury where criminal tax 
violations, gross criminal tax violations are then investigated 
and pursued, not wearing that same hat as an IRS agent.
    That is what intimidates the hell out of people.
    Senator Bryan. It scares the hell out of me. [Laughter.]
    Witness No. 6. I would also commend this committee for the 
initiative its taken in its oversight efforts.
    Senator Moynihan said that it hadn't been done in 20 years. 
I think it needs to be done much more often.
    Senator Bryan. Did I interrupt you when I asked you to 
further explain the separation concept that you were advocating 
between civil and criminal?
    You were about ready to say something else. And rudely I 
interrupted you, but I didn't want to miss the point.
    Witness No. 6. The only thing I was going to suggest was 
again the Inspection Division be moved and separated from that 
inbreeding and cozy relationship that it shares with IRS 
management.
    Senator Bryan. No. We are talking about the Inspection 
Division and the Internal Security. Is that one and the same? 
Or are those two different functions?
    Witness No. 6. Okay. The Inspection Division is the parent 
organization which is made up of Internal Audit and Internal 
Security.
    Internal Security is the criminal investigative arm. 
Internal Audit does the management control reviews.
    Senator Bryan. Thank you very much.
    Thank you, Mr. Chairman. I think our witnesses have been 
very helpful. And I thank them.
    The Chairman. Thank you, Senator Bryan.
    Senator Rockefeller.
    Senator Rockefeller. Thank you, Mr. Chairman. I would very 
much agree with something that Senator Murkowski said when he 
was here.
    And that is that part of the ways I think we can be helpful 
is to simplify the tax code. I mean, I think that the piles and 
piles of paper.
    The budget bill we passed last year, I think we've added 
800 new pages. In other words, Congress itself makes your job 
more difficult.
    I am also very aware of the fat that we are all Federal 
employees. We are called Senators. You are called IRS 
employees, but we are all public employees.
    And therefore, we all have a responsibility to do 
everything that we can to protect the rights of the taxpayers 
and to make the job of government working better--work better. 
And that's more easily said than done.
    I've been through this recently in an unrelated, but in 
some ways related manner with the Department of Defense on the 
Persian Gulf War veterans and their so-called mystery illness 
syndrome which I think is certainly an illness, but certainly 
no mystery, but it's still referred to as that.
    And trying to get the Department of Defense to admit what 
they clearly had done wrong and withheld from the public was an 
extraordinary process.
    The culture of bureaucracy, it's just stunning. It's 
terrifying.
    And frankly, if we hadn't had in the veterans committees 
hearings, such as Chairman Roth and ranking member, Senator 
Moynihan, are having, I don't think we would be any farther 
along in helping the 100,000 or so sick Persian Gulf veterans 
who got sick through no fault of their own, but through frankly 
actions, unwise actions on the part of the government.
    If we hadn't had those hearings, nobody would be any better 
off.
    So I think these hearings are very, very important and what 
you're saying, just the act of what you're saying which I 
take--which I believe is important.
    Now, but the other side of the coin is that as public 
servants, we all are responsible. I mean, I'm accountable to 
the people I represent which are particularly the people in 
West Virginia, but in the larger sense the people in the 
country. And so are you.
    And we all have certain procedures to follow, you know, 
ways in which we are meant to try to bring things forward into 
the public light, such as the abuses.
    And I'm struck because some of you have been with the IRS a 
long time. Others have been employed more recently.
    But I'm struck that you have not talked, I don't think, 
about having made these complaints yourself to your 
supervisors.
    And let me explain just a bit. There's a hotline, for 
example, that is anonymous that could be used. Now, it might 
end up in nothing.
    But have any of you ever used the hotline at the IRS?
    Witness No. 4, well, you said it. You said, yes. Was there 
any response to that?
    Witness No. 4. Absolutely not. I've reported things on 
several occasions. And it was just swept under the rug. So I 
don't think it's working.
    Senator Rockefeller. All right. Have you--have--all of you 
I assume then have made complaints directly to your supervisors 
or to senior management about abuses that you saw taking place 
towards the taxpayer?
    Witness No. 3. Everything I've said before you, I have said 
to my superiors.
    Senator Rockefeller. All right. And from that, let me draw 
this conclusion, too. It will appear to the public as though 
you are in a sense about to sacrifice your jobs or have your 
heads cut off because you are surrounded by screens and, you 
know, you're not known.
    I would argue you're probably the safest people at the IRS, 
the safest six people that exist because if we don't now, we 
will all know who you are.
    And I just wonder about all the IRS employees who are off 
sick today and if there are people who are worried about 
whether they are up here testifying.
    I think you're very safe, you see. In other words, I don't 
consider you're taking a risk. I consider you're doing 
something which is patriotic. You want to do something for the 
IRS.
    But I don't consider you're putting yourself at risk. You 
may. I don't.
    There is something called the Whistleblower's Act. And the 
Whistleblower's Act, well, even within the IRS itself, it says 
there is a requirement that all IRS employees are to report 
promptly and directly to the Inspection Service or the Treasury 
Inspector General.
    Have any of you reported to the Treasury Inspector General?
    Witness No. 3. Yes. And I could tell you what it was. It 
was our director, when they merged the three districts, was 
going to lose his job.
    This was common knowledge that they had on the books a new 
district office for him with a nice suite of executive offices 
for his staff.
    When they announced that there was not going to be a 
district there, he went right ahead and built or had GSA build 
that district office which is now having to be--they've vacated 
part of it.
    GSA is still paying rent on the whole building. And they're 
going to have to renovate it in order to rent it to other 
tenants. And I don't think GSA has any other tenants.
    Senator Rockefeller. Okay. I understand what you're saying. 
The National Commission which we've been discussing here 
conducted over 300 field interviews with IRS employees.
    And they evidently came away with the impression, the 
overall impression of competent, hard-working people who wanted 
to deliver a high-quality product to the American taxpayer, 
page 11.
    They also concluded the agency has spent significant 
resources educating personnel to treat taxpayers fairly.
    And, as I understand it, the commission found very few 
examples of IRS personnel abusing power. Now, this is Senator 
Kerrey's Commission.
    I'm trying to get a sense here of what our mutual 
obligations are. I think we have to help you do your jobs 
better.
    I think, you know, the Whistleblower Protection Act of 1989 
came out of precisely situations like this that if people came 
forward and stated your complaints because you've been rebuffed 
by your supervisor or you've been, you know--which all of us 
have.
    I worked for the executive branch of government for 4 
years. And I was rebuffed by my supervisor, but I wasn't 
dealing with taxpayers like you are in the same manner.
    Have any of you considered using the Whistleblower Act 
which provides specific protections for whistleblowers?
    Witness No. 2.
    Witness No. 2. I would just like to advise you that the 
Office of Special Counsel has about a year backlog in looking 
at those complaints when somebody makes one.
    And I have known other people who have called the IG 
hotline numbers where they have caller ID and were able to call 
the person back at his number for additional information.
    So there is some weaknesses and loopholes in this umbrella 
that people report things to.
    Senator Rockefeller. I understand what you're saying. In 
other words, if you use the hotline there may not be a change.
    What I was referring to was the whistleblower procedure.
    Witness No. 2. I said that has about a years backlog when a 
person makes a complaint.
    Senator Rockefeller. All right. But does that make it----
    Witness No. 2. The office is either under staffed or----
    Senator Rockefeller. But I think Witness No. 1 said that 
this process of abuse of taxpayers has been going on for 25 or 
35 years.
    So in other words, a year is a long time. But 25 or 35 
years is a lot longer. I would like to have seen some of these 
reports of abuse come to light sooner through procedures like 
internal IRS reporting or whistleblower protection.
    I'm just trying frankly and honestly to search out how can 
I as a Senator, how can IRS employees as employees, but Federal 
public servants pay their salaries, paid by the taxpayers, how 
is that we can bring forward these matters without having to 
have, you know, something of this sort.
    If it's not possible, then something of this sort we must 
have.
    But it seems to me that you all have an obligation to 
press.
    If you're angry enough to come here, you must have been 
just as angry 55 other times or more over the last 5, 10, 25, 
35 years.
    How do you see your responsibility in terms of protecting 
the taxpayer from abuse by the IRS?
    Maybe, I will just ask Witness No. 3.
    Witness No. 3. What was the question again?
    Senator Rockefeller. The question was, how do you see your 
responsibility in terms of protecting the taxpayer?
    I mean, is it required that you have to wait for a hearing 
like this with lots and lots or camera that are just 
photographing the back of the empty----
    Witness No. 3. Well----
    Senator Rockefeller. How do you this?
    Witness No. 3. Lots of times, you can just do it. I've 
intervened with other collection officers when I thought that 
they were mishandling a case or treating the taxpayer badly.
    And then, lots of times, they will listen. And they'll 
straighten it out.
    Senator Rockefeller. And they----
    Witness No. 3. Most of the people I work with are the 
finest folks in the world. We have some SOBs, but most of the 
folks are--would make friends, neighbors.
    Senator Rockefeller. No. I understand. I understand.
    Mr. Chairman, I would end simply by two things which I 
would like to put into the record. One is the Internal Revenue 
Service employees disciplinary action.
    In other words, it just says how much disciplinary action 
has been applied towards IRS employees as a whole.
    And it lists eight different categories of punishment. And 
in 1997, there were 172 out of 102,000 employees.
    That's one thing I would like to answer--put into the 
record. In other words, my point there, is the panel the, you 
know--because there are other forms of penalty than punishment.
    And I understand that. There is a sort of bureaucratic 
psychology punishment. And I understand that.
    But the other thing I would like to put in the record is a 
letter from the Deputy Secretary of Treasury, Lawrence Summers, 
in which he describes a variety of things that they are doing.
    And it makes an interesting point. It says, ``Not a single 
staff member or member of Congress expressed any concern about 
the IRS' use of revenue measurement.'' That is the so-called 
enforcement matters we are talking about here, ``or suggested 
there should be less emphasis on revenue-related goals.''
    That is a way I think of my saying that I bear 
responsibility. We all bear responsibility for what's 
happening.
    And that I think in a mature and methodical way, we have to 
get the management to understand we have to get somebody to run 
the agency, get that person appointed, and--because we don't 
want to see the Persian Gulf experience repeated.
    And I don't think you do. I know I don't. And I think 
working together intelligently, we can make a lot of 
improvement.
    And so I submit these two for the record.
    The Chairman. Without objection.
    [The information submitted by Senator Rockefeller appears 
in the appendix.]
    The Chairman. Senator Baucus.
    Senator Baucus. In going through all this, my question--I 
have several questions. The first is other than retribution or 
reigning by the numbers, what other actions has management 
taken to try to motivate personnel?
    I'm talking about on a positive basis. That is praising 
people who do a good job.
    I mean, is there some way to motivate people other than by 
the numbers or through a peer factor?
    I am just curious the degree to which the agency has spent 
a considerable amount of time in trying to figure out a 
positive way to motivate people into better performance.
    Witness No. 6. Senator, I wish I could say that there was 
positive motivation. But the only factor that is used is fear.
    Senator Baucus. Would most of you agree with that? Is there 
anybody who disagrees with that?
    Okay. There's--yes, No. 5.
    Witness No. 5. Although fear has been used to motivate, the 
fear is coming from upper management.
    Our first-line managers in the district in which I work, 
there are a couple of excellent managers who have a method of 
dealing with employees fairly.
    They look at their cases. They praise them when praise them 
when praise is due. They criticize them when criticism is due.
    These managers, however, are very outspoken when they see 
taxpayer abuse. They have been very vocal to upper management.
    Upper management has now targeted them and has made it 
clear that because of their lack of support of upper 
management's position in dealing with issues like this, they 
will not be tolerated for future employment.
    Senator Baucus. Is there general agreement that more of the 
problem is so-called upper management than lower management?
    Witness No. 5. Yes.
    Senator Baucus. You all in general agreement.
    Now, what do you mean? Could you describe for us, define 
upper management? Who is upper management? What are we talking 
about here?
    Witness No. 5. Within my district, we would define the 
upper management as anybody above the first-line manager.
    Senator Baucus. Anybody above the first-line manager.
    Could anybody else add a little more flesh and blood to 
that?
    Witness No. 2. Grade 15.
    Senator Baucus. Grade 15.
    Witness No. 6. And above.
    Senator Baucus. And above.
    And how many upper managers are we talking about? Roughly, 
how many are there?
    Witness No. 2. Half a dozen or so just within the region.
    Senator Baucus. In the country, how many? You know, 
somebody? You must have some idea, a rough guess, just rough?
    [No response.]
    Senator Baucus. You don't know.
    Witness No. 6. Fifteen's and above, I'd say 50 to 100.
    Senator Baucus. Roughly, 50 to 100 upper management. Okay.
    Now, another point strikes me, very often when there is a 
problem, Congress holds a hearing maybe like this.
    We pass a law hopefully to correct the problems. And often, 
not much happens for lots of reasons, primarily culture 
inertia. That is that the bureaucracy is just too big and large 
that not a lot happens.
    I'm concerned, although these hearings are very good and 
although we ought to pass some legislation that's going to 
help, potentially correct some of this, and although I suppose 
some senior management listening on this are going to try to 
perform a little bit and issue some directives and so and so 
forth, but maybe not a lot is going to happen that's positive 
as a consequence of all this.
    And after, you know--and that is after about two or 3 
months, five to 6 months, it will be business as usual.
    And it seems to me that in order to prevent business as 
usual, one way is to have a very strong independent, very 
independent sort of inspector general who lots of powers, who 
can go in and get the information he or she needs, and who is 
truly independent of the Service and similar to some of the IGs 
and perhaps some of the departments.
    I'd like maybe No. 6 to comment on the degree to which we 
need a stronger, more powerful, more independent inspector 
general.
    Witness No. 6. You are preaching to the choir when it comes 
to that suggestion. I think that a strong, fully funded, 
independent inspector general could only help.
    Senator Baucus. And how much would that help?
    Say we've got--say we have just what you want, how much 
would that help?
    Witness No. 6. As long as it's not the same inbreeding that 
we have now, as long as it's a different independent 
organization.
    Senator Baucus. Yes. Independent, you know, lots of powers, 
you know, basically what you would like to set up yourself, how 
well would that work?
    How much of that would solve the problems we're now talking 
about?
    Witness No. 6. I can't say it's going to be a panacea and 
solve all our problems, but it's better than the current 
situation.
    Senator Baucus. But you do think that's probably the 
essential condition. That is we need to do something like that 
so we're not always back here.
    Witness No. 6. Yes, sir, I do. But I also think that as 
long as the IRS knows that they're accountable and that other 
people are watching and that there is strong oversight, many of 
these abuses and lapses of ethics won't take place.
    Senator Baucus. Does anybody have any other comment on that 
subject?
    [No response.]
    Senator Baucus. You generally agree with No. 6?
    Witness No. 5. I believe that if upper management knows 
that they will be held accountable, that there will be 
penalties to pay for their infractions, then things will 
change.
    As it stands right now, upper management knows that if 
there is an inspection issue that comes up in which they've 
been reported for wrongdoing that their manager will support 
them and ask that inspection disregard the issue and overlook 
it.
    If you have an independent agency, then they are not going 
to disregard the issue.
    Senator Baucus. You, No. 6, used the word that I think is 
also important here. And that is ``oversight.''
    I believe that Congress generally fails at one of its 
responsibilities. And that is oversight.
    That we have lots of hearings, lots of new legislation, 
passed lots of legislation out of committees and so forth, but 
we do not do enough oversight.
    And by oversight, I mean, calling up some of these Grade-15 
folks and asking them about this and that, so on and so forth 
with significant frequency.
    Again, I would like your comment on the degree to which 
that might help us prevent from us buying ourselves 6 months 
from now from doing business as usual.
    Witness No. 6. If upper management knew that they could not 
hide behind the shield of taxpayer secrecy every time a member 
of this body called them and that they would be personally held 
accountable, I think that would go a long way to moving this 
issue along.
    Senator Baucus. No. 2.
    Witness No. 2. No. 6 stole my words. Disclosure is a big 
problem. You have to have access to the information to be able 
to delve into complaints, number one.
    And then, the people responsible for the abuse have to be 
held accountable. They need to pay for their own attorney.
    The government affords managers an attorney because the 
agency has something to protect. And maybe, managers would 
think twice about following the regulations.
    Senator Baucus. Mr. Chairman, I don't have anymore 
questions.
    I want to thank all of you very much for the service you're 
performing here. It's you're true Americans.
    We live in a democracy. You're doing what people in a 
democracy should do. And I very much--and I think I can speak 
for the entire committee and say how much we thank you for all 
of your efforts.
    And it's my hope, Mr. Chairman, too, that we can in 
legislation that we hopefully will pass provide for a very 
strong, independent IG or something similar because that will 
help.
    And it's also my hope that we can have some much more 
frequent oversight hearings because I do believe oversight is a 
good part of the solution here. Thank you.
    The Chairman. Well, I would say to my distinguished friend 
and colleague, of course, that's the reason I began these 
oversight hearings now.
    Senator Baucus. Right. And I compliment you for that.
    The Chairman. I agree very strongly that there should be 
continued monitoring of the organization to ensure that it is 
operating as intended by the Congress and by the President.
    Senator Baucus. Thank you.
    The Chairman. I would also say that as one who is very much 
involved creating the inspector generals, I think that is also 
something that needs to be looked upon because there has to be 
some independent check to ensure that the agency is functioning 
as intended.
    Senator Baucus. Mr. Chairman, if I might ask one more 
question if possible very briefly?
    The Chairman. Sure.
    Senator Baucus. And this might not be appropriate because 
the sponsor is not here. And that is your judgment of the 
degree to which the proposed commission to oversee----
    Senator Kerrey. Yes.
    Senator Baucus. Is a solution to this problem.
    Witness No. 1. This is Witness 1. I am from the outside. I 
represent taxpayers before the IRS. And I don't see how the 
restructuring is going to protect taxpayers from abuse.
    As another has said, there is always going to be IRS 
collections. And as long as you've got people out there 
enforcing collections, you're going to have abuse.
    The restructuring I don't believe is going to help protect 
taxpayers from abuse.
    Senator Kerrey. Mr. Chairman, just in the interest of 
wanting to respond, first of all, the bill that we've 
introduced has governance and management as the first section. 
The third section is protection and rights.
    There is much more in the bill than just the restructuring.
    And I have here a letter that the Deputy Treasury Secretary 
Summers has written to Senator Rockefeller, saying that not a 
single staff member has asked about use of revenue measurements 
as goals, as has been mentioned by a number of these employees.
    The letter says, ``Not a single staff member or member of 
Congress expressed any concerns about the IRS' use of revenue 
measurements or suggested there be less emphasis on the revenue 
measurement goals.''
    That simply isn't true. Our commission both staff and 
members and in our final report called for a complete redesign 
of this system.
    He is saying essentially, we sent a report to Congress and 
Congress didn't express any concern about the use of 
measurement.
    And I would just--I would say that that makes the case that 
there is a bunker mentality over there trying to protect the 
status quo rather than trying to engage in a useful debate 
about how to improve the system.
    The Chairman. Let me just intercede once again because time 
is moving on. As I started to say, I think an independent 
inspector general is one approach to the problem.
    There is no question that there have to be some checks and 
balances built into the system that do not exist currently.
    I would say to my distinguished colleagues that I think it 
is a mistake to think that any one or two changes are going to 
make the kind of cultural change that I think is necessary.
    It's going to be important to look at the organization.
    I commend the Commission for what it did. And I think 
that's something that we are going to have to wrestle with in 
the very near future.
    I think we have to do something about correcting the 
computer problem.
    The availability of information and data to this committee 
is an important part of opening up the system.
    But I have to say that by coming here today, I think what 
you people have demonstrated beyond question that much of the 
problem is management, that there has to be a change in the 
outlook of the organization. It is not right for this agency to 
look upon itself as a law enforcement agency--as too many 
people currently do.
    Yes, there are some areas in which that is the agency's 
responsibility, and its duty. But its primary responsibility is 
to serve the American people, the taxpayer, and I believe this 
is something of which we must never lose sight.
    I want to----
    Senator Moynihan. Mr. Chairman, can I make just one 
comment?
    The Chairman. Oh, yes, of course.
    Senator Moynihan. Just that it is my experience, it's 
curious that you always learn something if you ask how they do 
it in Canada?
    And sometimes, you know, it's better and sometimes not, but 
you learn something.
    Revenue Canada is not a law enforcement agency at all. Law 
enforcement is done by their equivalent department of justice 
if they decide that there is some legal action needs to be 
taken.
    The Chairman. Perhaps, you and I should go to Canada and 
look at the system.
    Senator Moynihan. It would be called--as long as the 
weather is bad, we can get away with it. [Laughter.]
    The Chairman. But I want to thank each one of you for being 
here today. I think you can see the interest, the questions 
that you have made a very, very real contribution to good 
government and that you have demonstrated that this is an 
agency that needs change.
    We all seek the same thing. And that is constructive 
reform. I want to commend you.
    I have to say I disagree with those who say that you have 
no reason to fear. I will assure you----
    Senator Moynihan. Well, if they do, they can always call 
you, can't they?
    The Chairman. They can always call you and the 
distinguished ranking member, as well as members of the 
committee because you have done two things.
    You've made, as I said, a major contribution to good 
government. And you also have demonstrated that by your 
presence and by your testimony that the vast majority of 
Federal employees are good, hard-working American citizens.
    And I just want to thank you for your contribution.
    We now have to clear the hearing room to allow the 
witnesses to exist. I ask the witnesses to remain seated until 
directed to exit by the Capitol police.
    I would ask that the Capitol police clear the room at this 
time.
    I would ask that the cameras be turned away from the dias. 
There would be no photographs or video recording of the 
witnesses leaving the room or building.
    And it's my intent to reconvene the committee at 1:00 
o'clock.
    [Pause.]
    The Chairman. Again, I would ask that all the cameras be 
turned away from the dias.
    [Whereupon, at 12:27 p.m., the hearing was recessed and 
reconvened at 1:15 p.m.]

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order. Before 
I welcome our next witness, I want to take a moment to express 
our sincere appreciation for the witnesses who have testified 
thus far.
    These hearings would have been impossible without the 
contributions of the men and women have come forward, 
particularly those who work on the front lines of the IRS 
itself.
    These witnesses have painted a troubling picture of the one 
government agency that touches all our lives.
    And their testimony has put a tremendous responsibility on 
the Senate Finance Committee, the committee responsible for the 
IRS.
    And as these hearings have progressed, I have been 
overwhelmed by the number of calls, letters, and faxes we have 
received.
    Americans are looking to us, to this committee to ensure 
that integrity and fairness are the foundation of the IRS.
    We have identified many egregious problems these last 3 
days, problems that have devastated the lives of honest 
taxpayers, problems that raise serious concerns among IRS 
employees themselves.
    Now, this certainly is not the purpose of the Internal 
Revenue Service.
    But as Deputy Treasury Secretary Lawrence Summers confirmed 
today, there is a problem within the culture of the IRS.
    We must get the agency back to its mission statement to, 
and I quote, perform in a manner warranting the highest degree 
of public confidence in the IRS' integrity, efficiency, and 
fairness.
    Targeting vulnerable taxpayers, treating with them with 
hostility and arrogance, using unethical and even illegal 
tactics to collect money that sometimes is not even owed, using 
quotas to evaluate employees, and retaliating against men and 
women who work within the IRS do not agree with this mission 
statement.
    It is behavior that not only is unacceptable, but 
reprehensible. And the problems we've heard are 
multidimensional.
    The solutions will require a careful study, continued 
oversight, and a combined bipartisan effort, an effort that 
must include the Senate, the House, the Secretary of the 
Treasury, the commissioner, taxpayers, and most importantly the 
employees of the IRS.
    Together, we must work for a solution. We will work for a 
solution. And I won't be satisfied until Americans see a real 
difference.
    As long as I am chairman of this committee, public 
confidence in our tax system and its administration will remain 
the highest priority.
    Now, after 3 days of often emotional hearings, none can 
doubt that serious problems exist.
    Those few who still may be in denial need only reread or 
review what has taken place in this committee room. We have 
listened to disturbing truth.
    Now, let these hearings begin a process that leads to 
necessary and lasting change, change that will protect the 
taxpayer, change that will create a better environment for 
employees within the agency, and change that will emphasize 
service in the IRS.
    I would now like to welcome the Acting Commissioner of the 
Internal Revenue Service, Mr. Michael P. Dolan.
    Mr. Dolan, thank you for testifying today to provide agency 
insight into the troubling problems within the IRS.
    Now, it is our practice in these oversight hearings to 
swear in all witnesses.
    Will you please rise?
    [Whereupon, the witness was duly sworn.]
    The Chairman. Thank you. And please be seated. Mr. Dolan, 
please proceed.

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

    Mr. Dolan. Good afternoon. Mr. Chairman and Senator Gramm, 
I appreciate the invitation to come on this the third day of 
hearings.
    It is the first opportunity I have had to appear before the 
Senate Finance Committee in your oversight role.
    And I think I would like to start out, if you will, where 
you left off, Mr. Chairman.
    I don't come here in denial. And I come here having taken 
you seriously on the day that you announced these hearings and 
on the day that you opened this week, in the sense that I 
believe that the committee looks for an opportunity to help 
solve the problems that have been identified both this week and 
that collectively we know exist.
    And so what I hope to do this afternoon is offer some 
perspective on how it is I think that certainly we in the 
service and maybe we collectively have the capability of 
getting at some of the issues that have been identified this 
week.
    I also guess I have to tell you that as somebody who has 
spent his career in public service and specifically in the IRS, 
these have been a very painful 3 days, painful because it 
distresses me greatly to see the mistakes we've made, to see 
the impacts of those mistakes, and perhaps more distressed to 
sit and watch this morning's testimony where men and women, my 
colleagues, sat before the committee.
    And even where I might not understand the facts as they do 
or where they might have a perspective different from mine, I 
couldn't help but be taken by the seriousness of their 
comments, the genuineness of their willingness to come forward.
    And so my accounting of the facts almost becomes immaterial 
to the extent that they've got that concern.
    And one of the things that concern me is in the questioning 
that the members did this morning.
    There seemed to be a reluctance on whether or not there 
would be a process by which those people could come forward and 
perhaps share more insight into things that they thought needed 
addressing.
    And, Mr. Chairman, with your permission, I would like to 
work with you and the staff to find some way either through the 
intervention of the Treasury Inspector General or some other 
means by which we can invite those employees and any other 
employees that have been in contact with the committee to come 
forward with the things that we should hear and we must hear.
    What I would like to do at the beginning though is 
stipulate that in the course of the week, you heard from 
taxpayers whose cases we handled very badly.
    And for that, as I have said earlier and I say today, I am 
extraordinarily sorry.
    As I listened to the statements that both the members of 
this committee made and witnesses during the week, it struck me 
that there were three basic themes that were sounded in the 
course of the week's hearings.
    The first one is clearly, as I said, individual cases were 
identified that were handled badly. It caused the affected 
taxpayers to suffer in ways they should not have.
    We were a part of disrupting their lives. And this is 
wrong. There's no excuse for it. It's unacceptable.
    The second theme that I think I heard this week has to do 
about the IRS culture. And I think the discussion that we----
    The Chairman. I'm sorry. The what?
    Mr. Dolan. The IRS culture.
    The Chairman. Oh, okay.
    Mr. Dolan. And as I at least listened to the week's 
witnesses and tried to glean from what you've heard, it strikes 
me that those who have asked you to concentrate on the culture 
prompted the question of whether something about the IRS 
culture indeed causes us to deal with taxpayers in a callous 
form, an overly aggressive form, or perhaps a form of even more 
seriousness.
    The third issue that strikes me that came out in the course 
of the week was one where I would lump two kinds of concern I 
heard.
    One was on basic fairness. And that was manifest in the 
form of several concerns about whether smaller taxpayers as 
contrasted with larger taxpayers were focused on 
disproportionately.
    And the second part of that fairness issue I think had to 
do, Mr. Chairman, with something I think you mentioned in your 
opening, the business of quotas and goals.
    And so you probably could stack the week's testimony 
differently, but those are three themes that I believe at least 
from my listening were ones that summarize some of the more 
crucial points and are the ones that I would like to address as 
directly as I can this afternoon.
    Maybe, before I do that, I'll tell you something that I 
think you probably both know. In preparation for these 
hearings, it's been real clear to me that both Secretary Rubin 
and Deputy Secretary Summers are vitally interested, not only 
in the hearings, but the issues that underlie the committee's 
attention.
    They have had some considerable interest in the last 
several years with improving our customer service capacity and 
treated it actually as one of their central priorities.
    Upon the close of this hearing, I will clearly share with 
them both the assessments we've made of how cases got botched 
and in addition will talk to them on a forward-going basis 
about the things that need to be done.
    With respect to the specific cases, you heard from four 
taxpayers that were legitimately frustrated about the way the 
IRS dealt with them.
    These taxpayers didn't receive the treatment that they 
deserved.
    And while each of the cases was different, the end result 
was indisputable. We were wrong in the way we handled many 
aspects of the cases.
    And I appreciate that at this stage in their ordeal, an 
apology does little to correct the frustration they felt.
    But I would hope that perhaps in apologizing for them, they 
may take some solace in the fact that we will deal with their 
cases and the outcome of their cases in a way that will 
hopefully result in others being kept from that same 
experience.
    You said something though, Mr. Chairman, at the beginning. 
And I think others have repeated it.
    I think in all fairness to the work force of the IRS who 
succeed in doing a very complex job well, these hearings have 
to be placed ultimately in a larger context, the context of the 
millions--the millions of successful taxpayer interactions that 
IRS has each year.
    And many of you urged that in your statements. And I know 
appreciate it. And I know my colleagues appreciate it.
    Notwithstanding that fact, I think there are a number of 
actions we've got to take immediately to try to preclude the 
kind of case incidents that you saw before this committee 
earlier this week.
    And in preparing to come before you, a series of us have 
spent a lot of time with these cases, perhaps not as much time 
as some of your staff, but a lot of time.
    And in so doing, I think we've gotten a very graphic sense 
for some of the frustration the taxpayers experienced in these 
instances.
    And one of the things I think is incumbent on me is to 
demonstrate in some visible way what the impacts of this 
frustration have been to the rest of our organization so that 
the organization doesn't treat this as a set of 3 days of 
hearings and four taxpayers, but as a device by which we find 
out how to do things differently, find out how to not cause 
these problems to recur.
    As a consequence, I'm in the process of doing several 
things related directly to what this hearing has brought to 
bear.
    In the first instance, what I'm doing is asking each of the 
regional commissioners under whose jurisdiction those four 
cases reside to take the transcript of this hearing, to take 
the witness' testimony, to take the case file we assembled, and 
to take that back to the individual office in which the case 
originally arose.
    And to the extent there was more than one office, as there 
was in several occasions, to take it, break the case down, 
understand from the first moment what happened in the case, 
understand where the errors were made, and perhaps more 
importantly identify the places at which somebody could have 
fixed it. Because as I looked at these cases, as objectionable 
in many instances as the original error was, perhaps more 
troubling was the opportunity that people had along the way to 
recognize something off the track or to recognize that there 
was a capability to fix it.
    The second thing that we are going to do in connection with 
that is--and I make this kind of an invitation to you, Mr. 
Chairman.
    I know you have said on several occasions when you made 
your announcement last year, you had a lot of people pick up 
the phone, fax you, write you. Even in the course of these 
hearings you talked about other cases.
    I would like to make to you the offer that for any one of 
those cases or any number of those cases that the committee 
staff feels they want to turn over to us, I will put together a 
special task force under one of the best project managers I can 
find. And we will work those cases to conclusion.
    And while they are in our custody and while we are working 
to solve them, I will make a report back to the committee every 
30 days on the status of them. And we won't quit until we're 
done.
    The third issue is that I'm asking this afternoon our 33 
district directors and our 10 service center directors to take 
the last several months of correspondence into their office, 
not necessarily the correspondence that found its way to the 
Problem Resolution Office or found its way to them, but take 
and look at the correspondence that has come in the last 
several months and look for the cases, look for evidence that 
things are off track, look for the indicia that something, some 
taxpayer, some practitioner, some Senator or Congressman for 
that matter has registered something that may well not be 
getting attention.
    I think out of that, we will do two things. Hopefully, we 
will identify some cases that we can put under control and 
solve.
    And secondly, I think it will create an even higher energy 
level at the most senior levels of the organization to be 
attentive day in and day out for the cases that in some early 
stage are ones that we can take and do something about.
    By these actions, I think we will not only take the lessons 
such as they are from the four cases that you all examined 
earlier in the week, but I also think that it will give us an 
opportunity to dramatize back to the organization that we are 
serious, not about getting four cases behind us, but serious 
about doing some things that will help us prevent these kind of 
cases from recurring and hopefully avoid some of the 
frustration and stress that was evident in each of the 
taxpayers that you brought before your committee.
    The second area is this area of culture. And to me, that's 
a far more complex issue. And you as well as I know some of the 
issues.
    The Chairman. I'm sorry. I couldn't hear you.
    Mr. Dolan. The second issue was culture. I'm sorry.
    The Chairman. Okay.
    Mr. Dolan. I think that when you look at a culture, I think 
again it's a matter of putting, as you said your first day, 
things into perspective.
    If you think of our system as a whole, the vast majority of 
Americans meet their tax obligations.
    In most cases--and there was some discussion I heard this 
morning--and Senator Moynihan was positing the difference in 
compliance rates.
    But roughly speaking, we think there is an 83-85 percent 
level of compliance which means an awful lot of people are 
meeting regularly their tax obligation.
    For those millions of people, their normal interaction with 
the Internal Revenue Service is the act of filing, paying, 
getting a refund millions of times a year.
    And for those people, what the Internal Revenue Service has 
been trying to do, particularly in the last several years, is 
make it easier.
    Those are folks for whom the burden of staying compliant, 
for whom the burden of operating effectively within the tax 
system, ought to be a priority.
    And we have tried increasingly to make it a priority at the 
Internal Revenue Service to make it easier to file.
    And you see such instances as the kinds of progress we've 
been able to make. And one of the Senators mentioned the other 
day, in our electronic filing, the capability of allowing next 
year up to 26 million Americans to satisfy their tax filing 
obligation with a 10-minute, push button telephone interaction.
    We've looked for ways to put the forms, the publications, 
the information that you used to have to go to a bank or a post 
office or one of our offices to get, available on the net now; 
117 million times during the filing season last year, people 
came there and got what they needed.
    We've looked to beef up our ability to handle things over 
the telephone. Last year, we got in excess of 100 million live 
assistor and automated telephone calls.
    I believe we will get many more this year with the 
introduction of a major piece of tax legislation.
    That's going to create a tremendous interest in how those 
benefits extend to me, how those obligations extend to me.
    My point is not necessarily to over dramatize that, but to 
suggest that in terms of this culture that people have 
commented upon, I believe if you look at it in the context of 
the last couple of years, there is evidence that the IRS has 
tried very hard to make a priority of serving the taxpayer that 
is compliant, of serving the taxpayer that is wrestling day in 
and day out to meet their obligations.
    Now, on the other side of that are taxpayers who do not 
file. I've heard again, from almost every one of the members of 
this body--Senator Gramm, the other day, you said quite 
eloquently that you don't stand for the proposition of people 
who ought to pay and do not pay.
    And I don't think anybody on this committee does or in the 
Congress does.
    In those cases, I think we clearly are compelled to use the 
enforcement tools that you have given us almost out of fairness 
to the people who do comply.
    Now, the question that has been before this committee is, 
are those tools used as you want them to be used?
    Are they used with the sensitivity and with the care and 
with the precision the Congress authorizes to use them?
    I think there have been some very valid questions raised in 
the course of the many people you've heard from about whether 
in each and every case they are.
    I think that's a very serious issue. And it's an issue that 
either in the context of this oversight, certainly in the 
context of the IRS' overall responsibility, we need to pay 
absolute care that those kinds of tools are used with, not only 
the utmost of precision, but with respect for the individual 
taxpayers.
    One of the things that may have bothered me the most, both 
in this morning's discussion and some others, has been the 
notion that wrongdoing exists and the wrongdoing doesn't get 
surfaced, doesn't get dealt with or some climate exists where 
it's not desired to be dealt with.
    That's not my experience. And I don't think it's the 
culture of the Internal Revenue Service.
    Our rules of conduct are fairly explicit, are very 
explicit. And the rule of conduct, and I quote, says, ``Any 
employee who has information indicating that another employee 
engaged in any criminal conduct or violated any of the Rules of 
the Standards of Conduct shall properly convey such information 
to the Inspector General or to the IRS Inspection Service.''
    One of the things I heard this morning were some questions 
about did those values work as they should? Were people as 
comfortable as they should be?
    And I think that's a fair question and one that I certainly 
will walk away from this morning's discussion wanting to know 
more about, wanting to look more about.
    But I say to you also, it does work to some extent. In the 
last 3 years, 475 employees have been disciplined as a result 
principally of the kind of referrals that come through those 
devices, the 475 employees in the area of some form of taxpayer 
mistreatment.
    Now, I can't tell you that that's the universe. I can't 
tell you that every one of those was handled exactly like I 
might handle it in retrospect.
    But I think the culture in place suggests it's an 
obligation to make those violations known. And the culture 
suggests that once known, the Inspection Service does take them 
and investigate them.
    And the culture is that once those investigations come back 
to management, action is taken when those kinds of 
transgressions occur.
    I don't put this before you as a perfect chapter in a 
perfect book, but I put it before you as evidence of a part of 
the culture that I do believe leads us in the direction that 
both you and we would have us go.
    Beyond the code of conduct, I think there are a variety of 
other things, some of which this body has actually caused to be 
which helps with this culture.
    I heard some conversation this morning that frankly doesn't 
square with the way I have seen the taxpayer advocate in the 
organization.
    I think there were some fair questions this morning, for 
example, about how collection personnel are used on detail or 
used as adjuncts to the advocate's office.
    We've looked at that almost every year since I can remember 
to make sure that we do have the right kind of balance there.
    But I think if you would do a poll and I suspect many of 
you have this information from your home staffs, I believe the 
advocate's office in the eyes of many frustrated taxpayers and 
in the eyes of many practitioners has been the kind of window 
of access, the kind of window of problem resolution that I 
believe stands for the kinds of things that this committee 
wants more of.
    And I believe it is not evidence of a culture that's 
callous, but evidence of a culture that recognizes that's an 
obligation we have.
    Again, I don't put before you a perfect picture of 
something without need for improvement, but I think it's an 
element that suggests that we invite those kinds of instances 
for resolution.
    Beyond that, there are a variety of things that again this 
committee helped put into place. Last year's TBOR 2 brought 
with it a complete process.
    That complete process for the first time has us 
categorizing the various and sorted complaints that we receive 
along lines that, not only will help us deal with perhaps 
somebody who misbehaved or conducted themselves 
inappropriately, but more importantly will allow us to group 
the reasons and will allow us to identify over periods of time, 
over quarters, over months that this kind of thing has happened 
too often.
    This part of the process, this officer perhaps, this 
transaction, this use of one of these enforcement tools is 
showing up far more frequently than it should.
    And so again, I make the point that I believe there are a 
number of processes that either have been put in place with the 
help of the Congress or that have gone in place as part of 
dealing with the culture issue in a way that I believe is 
positive.
    Now, despite the existence of these systems, I've heard 
many concerns during the 3 days that, as I said at the outset, 
disturb me.
    The outcomes that are demonstrated in some cases don't 
represent the kind of professional standard or performance that 
I'm telling you our culture is all about.
    So clearly, there are problems. Clearly, there is evidence 
that this is not a chapter that needs to be read through 
quickly.
    It's a chapter that needs to be kept open. It needs to be 
improved.
    And regardless of how small that minority of employees 
might be that are associated with some of those cases, it's no 
less offensive, the misuse of judgment, the poor handling of a 
case. Whether it's in a few cases or several cases it's 
objectionable. And it's not right.
    These kinds of instances I think, as again, Mr. Chairman, 
you said pretty eloquently, erode the confidence of the whole 
system.
    If IRS personnel are not viewed as doing their job as 
absolutely professionally as possible, this erodes the 
confidence in the entire system.
    Again, I think we have to look for ways to engage the 
organization in the lessons learned out of this hearing, and 
there are two or three things that I'm doing in this arena 
again as a direct outgrowth of the kind of dialogue we've had 
both in preparation for this hearing and in the hearing.
    In the first instance, what I'm doing is taking a page out 
of a couple of our district directors' books that seem to work 
pretty well.
    And what I'm doing is asking every one of the 33 district 
directors to devote 1 day of the month exclusively to the 
business of that director being out with key staff in his or 
her district and advertise it as the day bring your problem 
cases to the district director.
    And so you can be an individual taxpayer. You can be a 
practitioner. You can be anybody who believes you have one of 
these cases that's been out there in your judgment flopping 
around too long.
    This is something that we've seen work in a couple of 
districts. And I believe if we ask each of our district 
directors to do it, it will give one more point of access to 
people who have felt frustrated by their ability to get those 
cases solved.
    Secondly, what we are going to do in the next month to 45 
days is bring to town every one of our heads of office.
    We're going to bring to town everybody who runs our 
collection, our examination, our customer service activities.
    Again, we are going to put in their hands transcripts as 
well as videos from this hearing.
    We're going to break down the cases that was examined in 
preparation for this hearing.
    We're going to go over the testimony that was given by our 
employees, by our former employees, by practitioners.
    And we are going to engage that group and their ideas, both 
about perception and about reality and again try to solve this, 
not as something that somebody comes to a hearing table and 
makes promises about, but as something that an organization 
gets engaged around.
    Thirdly, what I want to do is reinforce with every employee 
in the organization. I will do that early next week. I will 
write to every employee in the organization, reminding them of 
their obligations regarding the Problem Resolution Program.
    We have a very specific set of instructions that are out. 
Some of what I heard in the last couple of days suggests to me 
at a minimum that folks need to be reminded that when you're in 
an interaction with a taxpayer and see you it going off the 
track, the Problem Resolution Program is a place to get that 
case referred. So we will do that early next week.
    And two last things, something we have done earlier this 
year in both our appeals activity and in our general audit 
program.
    We have begun to send out customer satisfaction surveys 
essentially at the end of the transaction, at the point that 
somebody's appeal was complete or at the point that an 
examination was complete.
    And the examination is a good example because typically 
what we have done in the past in the examination is pull a 
sample of audits.
    And we would pull a sample for purposes of internal quality 
review. And we would examine the results of that case against 
the auditing standards. And we would essentially grade our 
effort.
    Well, in the past, that exercise did not include any input 
from the taxpayer. This past year, we began to do that in the 
general examination program.
     In the next 6 months, we will extend that same approach to 
the collection program. You heard an awful lot about collection 
cases in these 3 days.
    It strikes me that that will be a very valuable device for 
us to ask at the end of my case being closed in collection, 
whether it's closed by full payment, whether it's closed by an 
installment agreement, whether it's closed by being written 
off.
    I think we will get valuable feedback from people about 
their interaction with the Internal Revenue Service.
    And the last thing I think we need to do, Mr. Chairman, in 
addition to getting the leadership on board and engaged, as is 
particularly evident after this morning's panel, we need to 
have a device that makes it easy for people to get the 
perspective from the front line into the equation.
    And so I have asked the National Treasury Employees Union 
and their leader, Bob Tobias, to partner with us in putting 
together a nationwide assembly of front-line people where we 
will take the results of this hearing and many of the things 
you've heard in this hearing to that group.
    And we will ask that group, what about the goal setting 
process? What about your interaction with management?
    What about all these things that have come out in these 3 
days? What about those things that are dysfunctional?
    What about those things that you recommend should be 
changed? What about those things where you need help in doing a 
better job for the taxpayer you serve?
    And so at the end of the day, I believe that we are able to 
piece both elements of that together, the folks with the 
responsibility to run large parts of the organization, as well 
as the people who day in and day out are on the front line 
encountering the difficulties of their job, encountering 
hopefully many instances of effective use of these tools that 
will get them in the business of helping deal with the problems 
that have been identified this week, as well.
    I'm going into the third area, Mr. Chairman. And you could 
have called this probably different things.
    I set it up as a kind of a fairness and measures issue 
because the two things I heard the loudest were in the first 
instance the issue on fairness.
    And typically, although people used various kinds of 
colorful language, the way I heard that come back was that 
somehow or the other it is a strategy of the Internal Revenue 
Service to devote more of its enforcement resource on the 
lower-income taxpayer rather than the higher-income taxpayer.
    My personal perspective on that is that the data just 
doesn't bear that out. And I guess what I would like to do over 
the interim is have some dialogue with the staff about 
particularly this usually comes back as a commentary on the 
audit process.
    And I believe I could be--notwithstanding what I understood 
yesterday from Ms. Long to be different testimony.
    And I have taken, by the way, what Ms. Long said to you 
yesterday and referred that to the Inspector General because I 
believe there are some elements in what she said that need to 
be run down.
    But notwithstanding what she said yesterday, I think I 
could satisfy your concerns that that's not happening as some 
have suspicioned it might be.
    The second part of this is the business of quotas and 
goals. It's a little more problematic to me because while I 
might sit here and want to tell you that we are clearly 
following the law as written, you heard from a lot of people in 
the course of the 3 days that even if that is the case, there 
is an extreme concern about the way goals and measures and 
statistics have found their way into the lives of every front-
line employee and presumably their managers.
    And so without question, I think there's work that has to 
be done there. I think without question, there have been 
allegations made that the law has been violated.
    As you've been having your hearings and had people come 
before you, I've had people call me up. I've had people fax me. 
I've had people tell me that they believe there are violations 
in that arena.
    And so I don't sit before you to discount that at all. I 
think it has to be examined much more carefully than perhaps 
we've examined it in the past.
    In this arena, I do think that again it's important to 
remember as I sit before you today that we want to be very 
careful about the way measures find their way into the 
organization.
    But I will also sit before you some time in the future and 
you will want to hold me accountable under GPRA for the outcome 
measures that I submitted in my 1998 budget.
    And those outcome measures in the 1998 budget will be very 
specific. You will have appropriated or helped to appropriate 
funds for very specific purposes, many of them with very 
specific revenue assumptions behind them.
    And so I think the challenge for us as an organization is 
how to make that GPRA process work in the way that Congress 
intended it, how to set outcome measures, how to deploy those 
outcome measures in the organization, and yet at the same time 
not do it in a way that people will report the sense of 
artificial pressures, the sense of taking judgment, taking 
actions that their judgments would dictate otherwise.
    In this particular arena, again it's important that we do 
some things after what we heard in the last couple of days.
    And notwithstanding my obligation and our obligations as an 
organization to perform as we said we would perform in 1998 
under GPRA, what we are going to do is take some actions that I 
think will insulate some of what people said they felt.
    In the first instance, what we're going to do is we have a 
process in the Internal Revenue Service that people alluded to.
    I'm not sure anybody ever came right out and talked about 
it in great detail in the hearing. But we have a field office 
performance index.
    That performance index is the way that we have typically 
taken our performance measures. And at the end of a process of 
weighting and evaluating comparatively, we have ranked offices.
    And if some office knew an index of all of the measures 
that we're accountable to Congress for, they might be one or 
they might be five or they might be 10 or they might be last.
    And it's clear to me from both what you've heard and what 
I've heard that that's producing a dysfunctional outcome.
    I have terminated that and will not use that relative 
ranking because it's producing the wrong outcome.
    Secondly, we have had a practice of taking our GPRA goals 
and distributing them down into the organization, so that a 
district office or a center would get its piece of the GPRA 
goal.
    Again, what I think I heard in the last couple of days is 
there is some parts of that deployment that are problematic.
    And so what I have done is suspend the part of those goal 
deployments that have to do with allocating any specific dollar 
requirement.
    So while I will be on the hook to the Congress to perform 
as I've said I would perform with respect to revenue, I will 
not deploy those revenue-specific goals down to the districts 
or centers again as a way of taking what is even the perception 
of the wrong kind of pressure on folks.
    Lastly, maybe one other thing. And it came up by reference 
of one of your witnesses.
    One of the things that has happened from time to time in 
our examination activities, people have thought that when we 
added penalty revenues to the tax assessment revenues, perhaps 
we were sending a wrong signal.
    Perhaps, we were saying to people that penalties are 
designed to be revenue raisers.
    And that's not why you wrote them. And that's not how we 
should implement them.
    And so another one of the things that I will do immediately 
is stop including any penalty revenues in the ways that we 
report the assessment activity for examination.
    We will be accountable to impose the penalties correctly. 
We will be accountable to collect them and pay them over.
    But we are going to take them out of our measures because 
again, I think what we've heard is there is the potential that 
that sent the wrong message.
    And lastly, you heard a number of times and even when you 
didn't hear it, I've heard it loud and clear that people 
question whether this prohibition on goals and quotas is really 
working as it's intended.
    Now, again, one of the things that I can tell you is that 
quarterly, we do, as the Taxpayer Bill of Rights suggests we 
should do, ask every head of office to certify that it's 
working as it should.
    We ask them to surface any examples of it not working as it 
should.
    Up until the last 3 days I would have had confidence that 
that was producing the end result that I thought it was 
producing.
    What I've heard in the last 3 days makes me question that. 
And so what I'm going to do is ask the GAO to come in and work 
to see whether this self-certification process that we've had 
in place since the inception of this provision in 1988 in the 
Bill of Rights, whether that certification process is working.
    And if not, to propose an alternative way of ensuring that 
we enforce that provision in the way that the Congress intended 
and taxpayers deserve.
    I've probably gone longer than you expected me to go. And I 
apologize for that.
    But I think in accordance with 3 days, there have been a 
lot of things out there that warranted my providing you some 
response. I've not tried to be exhaustive by any means.
    I look forward in the future to some further opportunity to 
work some of these deeper.
    But before I close, I will tell you that again as a 26-year 
civil servant who sat through three days of this and, as I said 
at the outset, it has been pretty painful, I'm disappointed 
that we handled the cases--many of the cases the way we did.
    I think it's important to recognize collectively and 
individually that we've erred. And it's important to know where 
we need to improve.
    I haven't spent much time, except for a couple of brief 
glimpses, talking about the millions of things that work right 
week in and week out.
    Not unlike any other business or any other enterprise, the 
thing that gets the activity, that gets the attention is 
typically not the millions of transactions or the millions of 
interactions that are going right.
    But I would certainly not represent well the 100,000 
employees of the Internal Revenue Service or the tax 
administration process in general if I didn't again ask you to 
work with us in this larger context.
    Clearly, there are problems. Clearly we are before you, not 
to be defensive, not to suggest they didn't occur, but to do it 
in a context that hopefully respects that many, many things 
about today's system work well and also particularly the many 
men and women who do such a complex job well.
    I think we're an organization that without question is in 
the midst of a tremendous amount of change.
    Much attention has been paid to modernizing our computer 
systems. We're in the business of modernizing the entire 
process.
    Clearly, the computer systems are now at a point where with 
the architecture and the blueprint that have been released in 
the last 6 months, I think we're on the verge of bringing to 
bear some of the technology that will help in many of these 
areas.
    Maybe as importantly, we are about 30 days away from what I 
think is a very exciting set of efforts where we have joined 
the Treasury Department and the Vice President and NPR to look 
at the entire customer service focus in the Internal Revenue 
Service.
    In the middle of October, a group of about 50 or 60 front-
line people will come back to us with what I think are some 
promise of even better ways of serving the American taxpayer.
    I guess I close with saying we've not only heard you this 
week, we've heard the taxpayers, the employees, the many people 
who have come before you.
    I would also like to tell you in hearing that that we 
understand our obligation to improve. We understand our 
obligation to act constructively on the information that you've 
helped bring before us.
    And I would welcome the ongoing opportunity to work both 
with the members and the staff of this committee in an 
oversight role or in any other role you choose to see that we 
make the progress that the American taxpayer deserves.
    Thank you. I have some colleagues with me.
    To the extent that your questions go in areas that I get 
out of my depth, I would like to have the ability to bring them 
to the table. But I'm now prepared to respond to your interests 
as best I can.
    [The prepared statement of Mr. Dolan appears in the 
appendix.]
    The Chairman. Thank you very much, Mr. Dolan. Let me start 
out by saying that I think in order to remedy what I think is a 
very, very troublesome situation it is critically important to 
recognize that the problem exists. I am pleased, in part, that 
you agree there is a problem. But I have to say, in all candor, 
I am concerned that you do not understand the depth of the 
problem.
    You talk about culture. In the case of culture, you use the 
language ``serving the public.'' I think it is important for 
you to understand that the perception on the part of the public 
that the numerous witnesses that appeared before our committee, 
whether they were the experts, the authors, the individuals who 
have been studying the IRS, the taxpayer cases we presented 
yesterday, or whether it is past or present employees, they all 
expressed a very deep-rooted concern that in the IRS the 
culture is not based on service, it is not even citizen 
friendly, but you--the IRS--are viewed as an enforcement 
agency.
    I think in many ways that is the very root of the problem. 
Service has to be the basic characteristic of this 
organization. As you mentioned, most of the Federal employees 
are good employees, and with that I agree. I would also say 
that the majority of American citizens are law-abiding 
taxpayers.
    But what we are so concerned about is that there are too 
many instances, far too many cases that demonstrate otherwise. 
I think we are going to have to look at your organization, and 
how it is structured.
    I think we are going to have to look at the question of 
power, and whether all the power that has been delegated to you 
is necessary. But most importantly, I think, is this question 
that the organization has to be turned around to recognize that 
the basic purpose in dealing with the American people is to be 
consumer friendly. I cannot stress that too much.
    Mr. Dolan. Mr. Chairman, if I might. I appreciate your 
candor, and I know you want me to be equally candid in return.
    The Chairman. Please proceed.
    Mr. Dolan. I understand what you have said, and I think an 
awful lot of my colleagues understand. One of the dilemmas I 
have is that frequently people go down a road of discussion of 
culture and we all operate, perhaps, at different levels. Some 
of us are anthropologists and we are very sophisticated, and 
others of us are operating at a different level. One of the 
things we frequently do is set this up as if they are poles. On 
the one pole is service, and on the other pole is enforcement. 
I do not believe that is the case. I believe it is a spectrum.
    I believe that what you do is invest in the front-end kinds 
of service, the taxpayer friendly aspects that you talked 
about, with an objective in mind. The objective is having a 
system where people are able to be, encouraged to be, as 
compliant as possible.
    At some point in time though, if I am here and I am 
compliant, I think that person expects the Internal Revenue 
Service to deal with somebody who is not pulling their load. So 
I hope over time that we do not have to talk about this as if 
it is a right brain or left brain, but as if it fits together 
in some kind of a spectrum where we have to be sure we balance 
right.
    The Chairman. The point I am making is that the principal 
purpose of the IRS is taxpayer service. You are absolutely 
right, there is unfortunately a minority of individuals who do 
cheat, and do not want to pay their fair share of taxes. No 
question, but that we have to go after them on an enforcement 
basis. We all agree on that.
    But what I am concerned about, is the organization appears 
to characterize itself too much as being a law enforcement 
agency rather than taxpayer friendly.
    Mr. Dolan. I accept that feedback, and I appreciate you 
giving it to me. One other thing that I think you know, but 
just maybe as an antidote to this, and I think some of the 
other members may know, is last year we made a very conscious 
decision that I think put us in the direction that you have in 
mind.
    We took a fairly significant percentage of our people that 
would normally have been working in our service center 
compliance operations and we moved them over to try to move up 
our phone access, because the budget we had for telephones was 
only going to put us to a point. We knew that was not 
satisfactory.
    We knew taxpayers needed to get in during the filing 
season, so we took people that would otherwise have had 
compliance activities and moved them over for the very purpose 
that you have in mind. So you will not get an argument from me, 
Senator, about that being a very key part of why we are in 
business.
    The Chairman. I have a series of questions I would like to 
propound to you and I want you to have adequate time to answer 
them, but I would ask that you be as concise as possible.
    As you know, we had a number of your employees appear 
before us yesterday and today. Will you give me your personal 
assurance that no one involved in this hearing will ever suffer 
any form of retaliation by IRS?
    Mr. Dolan. Unequivocally I will give you that assurance.
    The Chairman. Unequivocally.
    Mr. Dolan. Unequivocally.
    The Chairman. We have talked about the use of goals and 
quotas. Is that a basis of evaluating employees' performance?
    Mr. Dolan. Well, as you heard me say, Mr. Chairman, the 
law, the policy, the practice, I believe, is that goals and 
quotas are not used. But what you heard is the same thing I 
have been hearing the last couple or 3 days, is that might be 
all well and good, but there are other measures at work in the 
organization that are either being used as surrogates for or 
are having the same effect. That is why I took the series of 
actions I did to take that set of potential other measures, 
albeit not goals or quotas, and if they are producing the same 
net pressure we ought to do something about them. That is why I 
have suspended the measures and changed the ones I have 
mentioned to you.
    The Chairman. Mr. Dolan, it concerns me, to be candid, and 
that is the purpose of this discussion.
    Mr. Dolan. Absolutely. Absolutely.
    The Chairman. It concerns me that you learned about this 
only over the course of the last 3 days.
    Mr. Dolan. I did not say that, sir. I said that with what I 
heard the last two or 3 days, I am not comfortable with the 
devices I talked about earlier, the quarterly certification, 
the reemphasis of the policy statement and managerial training, 
employee training. You had people come before you that at least 
make me want to go be sure that what I have been relying on as 
verification is accurate.
    The Chairman. Let me ask this question. Are you aware of 
the use of goals, quotas, and statistics to evaluate employee 
performance?
    Mr. Dolan. I have had several allegations made to me, which 
I have referred to Inspection. I am aware of the ones that have 
been made to you this week. I am also seeing in the quarterly 
certifications that come forward to me, there have in several 
of those certifications been one, two, three instances where 
somebody identified in a performance review or a branch review 
something that they thought violated the policy and they 
corrected it and reported it. So, I am aware of those 
instances.
    The Chairman. I would like to have them put up the San 
Francisco division examiner chart over there. Can you give him 
a copy of the sheet, too? Mr. Dolan, I will give you a minute 
to look at it.
    Mr. Dolan. Thank you.
    [Pause.]
    The Chairman. Let me ask you this. Would you comment on the 
San Francisco district mid-year report on goals for revenue 
agents?
    Mr. Dolan. I have about three or four pages of management 
information that are routinely gathered and maintained in the 
organization. About a third to a half of them represent the 
output measures that GPRA requires me to not only put in my 
budget, but to execute my budget against. What you have in some 
part here is the deployment of some of those GPRA measures, 
first to the western region, then subdivided within the western 
region to the San Francisco district.
    So what you have here is that. This does not represent a 
goal for a front-line revenue agent to go do X or a front-line 
revenue officer to go do Y. This is the thing I told you that I 
have suspended because some people in the course of your 
hearing or other venues have said, well, this may not be a 
goal, it may not be a statistic, it may not be a quota, but it 
is too easy for somebody to infer one.
    The Chairman. Just let me point out that this document has 
on it a category RA, that is revenue agent, of course.
    Mr. Dolan. Correct. Correct.
    The Chairman. The goal. The next column says, ``Goal: 
$1,000.'' Below that you have two others. Finally, ``TA.'' The 
goal is $1,012.
    Now, RA stands for revenue agent.
    Mr. Dolan. That is correct.
    The Chairman. Let me just point out. Now, I heard you, Mr. 
Dolan.
    Mr. Dolan. All right.
    The Chairman. I would just like for you to note that, for 
both RA and TA, ``A general improvement is needed. A large 
improvement can be made by bringing down hours per return.'' I 
do not care how you dress that up, that is setting a goal.
    If you give that to the employees, they are going to 
understand that they are obligated, if they want to do a good 
job, they have got to meet those goals. There is no way, in my 
judgment, that you can explain away this kind of chart. It is a 
failure to recognize what the purpose of this chart is.
    Mr. Dolan. I do not seek to explain it away and I am not 
trying to dress it up. What I would do is invite also your 
attention to things like cycle time, required filing checks.
    What this represents for the San Francisco district, and I 
do not know at my fingertips how many agents there are there, 
but the agents in the Examination Division of the San Francisco 
district have a wide sort of work.
    I mean, it makes no sense to say to somebody on each and 
every case in the San Francisco district, $1,000 or some other 
number. What this does is invite the San Francisco district to 
look at the work that is in inventory, look at how the hours 
are being applied, look at how the issues are being examined.
    The Chairman. Well, I would just point out that that is not 
the way your employees interpret it. I think that is the 
problem.
    Mr. Dolan. I agree with you. That is why I said what I did. 
I can sit here and explain this to you all day, but you have 
had people say to you, that is nuts. I am inferring a goal from 
that. That is why I suspended it. I do not want that result.
    The Chairman. And all I say, if you are an employee, if you 
are an RA and you see this chart, I do not know how you could 
interpret it any other way but being a goal for the success of 
your performance. But let us move on.
    Does the use of such goals violate the Taxpayer Bill of 
Rights?
    Mr. Dolan. Mr. Chairman, again, the way that I have tried 
to explain this----
    The Chairman. I am not asking you to explain.
    Mr. Dolan. All right.
    The Chairman. I said, does the use of goals----
    Mr. Dolan. In terms of the use of this goal at the division 
level to set a division allocation, I do not view this as a 
violation of either the law or the policy statement. The law is 
quite specific about using this as a goal or quota for a front-
line enforcement person or their manager.
    The Chairman. Let me ask you this question. Do you see any 
problems in using goals?
    Mr. Dolan. Absolutely. Absolutely.
    The Chairman. What are those?
    Mr. Dolan. The problems are that I can sit here and tell 
you, as I just have, that this was not designed----
    The Chairman. I would like you to answer my question.
    Mr. Dolan. All right. I am sorry. I think I am trying to 
agree with you.
    The Chairman. Why is the use of goals not in the interest 
of the taxpayer?
    Mr. Dolan. Because it produces absolutely the wrong 
results. If somebody is chasing a goal instead of looking at 
the individual fact pattern, choosing a course of action based 
on that fact pattern, it is absolutely wrong. It is not the way 
they should operate.
    The Chairman. Let me turn to my next question, as time is 
moving on. Monsignor Ballweg testified yesterday that IRS 
correspondence did not include any name to which to respond.
    My question to you is, how does this promote 
accountability? Is it not essential that an employee be held 
accountable for his actions and deeds? If the taxpayer does not 
know who it is, who does he hold accountable?
    Mr. Dolan. You are right on two scores, Mr. Chairman. One 
is the accountability, and the other is the plain, common 
customer interaction. Our notices need a lot of work. Last year 
we took 25 or 30 of them and redid them from top to bottom 
because they do not communicate well, they are not customer 
friendly, and they fail on the accountability side as well.
    We are in a process today of trying to go top to bottom 
with our notices and correspondence and do more of what the 
Monsignor and you suggest. You are right, they should be 
different than they are today.
    The Chairman. My question is, this is not a very 
complicated request. Are you requiring the employees to sign 
their statements when they are sent to the taxpayer so the 
taxpayer not only knows who to contact to resolve his problem, 
but who to hold accountable?
    Mr. Dolan. Senator, we do not sign all of the 
correspondence. We do have a requirement that the letters be 
signed. We do have a requirement in law that deficiency 
assessments be signed. There is a series of notices that are 
not signed. Some of those notices today also do not have a name 
on them, only a telephone number.
    The Chairman. If we are going to hold employees 
accountable, should their name not be on it?
    Mr. Dolan. I think that is a fair question. I guess I would 
like to be able to come back to you and maybe talk about the 
entire universe and maybe draw some distinctions between one 
kind of a notice and another.
    The Chairman. Now, let me ask this, Mr. Commissioner. Are 
you aware that the data of the Bureau of Labor Statistics are 
used by IRS employees to create phantom income or inflate a 
taxpayer's income? Is it appropriate, in your judgment, to use 
national average statistics to indicate the income of a 
specific taxpayer?
    Mr. Dolan. I think it is hard to make an absolute answer to 
that question, and here is the reason. You heard in one of your 
panels the same thing that has been debated fairly 
significantly over the last couple of years.
    There is at one and the same time a need to create a 
consistency and an even-handedness with the way the law applies 
across the land. There is, on the other hand, a need to have 
the flexibility to take into account individual taxpayer 
circumstances.
    We have used these Bureau of Labor standards as a way of 
finding some metric that would create for a particular 
geographical area a standard that would represent a fair way of 
looking at everybody in that geographical area.
    I have had people raise questions about whether, if you 
push that too far, you get the wrong result. I think it is 
possible you do, but that is how they are used and that would 
be what I think would be a legitimate usage.
    The Chairman. But, again, is it fair to a taxpayer to state 
his income or his expenses as what are shown to be the national 
average; are you not supposed to have their actual income, 
their actual expenses?
    Mr. Dolan. Typically it comes to bear, and if you ask me 
one more question I will get out of my depth here, so I am 
going to take my last shot at my depth. But I think in terms of 
two instances where this would come to play, one would be 
potentially an instance where we have sought a return, gotten 
no answer to a series of four or five inquiries, have 
information that the person either had a W-2, 1099, or 
something else, so we have to set out to create what we call a 
substitute for return. So it could enter there.
    The other place it could enter is if someone were to come 
to us and say, I cannot pay this whole thing. I either cannot 
full pay it and I want an installment agreement, or I cannot 
pay it and I want to compromise my liability.
    In both those instances we have to have some way of 
projecting, what are the living expenses, how are we to deal in 
some fair way with what the expenses are associated with that 
taxpayer so we do not compromise one way in one part of the 
country and another way in another part of the country.
    The Chairman. Just let me say that I think the Bureau of 
Labor Statistics would be shocked if they knew for what purpose 
their figures are being used. My concern is that it is much 
broader than what you are indicating now. I think that is a 
matter that ought to be looked at carefully and corrected.
    Mr. Dolan. I would be interested in pursuing, Mr. Chairman, 
further discussion of this so that I am sure that I am picking 
up on the concerns you have.
    The Chairman. Are you aware of instances where IRS 
employees have been instructed by their superiors to frame 
taxpayer or other IRS employees?
    Mr. Dolan. Absolutely not.
    The Chairman. You have no acquaintance with any?
    Mr. Dolan. No. Zero. None.
    The Chairman. Mr. Dolan, if it came to your attention that 
an employee of the IRS engaged in illegal wire tapping or had 
fabricated a case against a taxpayer or had framed another 
employee to gain a promotion, what disciplinary action would 
you take?
    Mr. Dolan. Well, the first thing I would do is make sure it 
got investigated so I had the facts. If those facts were the 
facts, they would be fired.
    The Chairman. Of course. Of course. You would fire them.
    Mr. Dolan. Absolutely.
    The Chairman. Are you aware of any such cases?
    Mr. Dolan. I am not personally aware. I did not examine our 
disciplinary logs to see whether there was such a case, but I 
am not, as I sit here before you, personally familiar with such 
a case.
    The Chairman. Are you aware of instances where IRS 
inspection employees have been instructed to use unauthorized 
wire taps or engage in other illegal activity?
    Mr. Dolan. I am not.
    The Chairman. Did you listen to the testimony of the last 3 
days?
    Mr. Dolan. Yes. Well, let me qualify it. I said in my 
opening comments that a number of things that were said in the 
first 3 days are things that we have made referrals regarding 
your investigation to the IG to have them pursued because they 
were issues coming to our attention for the first time.
    The Chairman. Are you aware of instances where IRS 
employees have browsed confidential taxpayer information of 
jurors or witnesses?
    Mr. Dolan. No, I am not.
    The Chairman. You are not aware?
    Mr. Dolan. I am clearly aware of the browsing challenge, 
and many of you know that I have been in the middle of that for 
the last couple of years, but I am not familiar with the juror/
witness issue.
    Again, I heard it said in this room and we will pursue that 
as best we can. That is why I asked you at the beginning, too, 
if we could find some way for the people that appeared before 
you this morning to get that information into some hands you 
and they trust so that we can pursue it.
    The Chairman. Just let me say, I would like to have you 
pursue it within the organization.
    Mr. Dolan. I would be happy to.
    The Chairman. I think it is extremely important. If true, 
it is a most serious charge.
    Mr. Dolan. I could not agree with you more. I believe that 
was an allegation made this morning. If that person is either 
comfortable making his or her identity known to me, or if you 
will have the staff somehow get the information to me, I am 
more than happy to pursue it.
    The Chairman. Are you aware that the General Accounting 
Office found that there is inadequate information to show the 
extent of the proper or improper use of liens, levies, or 
seizures authority or collection enforcement authority?
    Mr. Dolan. I believe I am familiar with what is a draft 
report out at the moment that was done at your request in this 
area. Yes, I am familiar with that.
    The Chairman. The study was of course only within this 
area, but as a practical matter, what concerns me about this, 
what it really means, is that no one, but no one, not you, not 
I, or anyone else, are really able to evaluate or judge how 
serious a problem it is because the records are not adequate 
for that purpose.
    Mr. Dolan. I think, clearly, the records are not adequate 
for all of the purposes that you and I would both like them to 
be. I think that is different though, Mr. Chairman.
    The Chairman. The purpose of the study, the GAO 
specifically found that the records are not adequate to 
determine the extent of the improper use of liens, levies, or 
seizures authority. So I think that is an important finding and 
something that ought to be looked at by you.
    Mr. Dolan. I think, Mr. Chairman, not to argue a point, but 
there are some aspects of that report where the GAO found that 
it would be very difficult to go back, and very costly to go 
back, and in some other places they found that it would be 
impossible to make the kind of association that you asked them 
to make. So you have got both kinds of instances at work there.
    The Chairman. Are you aware of instances where IRS 
Inspection employees have been used to intimidate or harass 
other employees?
    Mr. Dolan. I am not personally aware of that, no. As a 
matter of fact, I think my view of the Inspection Service is 
quite a lot different from what I heard this morning described, 
and that is part of what concerned me. I have known the 
Inspection Service to do a very good job of taking many serious 
allegations and, in the case where they are substantiated, 
helping us prosecute them. In many other instances they help 
exonerate the employee's conduct. So I have come over my career 
to respect the Inspection Service.
    The Chairman. Now, I would point out that the employees 
this morning were under oath.
    Mr. Dolan. I understand that. I do not belittle that for a 
moment.
    The Chairman. Are you saying they were not being honest in 
their answers?
    Mr. Dolan. Not at all. I am repeating what I said at the 
outset. Where my understanding of the facts might differ from 
theirs, I am going to treat their statements this morning and 
their concerns seriously and pursue them.
    The Chairman. Are you aware of IRS employees engaging in 
whipsaw efforts, that is, attempting to collect tax from 
someone they know does not owe the tax?
    Mr. Dolan. I do not know about employees who are trying to 
collect tax that is not owed. The term ``whipsaw'' gets applied 
to a couple of different transactions, and to the extent you 
would like to pursue that further, I would like to have either 
Tom Smith or John Dalrymple help me on that. So I am happy to 
do that now.
    The Chairman. My time is running out, so we will not do 
that at this time.
    Mr. Dolan, the taxpayers that testified yesterday need to 
move on with their lives and close the chapter that is relating 
to the IRS. I am sure you will agree with me, they need to be 
treated equitably. Can you make a definitive statement that you 
will send a letter to the four taxpayers equitably resolving 
their disputes with the IRS?
    Mr. Dolan. Mr. Chairman, I am going to be unequivocal about 
three, and I am going to tell you that in the fourth case, and 
I think you may be familiar with this, in the fourth case, I 
have only limited disclosure authority.
    I feel certain that in two cases we are already there and I 
would have no trouble at all writing a letter. In the third 
case, we have offered to send to the taxpayer's residence one 
of our problem resolution officers, because the taxpayer 
believes there may still be an amount that was not correctly 
credited somewhere over a period of years. So I will certainly 
commit to working that through to conclusion.
    At this point I am not sure what I will be committing to 
you about equitable. I mean, if equitable means getting it to 
the right substantive result, I will certainly commit to that.
    The Chairman. Let me ask you this specifically. Is the IRS 
in a position to send the Hicks' a letter indicating that they 
do not owe tax liability relating to Mrs. Hicks' 1983 joint tax 
return?
    Mr. Dolan. Such a letter is on its way, Mr. Chairman.
    Senator Gramm. That is fast. That is good service. You have 
about 100 million more to write. [Laughter.]
    The Chairman. I would have to point out to my friend, the 
ordeal lasted 17 years.
    Senator Gramm. I understand. I understand.
    The Chairman. In the Jacobs' case, how much money does the 
IRS owe the Jacobs'? Has the entire amount been refunded, with 
interest? If not, why? Does the IRS intend to make a prompt 
refund?
    Mr. Dolan. If you do not mind, this would be the point, 
there are a couple of gentlemen who worked these cases pretty 
closely. I would like to not misspeak on that, if I could 
invite them to the table.
    The Chairman. Anybody that is going to answer will have to 
be sworn in.
    Mr. Dolan. All right. Mr. Chairman, can I make sure I 
understood your question? I think when I told you the letter 
was on its way, I think we believe we resolved the Jacobs' case 
in every facet. But I want to make sure I am not 
misunderstanding your question.
    Senator Grassley. He was asking about the Hicks' in the 
case of the letter.
    Mr. Dolan. I am sorry.
    Senator Grassley. I am right, am I not? You asked about the 
Hicks' being sent a letter.
    The Chairman. Yes, I did. However, regarding the Jacobs, I 
was asking how much money.
    Mr. Dolan. I am sorry. All right.
    The Jacobs' case is the case in which I mentioned that we 
believe it is solved. The Jacobs' have suggested they believe 
that they possibly are due a refund. That is the one where we 
have asked a problem resolution person to go to their home and 
walk through any records. We have a mountain of records we got 
as a result of looking at those.
    So I would say the Jacobs' may still have a question, and 
that is what we will seek to resolve. I am told that the 
Jacobs' have not decided whether they want us to come out or 
not. [Laughter.]
    The Chairman. You do not know the answer?
    Mr. Dolan. I will not know the answer until we have a 
chance to talk with the Jacobs'.
    The Chairman. Mr. Dolan, let me point out one of these 
things. In talking about these cases, they are not merely 
statistics.
    Mr. Dolan. Absolutely.
    The Chairman. They involve people.
    Mr. Dolan. Absolutely.
    The Chairman. And to me it was shocking to sit here and 
listen to these cases. In the case of the Hicks' it went on 
something like 17 years, roughly the same for the Jacobs'. The 
emotional stress, what it does to an individual life is 
unbelievable. There is no rationale or excuse for that kind of 
treatment.
    Mr. Dolan. You are absolutely right.
    The Chairman. So it is important that we put these to a 
close.
    Mr. Dolan. You are absolutely right.
    The Chairman. I would like to turn to the Savage case. I 
would like to direct your attention to a letter relating to 
this case which was discussed yesterday. The letter was written 
to the district counsel handling Mr. Savage's case on November 
1, 1993 by the chief of the Civil Trial Section, Eastern Region 
of the Justice Department. The thrust of this letter is that 
the levy against Mr. Savage's business was wrong.
    Let me read you what the Justice Department, through Mr. 
Snyder, wrote. Specifically he writes, ``After reviewing the 
complaint, the motion for summary judgment, your defense 
letter, and all the information forwarded by the revenue 
officer, we believe that the levy in question was wrongful, 
even assuming the facts in their most favorable light at the 
time of the levy, the IRS had assessed and only,'' the point 
there they had not made a proper assessment.
    ``No assessment existed against TSA or the alleged joint 
venture partnership. We do not believe that the IRS can levy on 
the partnership property for the unpaid Federal employment tax 
liability of one of the partners.''
    Further on it says, ``In fact, we read your defense letter 
to essentially concede that the levy was wrongful.'' Yet the 
matter was pursued notwithstanding the fact that the U.S. 
Department of Justice's Tax Division wrote that it was 
wrongful.
    What possible rationale is there for having proceeded in 
that case?
    Mr. Dolan. Mr. Chairman, I have to answer your question in 
two ways. The first, I believe you, or at least the staff, is 
conscious that this is a transaction that has more taxpayers 
involved than Mr. Savage.
    It is a transaction that, when we first began to examine 
this, we asked for releases for all the parties. We have only a 
release for Mr. Savage. I am happy to do an executive session 
and a more thorough discussion of this, but I am not able to do 
it in this setting with the limits on my disclosure ability.
    Second, regarding the issue of this letter, when this 
letter came up in Mr. Savage's testimony, I have asked the 
Justice Department to write me with their perspective on the 
context of the letter and what they believe this letter should 
mean to me in the context of that case.
    The Chairman. I find that very difficult to understand. 
After the fact at this late date, you are writing the Justice 
Department to give further explanation. I think this is very 
clear.
    Mr. Dolan. On this letter. On this letter, Mr. Chairman.
    The Chairman. The letter, without question, says that the 
action was wrongful. You do not need another letter to 
interpret that.
    Mr. Dolan. Mr. Chairman, what I----
    The Chairman. Let me just say, that is what concerns me. It 
is no wonder a taxpayer is feeling badgered, that he is not 
being dealt with fairly. In effect, you can almost call it 
extortion. Do you agree with that?
    Mr. Dolan. No, I do not agree with that.
    The Chairman. You think it is----
    Mr. Dolan. Mr. Chairman, let me just restate the case. We 
have spent months trying to work these cases and put everything 
we could on the table. This is a case that has at least two 
other parties. I do not have the ability to talk about either 
of those two other parties, so I cannot explain what 
transaction might have had this amount to something other than 
what it looks like on its face.
    The Chairman. For example, you say you need a release, when 
the one party does not exist. The problem is, the agency tried 
to claim there was a partnership that did not, in fact, exist.
    Senator Conrad. Mr. Chairman, could I inquire about the 
rules of the committee here? I mean, are other members of the 
committee going to get a chance to ask questions?
    The Chairman. I have got one more question and that would 
be all.
    Mr. Dolan. Mr. Chairman, we have tried to be forthcoming on 
this case. The staff and our staff have talked about the case. 
I would be happy to go into executive session in any setting 
that you choose and work this in a more responsive way. I just 
cannot do it in this setting.
    The Chairman. I have to say, I find this case and the 
treatment totally incomprehensible. It is no wonder.
    [Applause]
    The Chairman. I would ask the audience, you are guests of 
the committee. Applause is not appropriate.
    My time is running out, so I will turn at this time to 
Senator Gramm.
    Senator Gramm. Mr. Chairman, thank you. How much time do I 
have, 10 minutes?
    The Chairman. Ten minutes.
    Senator Gramm. Well, Mr. Dolan, let me first say that I for 
one am appreciative of the attitude that you have brought 
before this committee. I think had you come here today in a 
defensive posture, that we would have had tremendous 
confrontation which would not have served the IRS or the 
committee well. I think your basic approach is the right 
approach, and I would like to begin by thanking you for that.
    Let me also say that I try to be fair in dealing with 
government agencies in assuming that people often have ulterior 
motives, that there are always people who have axes to grind. 
When I read the testimony of your former and mostly your 
present agents, in reading the testimony it was hard to judge. 
But I would have to say that, in listening to their testimony, 
I found their testimony extremely compelling.
    Here is the problem, as I see it. Next year, the tax burden 
on the average American worker is going to be the highest it 
has ever been in the history of America. Next year we are going 
to use the power of government to take 31 cents out of every 
dollar earned by every American, on average. That will be the 
highest tax burden that we have ever tried to impose on the 
American people.
    Now, it seems to me that this system is going to break down 
if people become convinced that it is not fair, that part of 
the ability to collect taxes is based on people believing that 
they are being treated fairly.
    Now, I hear people talking about a consumer friendly IRS. 
Forgive me, I do not think either I or my constituents could 
ever view the IRS as customer friendly. I mean, basically your 
duty is to get money for the government to spend.
    So I think much of the idea that somehow we are going to 
make people love the tax collector. St. Paul was not successful 
before he went on that road to Damascus.
    I guess we are hoping to take the whole agency down that 
road, toward the bright light, and the conversion. But the 
point is, we cannot guarantee everyone that they are not going 
to have bad experiences with the IRS, and if they are cheating 
I do not want them to have good experiences.
    I do not want to do anything that will reduce your ability 
to collect money from people who are cheating, because part of 
fairness is being assured that cheats are going to be 
prosecuted and that they are going to pay like everybody else.
    But what is most damaging, it seems to me, in the testimony 
we have heard, is the very real picture, compelling picture 
that the system is not fair and that, in fact, in the last few 
years the level of unfairness has grown, and grown rapidly.
    We had six of your current agents here today, and I asked 
each and every one of them, in the last two or 3 years is it 
your perception that the problems you are talking about, 
problems of people being pursued for money they did not owe, 
problems of political favoritism or personal favoritism, very 
severe charges, it seems to me.
    Very serious charges, that we are not going after members 
of a union because they are politically favored, or that 
personal friends of a supervisor are not being audited because 
they are exerting influence. I think people ought to go to jail 
for doing things like that.
    But the perception of each one of those six individuals was 
that these problems were getting worse, that actually these 
problems were growing. It seems to me that what is called for 
here is a dramatic change in the way the IRS operates.
    It seems to me that we have got to do this not just for 
fairness, not just for accountable government, but I think it 
is going to become increasingly hard to collect the revenues 
that the country claims it needs if people do not believe it is 
fair.
    Now, I have heard, and I will get to my questions, a lot 
about this culture of the IRS. It seems to me there are two 
ways you can look at this. One, is you have got a culture 
problem and people basically have taken on sort of a calloused 
facade and they are running over people and you need to get 
them together and convince them not to do it anymore. I do not 
buy that. I think the systems make people behave as they do. I 
think the problem with the IRS is a very simple problem: power 
corrupts.
    I think what we have got to do is to find some way of 
having a separation of power, either within the agency or 
breaking the agency apart. I think we have got to have some 
checks and balances. I think maybe we need to bring more senior 
people into the service who did not come up through the ranks. 
I think you need a blending of the two.
    But I do not think we are going to solve this problem by 
just viewing it as sociology. I think the problem is, there is 
something very wrong with the system and I think that, 
especially in the last couple of years, it has clearly gotten 
off track.
    What I would like to ask you is, as a person who is acting 
director, who obviously is a man of considerable ability and is 
a person whose career is probably going to be judged on the 
outcome of the changes that we make in the next couple of 
years, whether that is fair or unfair, I think that is the 
case.
    What kind of changes, based on what you have seen in the 
last few days and what you know from 26 years of experience, if 
you were sitting where I was sitting and you really wanted to 
fix this problem and, sitting where I am, you know what you 
know from 26 years and having at least superficially looked 
into these questions that have been raised, what kind of 
changes would you want to see made?
    Mr. Dolan. That is the $64,000 question. That is a great 
question. Let me try to tick off some of them and tell you that 
I will probably wake up tonight and wish I had given you four 
better pieces of it.
    But first let me start by agreeing with you. I think when 
something is right or wrong it is typically not just somebody 
out there operating on their own. They are products of systems, 
they are a product of the way operations are designed, the way 
they are managed. So good, bad, or indifferent, the front-line 
person is a product of the system we ask them to operate in.
    We have got a number of challenges. Maybe the one I did not 
answer to the Chairman's satisfaction is that there is some 
tension. There has been historical tension.
    The tension exists not only within the IRS, but the IRS's 
relationship with the Congress. We can sit as you suggested, 
and talk about customer this or more of this, and some ability 
to better, over the long haul, reconcile, what is the 
expectation of the Congress with respect to the revenue 
raising, with respect to the capability of providing first-
class customer service. There are some core choices and 
reconciliation of views that maybe in the past we have not done 
as smoothly as we might.
    So if I were going to reinvent the world, I would find some 
mechanic to get the tax administrators, the administration, the 
Congress' reconciled views of what do we want out of this 
system. Is it a system that we mostly value because it puts 
$1.5 trillion in the bank every year, is it a system that we 
mostly value because it is one of the principal faces to our 
citizenry, is it both those things, how do we want to balance 
it.
    Senator Gramm. Well, let me tell you, you may get a lot of 
people who are going to give you a flowery answer, but we would 
not have an IRS if we did not need the $1.5 trillion a year.
    Mr. Dolan. Right. Right.
    Senator Gramm. So we are sure not doing this to be consumer 
friendly.
    Mr. Dolan. And I am making too much of this one point.
    Senator Gramm. Let me also say, there are three problems as 
I see it, and two of them are not your creation. No. one, to 
get people to pay taxes, they need to be convinced that we are 
taking a reasonable amount of their income. They are not. 
Number two, they need to be convinced that we are not wasting 
their money, and they are not. They are right on both those 
counts. The one you have the ability to control is that at 
least maybe we are taking too much and maybe we are squandering 
it, but the burden is falling fairly on everybody.
    We are clearly failing on the other two, in my opinion. It 
is the third one here that I think has been called into very 
real question. Not only do the American people believe the 
system is unfair, according to the polls, but in listening to 
these people who are on the inside it is obvious the people are 
right. The question is, how can you fix that problem?
    Another thing I thought about, let me try to direct the 
question a little better. In the criminal justice system, for 
example, you have got police officers who go out and 
investigate and then you have a DA who takes their work 
product, then that DA prosecutes. Then you have got a judge and 
jury, so there are checks on each other. I do not see that same 
system. Now, I do not know the IRS. I mean, I do not want to 
know it a lot better, personally. [Laughter.]
    Senator Gramm. But is there some way within the IRS we 
might replicate this system of checks and balances? Is this 
part of the problem? As many of our witnesses have said, are 
you the judge, the jury and executioner all put together?
    Mr. Dolan. I hope not. I say that not to be facetious, 
because I do believe that when you probably spend more time 
than either of us has today to spend on it, look over time at 
the way the processes have been designed.
    For example, the appeals process. The appeals process and 
the tax system, I think, by a lot of measures, is one of the 
most effective dispute resolution mechanisms that keeps the 
lion's share of controversy that comes out of tax audits.
    It is one of the most controversial things that a person 
can be involved in. That appeals process resolves a remarkable 
percentage of those disputes, short of ever having to be in the 
more litigious, long, drawn out ones.
    So I think my suggestion would be, Senator, there are 
elements of today's system that I think provide extraordinarily 
effective checks and balances. On the other hand, I think in 
terms of some of the examinations that have been done recently, 
just exactly where do we bring this more customer-sensitive 
capacity, what kind of capacity do we bring to the table when 
we deal with somebody's account?
    Do we have the same facility to give you a straight answer, 
a timely answer, closure to your transaction that you would 
experience if you dealt with your bank, your credit card 
companies?
    Those are not customer friendly, frilly things at the 
margin, those are core capacities. If we did them better than 
we do today, I think you would take a tremendous amount of the 
frustration out of some of the interactions that occur today.
    So I am not so sure it is a matter of finding a brand-new 
structure. I think it is a matter of taking some parts of these 
capacities and going from 1 to 10 on the scale that we are 
today.
    I think your suggestion about bringing in insight from the 
outside, bringing people in. We are in a complicated world, a 
complicated business, and you cannot grow it all from the 
ground up, you need expertise from the outside.
    Senator Gramm. Well, Mr. Chairman, I know my time is up. I 
just want to say that I am totally convinced that we need to 
pass legislation that is aimed at changing the structure of 
this system in such a way as to deal with the problems we have 
heard today and to at least give an assurance that, while we 
may or may not fix the unfairness, that at least we care and 
that we want to fix it.
    I think it is going to require not just another little 
Taxpayer Bill of Rights. It had a great title, but it had 
limited impact.
    I think we need a substantial amount of work from this 
committee and from this Congress to change the system to bring 
in checks and balances, to bring into IRS management outsiders 
who have been out in the world dealing with the IRS, while 
preserving, obviously, the experience of people who have been 
there 26 years.
    But I think we need to change the system. Not do pep 
rallies or hire psychologists. So, obviously, that affects you.
    The Chairman. Senator Graham.
    Senator Graham. Thank you, Mr. Chairman. Mr. Chairman, to 
pick up on the last comments from Senator Gramm, it would seem 
to me a good place for this committee to take a next step would 
be to hold a confirmation hearing for the nominee to be the 
permanent INS commissioner.
    As I read over some of the background of Mr. Charles 
Rossotti, who has been nominated, it sounds as if he has the 
kind of characteristics that we are looking for. He founded and 
led his own company for 27 successful years, the American 
Management System, a multi-million dollar computer system and 
consulting firm. As someone said, he does not come out of the 
kind of background that has typified previous IRS 
commissioners, for better or worse.
    I would suggest and urge, Mr. Chairman, that we hold a 
confirmation hearing in order to solicit the ideas of this 
fresh person and, if he meets our test, to get him on the job 
as quickly as possible, because he has sure got a lot of work 
to do.
    Second, Mr. Chairman, I would like to use as the basis for 
some of my questions a specific case which came to the 
attention of our office. I might state, we have received the 
appropriate release of confidentiality statements, which I can 
make available to whoever would like to see them, in order to 
talk about this case.
    In fact, the taxpayer has actually urged us to talk about 
her case. This is a case of a lady named Betty Bryant who lives 
in Opa Locha, FL. We get approximately 50 IRS issues raised in 
our office every week. This is one of those 50.
    In fact, Ms. Bryant, who is a single mother with one child, 
she is a 25-year State of Florida employee. She operated a 
group home for developmentally disabled adults. In the summer 
of 1995, she entered into a series of contacts with the IRS 
relative to whether she owed the IRS money or was due a refund.
    After approximately 6 months of this, in frustration, on 
January 29, 1996 she contacted the Governor of Florida, 
Governor Chiles, who in turn referred her to our office. So we 
have been dealing with this case since early 1996.
    Just to briefly recount some of the highlights of this, we 
referred the case, after having received the appropriate 
Privacy Act forms, to the problem resolution office in March of 
1996. It took the better part of 2\1/2\ months to get a 
response from the problem resolution office.
    The office first closed the case because Ms. Bryant was 
unable to provide all of the information necessary. Part of the 
reason she was not able to do it is because some of her records 
had been destroyed in Hurricane Andrew, which had occurred in 
August of 1992. The case was then reopened, transferred from 
one office to the other. In the course of this, her wages were 
garnished at $100 every bi-week.
    Finally, in April of 1997 it was determined that she was, 
in fact, due a refund. A refund was sent to the wrong address. 
She requested an explanation of the refund. That request 
resulted in a notice that, in fact, the refund was 
inappropriate and she did, in fact, owe taxes.
    Finally, in July of 1997, 2 years after the case started, 
it was resolved. Not only was it found that she was deserving 
of the first refund, she got a second refund. That, in summary, 
is her case.
    Now, what are some of the broader ideas or principles that 
come out of this case? One of them is that it seems as if this 
is an agency which has entities that sound as if their purpose 
is to help the taxpayer provide services, but where the 
taxpayers are extremely discontent with the service they 
receive.
    Complaints such as this, that phone calls are not answered, 
mail is not responded to, it takes 2 years to get a relatively 
simple answer and a resolution of the case. This is not an 
aberrant case, this is one of hundreds of thousands of cases.
    My first question, looking to the organization of the IRS, 
is how has the organization gotten so far away from its clients 
that it took a Congressional hearing to understand the severity 
of this case? If Burger King or McDonald's was so far away from 
their clients that they did not understand that they were 
putting out a bad hamburger, they would be out of business.
    How does the IRS institutionally try to avoid this failure 
to understand and be sensitive to its clients and the quality 
of service it is delivering?
    Mr. Dolan. Senator, let me take a crack at your basic 
question. Then if the Chairman would permit, I would like to 
have Lee Monk sworn in. Lee is our taxpayer advocate. I think 
you framed, by the facts of the case, a question of, why did it 
take such a long time and why did somebody not pick up on this 
earlier.
    I do not have an easy answer. It should have been picked up 
earlier. It should have been picked up upon the first set of 
correspondence. If it was not then, it sure should have been 
resolved perhaps more quickly when it got into problem 
resolution. I think Lee has a more full understanding of the 
actual case, Senator, if we could get him sworn in and he could 
react to it.
    Senator Graham. Yes. We will send you all the details in 
this actual case. But one of the principles that I think this 
case stands for is an agency that has lost touch with the 
people that it is intended to serve. I am really asking a 
diagnostic question: why did that happen?
    Mr. Dolan. Senator, I do not want for a second to suggest 
your conclusion is wrong with respect to this case, that we 
lost touch of the taxpayer in this instance. I think on a daily 
basis some 330,000, 340,000 cases went through the Problem 
Resolution Program last year, and I think in large part they 
went through to the satisfaction of the taxpayer.
    We have a variety of ways where we attempt to elicit 
problem cases, concern cases and I do not think we are as 
effective as we should be. That is why I ticked off those 
things. I may have done it before you came in the room. I 
ticked off a series of things that I want to see us do beyond 
where we are today, because putting these kinds of gaps between 
the taxpayer's problem and the ability to solve them is not 
good for the taxpayer and not good for the faith in the system 
that so many of the other Senators have talked about.
    Senator Graham. What about the question of, how did it 
happen institutionally that this agency, at least has created 
the appearance in this case, and I would suggest hundreds of 
thousands of others like it, that there is a disconnect between 
it and the people that it is intended to serve, the ``S'' in 
the Internal Revenue Service?
    Mr. Dolan. I think the only way to institutionally answer 
that is that you have to posit that we have placed inadequate 
resource and management attention on the processes that ensure 
that when we generate notices to taxpayers, someone is 
satisfied that you have the capacity to take the response call, 
to take the letter back. In some cases, our match of capacity 
in taking inbound calls or taking reply correspondence has not 
matched the volumes of outbound notices. We are trying today to 
fix that.
    You move on up the chain and you get into some of the 
things I was talking about in my opening statement. When a case 
in the early stages reflects itself as off track, do enough 
people feel that they own the responsibility to take that case 
and get it into problem resolution? I think we have failed in 
some respects, having a greater sense that no matter who you 
are in the organization, you have an obligation to get it over 
in problem resolution.
    I think clearly in your case you raise the question of, 
once in problem resolution, does it work as effectively as it 
should. So I think those would be the three aspects of the 
system and each of which leaves something to be desired about 
our past performance that would have to be improved.
    Senator Graham. Before these hearings this week, was the 
leadership of the agency aware that there were these problems?
    Mr. Dolan. Absolutely. We have a significant amount of 
effort, Senator, in each of those areas. I mentioned again, 
perhaps before you entered the room, a joint effort that has 
been ongoing for the last 3 or 4 months with the Treasury 
Department and NPR that is going to produce in middle October 
an entire suite of proposals. Several of them are going to be 
involved in just this area of how the notice process works, how 
we staff it, and how we respond to people who are replying back 
to our notices, which was the case in this taxpayer's instance.
    Senator Graham. This is a collections case. But the 
collection cases ought to be the rare ones, as you state. 
Eighty to 85 percent of the cases should be handled without the 
necessity of IRS intervention.
    Mr. Dolan. Correct.
    Senator Graham. So for those vast numbers of cases that do 
not get to collection, the basic things, answering the 
telephone promptly and with credible information, being able to 
provide the forms and those forms being understandable to the 
taxpayer citizen, explaining the instructions.
    At the beginning of this case this lady wanted to sit down 
with somebody and just say, here are all my records, tell me 
what I need to do. It took her the better part of 24 months to 
get to that point. People basically want to do the right thing, 
but in this complicated tax system and the complications of 
life, they need help to do what they and the American 
government wants them to do.
    Mr. Dolan. Senator, I agree with you. One of the things you 
highlight is a very significant challenge for us, which is 
making the notices and the information we send to people clear 
on their face, because some of what we send today certainly 
fails that test.
    Would you prefer that Mr. Monks deal separately on that?
    Senator Graham. I think maybe we could deal separately on 
the specifics of this case.
    Mr. Dolan. All right.
    Senator Graham. I was trying to use it to illustrate a 
broader issue.
    Mr. Dolan. I appreciate that.
    Senator Graham. Thank you, Mr. Chairman.
    The Chairman. Mr. Dolan, I did not hear your statement. How 
many people or how many cases are involved in the problem 
resolution process?
    Mr. Dolan. Last year there were just over 300,000 in the 
problem resolution program.
    The Chairman. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman.
    Thank you, Mr. Dolan, for being with us. I would imagine 
there is probably no person in the entire city of Washington 
that would have hoped that this committee would have already 
confirmed the commissioner of the IRS than you.
    Mr. Dolan. I was inclined to give an amen to Senator 
Graham's comment a moment ago.
    Senator Breaux. Well, I appreciate your being here as 
acting commissioner, and for your testimony. We have heard a 
lot of bad things for the last 3 days, but I think the best 
thing we have heard in the 3 days is your statement that the 
IRS is in the middle of a tremendous amount of change.
    I think that that, in itself, is very encouraging, 
recognizing that change is necessary, particularly after 
hearing the problems of the last 2 and 3 days. Hopefully, you 
and whoever will be the commissioner will learn from these 
hearings, as I think all of us are learning, about the things 
that need to be done.
    Let me ask just a couple of questions. How many tax filers 
are there in our country each year, approximately?
    Mr. Dolan. We have, I think, just over 200 million returns, 
of which about 119 million of them are individual tax returns.
    Senator Breaux. And of the 200 million plus tax filers, how 
many are audited each year, approximately?
    Mr. Dolan. It runs right around 2 percent, I think, 
Senator. I can put my hands on the number.
    Senator Breaux. So about approximately 2 percent of the 200 
million are audited. Is that a ball park figure? I am not 
looking for the actual number. I mean, it is about 2 percent of 
the 200 million?
    Mr. Dolan. 1.6 percent, I am told, Senator.
    Senator Breaux. So of the 98 percent that, I take it, are 
not audited, they would presumably have no additional dealings 
with the Internal Revenue Service after they have filed their 
tax return.
    Mr. Dolan. That vast majority, you are right, Senator. You 
file your tax return, either get one of the 85 to 90 million 
refunds that will be issued, or your check clears and pays the 
balance that is outstanding.
    Senator Breaux. How many employees does the IRS have?
    Mr. Dolan. It is 102,000.
    Senator Breaux. We heard from six today. How typical of the 
102,000 do you think the six we heard from are?
    Mr. Dolan. That is a tough one for me, Senator, because I 
want to tell you that I think you heard some differences this 
morning than what you might hear if you sampled more broadly. I 
want to say that, though in a way not for a moment to discount 
what those men and women have said, because there are clearly 
some things that need to be said, need to be heard, and need to 
be followed up on.
    We do have a couple of processes. We are just in the 
process of doing the third cycle of something we call survey 
feedback action. This is a process we have used internally now 
for about 6 years. On a regular cycle, we survey our employees 
about a whole series of things and typically look at cycle-to-
cycle changes.
    Senator Breaux. What type of surveys do you conduct among 
your employees; do you ask them to respond in writing if they 
have complaints?
    Mr. Dolan. Well, we do have a specific request. This survey 
is essentially one that asks you to place gradations on a 
series of maybe 40, 50 questions. The questions are compared to 
the prior cycle and the prior cycle to look at where----
    Senator Breaux. What is the purpose of that questionnaire?
    Mr. Dolan. It is for the purpose of finding out about the 
expectations of the job, about quality customer service 
impediments, about interactions with management. It is a 
general workplace survey that is both supposed to identify 
issues that are impediments and pluses to getting the job done, 
as well as environmental issues about the organization.
    Senator Breaux. Do the people that respond to those 
questionnaires do so without any fear of having action taken 
against them by the IRS?
    Mr. Dolan. They are done anonymously, Senator.
    Senator Breaux. So they are not identified and pretty much 
have a free shot at saying what they want.
    Mr. Dolan. That is correct. That is correct. That 
information is then played back. We distribute back to a group 
the profile so that the manager in that group has a way of 
saying anonymously, here is how the people in my organization 
feel about the elements of their job, this is the place to 
work.
    Senator Breaux. How long has that process been in place?
    Mr. Dolan. We have just administered the third cycle of it. 
I think it probably covers about a 6-year period; 5 to 6 years. 
This is the third time we have administered it.
    Senator Breaux. The Chairman read a letter from the U.S. 
Attorney, Department of Justice tax attorney, that basically 
said that a particular case did not have any merit, and 
suggested that the IRS not proceed on that case.
    Does the IRS ever get letters from the Department of 
Justice that suggest you should proceed on a case when the IRS 
feels you should not and therefore you do not take action, or 
does the Justice Department call the shots in all cases?
    Mr. Dolan. Well, typically we are making a recommendation 
to the Department of Justice, who has the final call on whether 
the case goes forward on behalf of the United States.
    Senator Breaux. The question, I guess, before it gets to 
Justice for prosecution or proceedings, does justice ever 
suggest that they do not think, or do think that a case should 
be pursued, that IRS determines that it should not be and, 
thus, is not proceeded against? Does it work both ways?
    Mr. Dolan. I am not coming up with an example right away, 
but I think it would work both ways, Senator. I probably could, 
if I thought long enough, could come up with an example where 
it could work both ways.
    Senator Breaux. The commission that Senator Kerrey chaired 
stated that the Omnibus Taxpayer Bill of Rights and Taxpayer 
Bill of Rights II had an important effect on changing the 
culture of the IRS. We had one of the witnesses say, their 
reaction was something to the effect of, well, they thought it 
could have been a lot worse, not as bad as it could have been, 
a branch manager said. The impression was that it did not mean 
a lot of anything to the IRS, what we passed in Congress. Can 
you comment on that?
    Mr. Dolan. That is clearly not the perspective that most of 
the people that I know have either towards the Taxpayer Bill of 
Rights or other enactments allowed by the Congress. When I 
listened to that gentleman this morning, I do think in the 
early days of the Taxpayer Bill of Rights, if I compared the 
Taxpayer Bill of Rights I and Taxpayer Bill of Rights II, in 
terms of Taxpayer Bill of Rights I, I think there was a lot of 
tension between the Congress and the IRS about what might be 
the underlying objectives and what should be the right result.
    Taxpayer Bill of Rights II struck me as an entirely 
opposite transaction where the Congress and administration 
chose to work hand-in-glove to effect that. But I am one that 
thinks that Bill of Rights I and II have had a decided impact 
on the way the men and women of the Internal Revenue Service do 
their business.
    Senator Breaux. Has there been occasion for specific 
explanation of what that Bill of Rights legislation requires 
IRS to do that had been for the benefit of IRS employees so 
they would understand what they were required to do under that?
    Mr. Dolan. Yes. Yes, there has, Senator, both in written 
form and in instructional form.
    Senator Breaux. Is it more than just posting it on the 
water cooler or where people can pass by and read it if they 
would like?
    Mr. Dolan. Yes. Yes, Senator, it is more than that.
    Senator Breaux. It has been suggested, and I would guess I 
might have been one of them, that with regard to the Problem 
Resolution office it was reported out that most of the people 
in that office are career people passing through different 
departments, they know they are going to be back in the 
Collection section as soon as they finish the problem 
resolution part of their career, and that it is not really 
going to work because they are going to be doing something else 
and their promotions are based on how much they do for the IRS 
and not how much they do for the taxpayer.
    So it has been suggested that what we establish is some 
type of ombudsman type of department agency, office, or 
something that would be on behalf of the taxpayer, that they 
would know there is someplace they can go, other than to court, 
where they could have somebody who is really on their side 
working for them and trying to represent their opinion to the 
IRS instead of having to go to the IRS to represent their 
position to the IRS.
    So I would like to ask, what are your thoughts about that 
suggestion?
    Mr. Dolan. Senator, I have heard a lot of really good 
discussion on both sides of that. The argument for independence 
has all the attributes that you describe.
    I have two concerns about that, however. One, at the end of 
the day, I certainly want a district director or service center 
director to be accountable for what is going on in their 
operation, so I think it is important that when mistakes get 
made in the district or center, the ownership, the person who 
is accountable for getting them fixed, is the person who runs 
that entity. You run some risk if you put your problem-solving 
process totally outside the line that it becomes somebody 
else's.
    Senator Breaux. I am not so much advocating that the 
penalty be done by someone from the outside.
    Mr. Dolan. All right.
    Senator Breaux. I am more concerned about, in determining 
whether they were treated rightly or wrongly, that it is not 
the people who have done the right or wrong that makes the 
decision of whether it was right or wrong.
    Mr. Dolan. All right. I am sorry. Let me suggest what we 
have just done within the last year in terms of offering 
administrative appeals to the Appeals Division, which does sit 
outside. It is a totally different organization from the 
district or center management.
    Today the liens, levies and seizures, which were all areas 
of considerable controversy in the collection cases, were 
things that we put into that administrative appeal process last 
year and I think they bring some of the separation or 
independence that you have in mind.
    Senator Breaux. I have one final question. How much does 
the IRS hate, when you get a letter from a member of the United 
States Senate or a member of Congress on behalf of a taxpayer? 
I mean, do they just go ballistic and say, we will show that 
taxpayer, we will show that member of Congress for trying to 
interfere with what we do as our job? Be honest about it.
    Mr. Dolan. Well, what I would like to do, is turn that back 
around to you and have you tell me that your home staffs think 
that they have pretty good relationships with the districts and 
the State. When the case worker calls the IRS Problem 
Resolution and says, I have got this problem, that frequently 
you feel like you are getting pretty good service.
    At least anecdotally, what I am generally told, and I have 
a lot of members of Congress say, I do not care too much for 
you, Dolan, here at the national office, but do not mess with 
the problem resolution officer, because that is my bread and 
butter back in the district or back in the State.
    So not only do we not have that reaction, I think we 
believe that those are pretty important portals through which 
we learn about taxpayer cases and try to get them solved.
    Senator Breaux. Does the taxpayer's case get a notation 
made on it that a member of Congress has made an inquiry?
    Mr. Dolan. As a problem resolution case, it does not. We do 
have a correspondence tracking process in almost every office 
that would identify an inbound Congressional and be sure that 
the response gets back. We have got a set of response dates for 
congressionals, and we control it for that purpose.
    Senator Breaux. Well, again, I thank you for being here. 
Number one, we have got to get the commissioner approved, and 
number two, the best thing you said was that the IRS is 
undergoing a tremendous amount of change and I congratulate you 
for that.
    Mr. Dolan. Thank you.
    The Chairman. Senator Bryan.
    Senator Bryan. Thank you very much, Mr. Chairman.
    Mr. Dolan, it is clear to me that the agency has a lot of 
problems. I agree with the observation generally of Senator 
Graham, but I think they are structural in nature. We are not 
going to be able to legislate a code of personal conduct unless 
we change the fundamental structure of the agency itself.
    It strikes me that one of the redeeming qualities, the 
great genius of the American constitution is it recognizes the 
inherent propensity for the abuse of power, so therefore it 
diffuses power across three branches of government, with a 
series of checks and balances. That system has served us well, 
it seems to me, over the past two centuries.
    What I think our challenge will be, is without in any way 
diminishing your ability to collect the revenue from those 
taxpayer who owe money under our Tax Code to the Federal 
Government, is to provide a series of checks and balances so 
the excesses which have been testified to by those who appeared 
before us today as employees of the IRS and those taxpayer who 
shared with us with some degree of specificity the problems 
that they faced on the day before, to build on that series of 
checks and balances.
    We are never going to make a trip to the IRS like a trip to 
Disneyland. That will never be one of the most pleasant 
encounters an individual will have in his or her life, no 
matter what changes we made. Inherently, your job is to collect 
money from us. That is something that does not put you on the 
high road, so to speak. That is something that everybody 
resists because we would all like to pay less money. That is 
the nature of the system.
    Some of the employees offered some suggestions here and I 
just want to get your visceral reaction to them and say, as my 
colleague Senator Breaux did, I hope you will work with us as 
we try to look at this restructuring of the agency. You have 
got 26 years of experience. That is helpful.
    The new commissioner, whom I hope will get a hearing early 
on and will be approved and confirmed by this Congress, comes 
from a different background, and hopefully he will be able to 
provide a different perspective.
    But a comment that seemed to run through several of the 
witnesses' observations this morning, it is for your internal 
security operation. That clearly has to have not only an 
appearance, but a reality of separation so that it can act 
without fear of reprisal or the perceived fear of reprisal. We 
need to take a look at that. Again, I hope that you will work 
with us, as a number of us are going to try to put some of 
these things together.
    A suggestion which I think may have some merit, and 
obviously I want to welcome your and other response, is perhaps 
we need to separate the Criminal Division from the Civil 
Division and provide its functions in a different agency so the 
IRS is not both a civilian enforcer as well as a criminal 
enforcer of the Revenue Code. Do you have any initial reaction 
to that?
    You heard the testimony that, indeed, it is the fear of 
potential criminal prosecution that gives the heavy hammer that 
comes down, in some cases, far too heavily and imposes the 
sense of fear that, my gosh, my case is going to be turned over 
for criminal prosecution unless I agree with everything the IRS 
wants me to do on this particular matter that may be in 
dispute.
    Mr. Dolan. Senator, both of the examples you used, as 
raised this morning in the witnesses' testimony, I think would 
benefit from further examination. We have looked at that in the 
past and there are a set of issues that would also argue for 
the continued strong relationship between the civil and 
criminal. So I do not know that it is a slam dunk. I think it 
is one where thoughtful engagement on both of those would be 
productive.
    Senator Bryan. Well, I appreciate your response. I do not 
know that that is the answer either, but I thought the comments 
made by the witnesses were thoughtful and I found them 
constructive when I asked specifically what to do.
    I mean, the concept of some kind of an administrative law 
judge, some fair, even-handed person who is not part of the 
IRS, not a former IRS agent who has been promoted from the 
system, but some sense that the taxpayer, before getting 
involved in the expensive process of litigating, or going to 
tax court, or paying money under protest and then suing to 
recover that money, some kind of an administrative process 
where the taxpayer can go and have some of these issues 
resolved expeditiously and at minimal cost. Is that a concept 
worthy of pursuing?
    Mr. Dolan. I do not care what walk of life we are in, 
Senator. That is a great concept.
    Senator Bryan. Yes.
    Mr. Dolan. What I would be inclined to do, though, is also 
advance again the comment of a couple of minutes ago. Our 
appeals function has had some unique success in that and I 
think before I created a brand-new box I would want to see if 
there are other ways of looking at expanding its jurisdiction, 
because it creates the kind of checks and balances you talked 
about.
    Senator Bryan. Right. And I am sure that you have had 
successes. But I think what we are hearing and what we hear 
from our constituents, there are clearly examples of great 
success that you have had. Our office, as well as every member, 
has had to contact them on behalf of a constituent and the 
issue is resolved quickly and satisfactorily to the 
constituent, you do not hear much about those because those are 
good news cases, but there is a perception out there, and a 
perception in our line of work as well as your line of work 
becomes reality.
    Mr. Dolan. I agree.
    Senator Bryan. That it is broken, that somehow we need to 
change the structure so that, indeed, the perception as well as 
the reality is that people can get a fair break if they have an 
honest difference of opinion with the revenue agent about 
whether or not additional revenue is owed based upon an 
interpretation of the Code or an honest dispute between the 
revenue agent and the taxpayer.
    Well, finally, Senator Breaux's comment, some kind of an 
ombudsman, somebody who can, in effect, speak on behalf of the 
average person who comes in there with a case that may not be 
monumental in terms of the magnitude of cases that you deal 
with at the top level, but for a modestly situated taxpayer, a 
few hundred dollars in his or her life can make a tremendous 
difference. Is that a concept that we can talk with you about?
    Mr. Dolan. Senator, I would like to talk further about it. 
Obviously in the two Taxpayer Bill of Rights we have sought to 
create in the taxpayer advocate this kind of capacity. I think 
there is now legislation moving in both Houses that will deal 
with another set of additional employee rights, and it may well 
be in the context of that that some of these ideas would 
profitably be considered.
    Senator Bryan. Yes. In other words, somebody that is on 
their side. Again, I think the appearance is terribly 
important. It just cannot be somebody that is assigned 
previously from the Criminal Division or the Revenue Collection 
Office has assigned to represent.
    It has got to be somebody who clearly is recognized by the 
taxpayer, that this is somebody that really does not have any 
ties, that this person does not eventually wind back into the 
system and, depending upon how he or she performs, he can have 
your job somebody, Mr. Dolan, for example. I mean, this has got 
to be a separate position.
    Mr. Dolan. I think you are dead on, Senator. I think 
perception is every bit as big as reality in these cases, and I 
think you are right.
    Senator Bryan. Good. Now, these are not monumental. These 
are not earth-shaking. We will not see these on the front page 
of the papers tomorrow. But, I mean, the suggestion that the 
offices be open in the evening, that is not a radical notion.
    I happen to represent a State in which our two principal 
cities operate 24 hours a day, but our municipal courts all 
over America operate in the evening, recognizing that most 
people work 8:00 to 5:00, 9:00 to 6:00. I mean, that does not 
require an act of Congress, does it?
    Mr. Dolan. No.
    Senator Bryan. If you found that meritorious, even on a 
trial basis to see if we could not try to make the office hours 
more responsive to the working schedules of average people.
    Mr. Dolan. Senator, that is also right on the money. Two 
weeks ago, we had all of our Customer Service Division Chiefs 
in looking at doing exactly that with our phone site. 
Potentially on some basis we have 24-hour access, and in some 
others, at least 16 hours. I think moving down that road and 
making ourselves available at points that work for the taxpayer 
is exactly the right way to go.
    Senator Bryan. And to do so on a trial basis, and recognize 
that every one of these pearls of wisdom that I am sharing with 
you may, in fact, sound better than they actually work out in 
practice, but to try it on a prototype basis. Municipal court 
systems that have a night court, that has been immensely 
helpful. Those are very, very convenient for the public.
    Finally, one thing that, if true, you should change 
immediately. That is, if your hotline has called ID so the 
individual who calls in can be traced immediately as a result 
of the call, that is something I would suggest, Mr. Dolan. We 
do not need an act of Congress for that.
    I would hope if that, in fact, is true, that you would 
issue an order, retroactive to this morning at 0800, whenever 
your people come in, that that has got to be dropped. That is 
just pretty outrageous.
    Mr. Dolan. Senator, let me say, as I heard that this 
morning I believe that was a concern raised about the Inspector 
General's hotline. I intend to be sure that she is aware of 
that.
    For the very reasons you mentioned, even in tax cases, our 
call sites do not use caller ID for that very reason. We do not 
want the average taxpayer worrying that we are going to pick up 
telephone numbers that way and call back. I will clearly take 
that issue to the Inspector General and be sure that she has 
been apprised.
    Senator Bryan. But the assurance that you are giving is 
that, at least within the area of your jurisdiction, people can 
call and there is not a caller ID.
    Mr. Dolan. I will satisfy myself before the day is out that 
that is the case in the Inspection Service as well. I believe 
it to be the case that there is no caller ID there.
    In terms of the case this morning, I think I am going to 
learn for sure whether there is right now. Doug tells me there 
definitely is not in our Inspection Service. I will take the 
concern to the Inspector General about the 800 number and see 
whether she needs to react or not.
    Senator Bryan. Yes. I appreciate that.
    One last point that I wanted to make. You, in responding to 
Senator Roth and Senator Breaux on the Savage case, that is the 
case where you got the letter from the Department of Justice, 
and you were reluctant to testify about it because you only had 
one release. Now, most folks out there do not know what the 
devil you are talking about, so let me give you an opportunity 
to tell them. You are talking about a privacy release.
    Mr. Dolan. Thank you, Senator.
    Senator Bryan. Senator Graham had a privacy release and 
emphasized that point. But you are not able to testify about 
the implications for the other two taxpayers that may have some 
relevance to the decision that you made or did not make in the 
Savage case, because you do not have a privacy release from 
them and, therefore, it would be against the law for you to 
discuss that in a public setting.
    Mr. Dolan. Thank you for cleaning up my act. I should have 
been more clear. That is exactly the case.
    Senator Bryan. But if you had those privacy releases you 
would be more forthcoming with our able Chairman and the 
committee?
    Mr. Dolan. Correct. And without it I would be capable of 
talking about it, but only in executive session.
    Senator Bryan. I appreciate that.
    Thank you very much, Mr. Chairman. Thank you.
    The Chairman. I would just point out to my distinguished 
friend from Nevada, that one of the parties does not, in fact, 
exist.
    Senator Bryan. So we only had one more tax release that we 
need.
    The Chairman. I have been corrected. Neither party exists.
    Senator D'Amato?
    Senator D'Amato. Mr. Chairman, let me pursue that, if I 
might. Now, Mr. Dolan, if we are talking about a fictitious 
party, are we talking about needing a privacy release for one 
additional person or two? If, indeed, you have asserted to the 
Chairman that there are two other individuals, I think it is 
important that we know. Now, how many individuals are there?
    Mr. Dolan. Senator, there are not two other individuals. 
There is at least one other actual----
    Senator D'Amato. Well, it is not at least. That would be a 
misstatement, would it not?
    Mr. Dolan. I am sorry. Thank you. It is getting late in the 
day and I am not doing this very well. There is one other 
taxpayer and I am told by counsel that if we had had the 
release of that other taxpayer we would have been able to 
continue the conversation.
    Senator D'Amato. All right.
    The Chairman. I would point out that the other party is no 
longer in business.
    Mr. Dolan. Senator, as I would understand it, that would 
still require me to have a release.
    Senator D'Amato. Let me tell you where I have some problem. 
I am going to go beyond that, but I do have a problem with the 
manner in which that was answered.
    Earlier today, and I was not here and I apologize, because 
we had a transportation bill, the ISTEA bill reauthorization 
for the next 6 years, and I chaired that hearing so I was not 
able to be here, Mr. Chairman.
    But I want you to know that the American people are vitally 
interested. I have received scores of e-mail letters. Let me 
share with you just two. I will only read parts of them.
    One from Dave Finger Lakes. ``Dear Senators D'Amato and 
Moynihan: The types of mismanagement and abuse being chronicled 
before your committee show a pervasive attitude towards 
disregard of the constitution and due process.'' It goes and 
says, ``Accountability has been talked of this morning, now it 
is time to put that, with the necessary consequences, into 
practice.''
    I would suggest that anyone who paid just a little bit of 
time and took the time to hear the witnesses yesterday would 
have to come to that conclusion, and not just with respect to 
the Savage case. It almost appears to me that, once again, we 
are not participating in the kind of manner this is.
    Let us get down to the bottom of this, what happened, who 
was responsible, and how are we going to correct not only those 
cases that took place in the past, but set about a mind-set and 
an attitude that we are not going to operate in that manner. 
Every one of those cases was more shocking than the other. More 
shocking than the other.
    A simple, humble optometrist. Now, let me say, you said to 
the Chairman today, am I not right, when he asked you to 
comment on the particular cases, that you had directed the 
district directors of each of these areas to report to you so 
that you could look into the file to ascertain what had taken 
place; is that right?
    Mr. Dolan. I said something a little bit different, 
Senator.
    Senator D'Amato. Well, tell me what you said.
    Mr. Dolan. Sure. What I said is, in the context of the last 
5 or 6 months, we have worked with the committee staff. We have 
assembled here in each of the four cases, at least, a fairly 
significant file and worked that with the staff.
    Senator D'Amato. Right.
    Mr. Dolan. Understand here what went on.
    Senator D'Amato. Yes.
    Mr. Dolan. What I said I wanted the directors to do is take 
those files. In addition, I want them to do as you suggested. I 
want them to see the tape and I want them to read the testimony 
of the taxpayers so that as they go back in their organizations 
and look at the ways they might have done it differently, it is 
used constructively.
    Senator D'Amato. All right. Here is the problem I have. As 
you said, these cases were not brought forth newly to you for 
the first time, but, indeed your staffs and the committee staff 
here had developed them and knew about them even before the 
members of the committee had an opportunity to hear their 
stories. I do not know which one was more chilling, to be quite 
candid with you.
    The story of the Jacobs', the optometrist, I found it just 
absolutely unconscionable. It seems to me that you must have 
had, in the 17-year history of torturing those people--and that 
is exactly what took place--somebody had to have seen that 
there was another file and have known what was taking place in 
the course of that.
    Now, one of the problems is accountability. If you send out 
forms and you say, here is a lien, or you owe so much and no 
one signs, and I can understand why you might not want a 
particular person's name, because then they might become a 
person who is harassed. But there should be some code, some 
number, 126-A, so that in the organization when a person calls 
and says I got a letter, I mean, do you not believe that that 
is necessary?
    Mr. Dolan. Senator, I agreed with an earlier question, and 
I think we do need to do more of that, yes.
    Senator D'Amato. You see, now, look. I feel totally 
inadequate as it relates to suggesting the kinds of things that 
can or should be done. But it seems to me, in fairness to the 
committee and to the American public, that these are the kinds 
of things that you should be prepared today to have discussed 
with us.
    Let me tell you what we have learned, not only from these 
four cases, but I have to tell you, it does not take a rocket 
scientist, in listening to those four cases, to say, this is 
obviously one of the problems, accountability.
    We do not want to put our tax people in the position where 
they can be harassed, so I understand why you might not put a 
person's name, address, and home telephone number on it.
    But certainly there should be the ability for whoever is 
making a legitimate inquiry to know they are speaking to more 
than just a piece of paper that says you now have a tax 
liability of $2,752 and you better send the money in, so they 
can call and there is somebody that they can speak to.
    Then after they have, they know that this is number 126-A, 
or whoever that person is, so they can follow it. That is one 
of the things that Monsignor Ballweg talked about. The Jacobs; 
they never knew who they were talking to. Mrs. Hicks, in terms 
of her situation.
    So it seems to me that even in your response, and I do not 
mean to personalize this, when you say, well, we are sending 
these files back to the district office and telling them to 
look at this, that they can do better, I mean, that is 
incredible.
    I mean, have you not analyzed each and every one? Of course 
you have. You have analyzed these cases, have you not? I mean, 
your counsel was able to tell you, there is one party more, 
there are two people who have not signed. So you have looked at 
them, right?
    Mr. Dolan. Correct.
    Senator D'Amato. You know them down to the ``T.''
    Mr. Dolan. I do not know them to the ``T,'' but I have 
looked at them pretty thoroughly.
    Senator D'Amato. Well, your people have, have they not?
    Mr. Dolan. Correct.
    Senator D'Amato. You are darn right. When you showed up 
this morning you knew you were going to be on the hot seat, so 
to speak, right?
    Mr. Dolan. Every indication.
    Senator D'Amato. Right. So tell me, what happened with the 
Monsignor? I mean, how did that happen? You have a chart there 
someplace that tells you what took place.
    Mr. Dolan. Senator, I do not have a chart, but I did say 
earlier that I have a couple of people with me who have been 
deeper in the case, and if you would like to talk with them, I 
would be happy for you to do that now.
    Senator D'Amato. Well, you see, if you came along and said 
to us, this is what took place there and this is what we are 
going to do to see to it that it does not take place again. 
This poor lady Jacobs, who did not know there was another 
number that existed when she opened up her new business account 
and did not know that the first one was with her until death do 
them part.
    How could it take 17 years; can somebody tell me how that 
took 17 years and how, year after year, she got hit with 
penalties, and how they told her, if you do not pay $11,000 and 
some odd hundred dollars we are going to basically put you out 
of business? I mean, do you want to have somebody talk about 
that?
    Mr. Dolan. I would like to, if you would like.
    Senator D'Amato. I would like to know how that happens, Mr. 
Chairman, would you not?
    The Chairman. Absolutely.
    Senator D'Amato. I do not know if you would. You have been 
here a long time, putting in lots of hours. I just think you 
are being tremendously accommodating. But, I mean, how did that 
happen? I know you are going to testify to the best of your 
ability.
    The Chairman. Anybody that testifies has to be sworn in.
    Senator D'Amato. All right, Mr. Chairman.
    Mr. Dolan. Mr. Chairman, this is Ronny Rhodes, our 
Assistant Commissioner for Collection.
    The Chairman. Would you state your name and position?
    Mr. Rhodes. Mr. Chairman, my name is Ron Rhodes. I am the 
Assistant Commissioner for Collection.
    [Whereupon, Mr. Rhodes was duly sworn.]
    Senator D'Amato. Ron, did you have an opportunity to take a 
look at this Jacobs case?
    Mr. Rhodes. Yes, sir, I have.
    Senator D'Amato. You studied it?
    Mr. Rhodes. Yes, sir, I have.
    Senator D'Amato. And did she testify truthfully and 
accurately?
    Mr. Rhodes. Yes, sir.
    Senator D'Amato. She did. So when she got this bill for 
$11,000 and told people, look, we paid every single time, why 
are you sending me this, what happened, how did that fall 
through the cracks?
    Mr. Rhodes. Senator, there are about five things when you 
look at this case, and there are nine pages of chronological 
history that I looked at.
    Senator D'Amato. Seventeen years.
    Mr. Rhodes. That is correct. It is a very complicated case 
and a lot has happened to this lady. This whole issue of this 
particular case revolves around, in my mind, five failures, if 
you will, on the part of the organization.
    First of all, obviously the length of time that it took us 
to resolve the case. That absolutely has to be looked at, and 
we did look at it. What complicated this particular case is the 
fact that the service actually ended up issuing multiple 
employer identification numbers. That was brought about by not 
having the right kind of checks in place at that time.
    There are a couple of things that we believe have been in 
place for a number of years that will prevent those kinds of 
things from happening today. When a person goes into business, 
we would like them to keep that same number, even if they stop 
business and then start up again.
    In this particular case, we issued an additional 
identification number. We should not have. Today, we cross-
reference the Social Security number of the individual when 
they make application for an identification number so that we 
end up assigning the original number. That is something that we 
have in place.
    Senator D'Amato. Let me go to this, and I see the little 
red light is on and I will come back to it. Have we figured out 
how much of a refund the Jacobs' are entitled to at this point 
in time?
    Mr. Rhodes. In terms of the Jacobs', based on the 
information that we have at this point, I believe we resolved 
the discrepancies in relationship to how much we believe that 
they owe and how much money we owe them.
    What we are in the process of doing right now is attempting 
to offer to the Jacobs' an opportunity to get with us if they 
believe that there are other monies owed and due them. We are 
more than happy to sit down and work with them, take a look at 
what information they have, trace it back, take whatever time 
that it takes to deal with any other questions that they might 
have.
    Senator D'Amato. Well, Mr. Chairman, you have been most 
indulgent. You have been here a long time, and you have got a 
General Accounting Office witness that is going to come up 
here. I think this makes the point, though.
    Here these people have been going through 17 years, and the 
fact is, they still have not, at least to their satisfaction, 
and I have to come down on their side, had justice. After they 
had gone through, all kinds of incredible problems, paying 
monies that they never had to pay to stay in business, worrying 
day and night, you could not help but feel the sincerity of 
Mrs. Jacobs and the torture that she and her husband had to go 
through, and no one there to really look at this and get this 
situation cleared up.
    Even at the present time, the question is, were refunds 
made to the proper taxpayers? We really do not know and I do 
not believe you are in a position to indicate that you know 
that. How much was refunded?
    I would just commend to you that we undertake that, even 
with this individual at this late time. But I think all of 
their stories illustrate very serious shortcomings. Very 
serious.
    Certainly people have a right to know, who did they last 
speak to, what number was it, where was it. You just cannot 
send them out a piece of paper and nobody is held accountable 
for it. I think that is pretty basic. Pretty basic. It should 
not take this hearing.
    So, Mr. Chairman, I commend you. I think we are just 
scratching the surface. This is an enormous problem, I know it 
is complex. I think the American people, in terms of some of 
the letters that I have gotten, say accountability has been 
talked about, but it is time to put it into practice. That is 
our obligation and also that of the service, because we just 
cannot legislate it, as Senator Bryan has indicated. It has got 
to be part of the culture as well. Thank you.
    The Chairman. Thank you, Senator D'Amato.
    Senator Kerrey?
    Senator Kerrey. Thank you very much, Mr. Chairman.
    Mr. Dolan, first of all, good to see you again. I 
appreciate very much and was not surprised, nor disappointed, 
with your presentation here today, which reflects well on the 
102,000 people that work for you at the IRS.
    You were very cooperative, as were many others at the IRS 
during our commission's examination of this very important 
agency. I am very grateful for your service and the way you 
conduct yourself in front of these hearings like this.
    Mr. Dolan. Thank you, Senator.
    Senator Kerrey. I would like to ask you a few questions 
about the legislation that came from that commission, and I 
will not, just so you know and you do not have to sit there and 
squirm, talk about this board at all, which is the hot button 
issue and the one that has caused a lot of heartburn.
    Mr. Dolan. Thank you.
    Senator Kerrey. Unfortunately, it is the only thing that 
has been given much attention by some. But there is a full 
range of recommendations that came from that. The first section 
deals not only with governance, but also with senior management 
changes. The second section deals with electronic filing. The 
third section deals with taxpayer protection and rights. And 
the fourth section deals with congressional accountability, 
with three sets: oversight, budget, and the third being tax 
complexity.
    First of all, have you had a chance to review this bill at 
all?
    Mr. Dolan. Yes, Senator.
    Senator Kerrey. All right. So it would be fair to engage in 
a little bit of dialogue.
    Mr. Dolan. I might not be able to go section by section, 
but I have clearly got the----
    Senator Kerrey. And I will not ask for the administration's 
views on this at all.
    Mr. Dolan. Sure. Sure.
    Senator Kerrey. I would like to get into some of the stuff 
that is relatively uncontroversial.
    Mr. Dolan. Sure.
    Senator Kerrey. In the first section, the issue, again, 
that is drawing all the heat, which is the oversight board. To 
be clear on this, my goal here is not to pull the tooth out of 
the Department of Treasury so that they lose authority. I am 
not trying to get them to relinquish authority.
    I still see IRS as an executive branch agency similar to 
what we have now with the Social Security Administration. There 
is no corporate CEO language in here, although that has been 
run around the block a few times.
    We are trying to get to a point where the commissioner is 
sufficiently independent to give us both the good news and the 
bad news and to get a long enough period of time on the job 
that some longevity can occur and a person can begin to apply 
the kind of expertise that is needed to run this agency. But, 
again, I will leave that alone.
    In the area of management, Mr. Dolan, let us say that you 
are before us right now, as Acting Commissioner. You know what 
authorities you would have the first day on the job and what 
authorities you do not have. Would you describe for the 
committee who you can hire and fire, as a commissioner?
    Mr. Dolan. Well, I think if I were the commissioner today, 
ultimately I have the ability to hire and fire the people who 
immediately report to me.
    Senator Kerrey. Define ultimately.
    Mr. Dolan. Well, it would work this way. If it were a 
senior executive service person who reports to me, I would hire 
them through the senior executive service application process, 
for the most part. This would envision an announcement, would 
go both within government and outside government and come in 
through the rules of the senior executive service.
    They would be set within the rules of the senior executive 
service. I would have a reasonably narrow salary band within 
which to attract somebody into the senior executive service. So 
that is how I would hire them.
    Senator Kerrey. The flexibility provisions that we have in 
this piece of legislation, former Commissioner Richardson 
looked at it very carefully, and most, I think, if not all of 
the previous commissioners looked at it as well and have talked 
about the lack of flexibility as a problem.
    What we are talking about here, as I see it, is you have 
got 102,000 employees. Maybe at any one point in time, let us 
say 4,000 or 5,000 are willing to abuse power, willing to do 
things wrong. Pick a number. It is a small number.
    Your problem is, it has got to have zero tolerance. Your 
problem is, you have to manage for zero error. You cannot 
afford to have a single violation of personnel policy, because 
one violation creates tremendous problems for everybody else.
    I suspect taxpayers watching this thing are going to get 
turned off entirely, presuming that this is going on throughout 
the entire agency. So the flexibility provisions of this bill 
were written in there so that you are better able to manage.
    Mr. Dolan. Senator, there is a ton of benefit in that 
flexibility section. I mean that I think it is hard to beat.
    Senator Kerrey. Pay, hiring. I mean, there are a lot of 
Federal laws that make it difficult for you. I am not talking 
about coming in and lopping off heads, I am just talking about, 
the taxpayers need to understand that the commissioner is 
restricted. They cannot manage as well as a consequence of 
legal restrictions that are in place.
    Mr. Dolan. Something you know very well from your time on 
the commission is that some of the places where we are most 
challenged to bring talent to the table is where you have to go 
out and compete in the marketplace in a way that today's 
structures and today's flexibility, salary, benefit, and 
everything else put you out there with one hand behind your 
back, frequently.
    Senator Kerrey. So your answer is yes. I am not going to 
ask you to endorse the language in here, but there is no 
question the answer is yes.
    Mr. Dolan. The elements of that section have got almost all 
up sides, and maybe there is something in the language that 
somebody would want to worry about, but what it strives to give 
to the commissioner, it seemed to me, is fundamentally right-
headed.
    Senator Kerrey. I mean, in the last couple of weeks we have 
had a very nasty incident in Nebraska with a hamburger 
processing plant that produced about 20 illnesses, and they do 
not even know if it is 20, it might be 4 or 5. But 20 people 
got sick as a result of eating beef that they believe was 
contaminated in this plant.
    Well, I know from my experience in the restaurant industry, 
which is what I did before here, is that all I need is to make 
one customer sick. If one customer gets sick, my business is 
shut off. So there is zero tolerance.
    I think the taxpayers need to understand that one of the 
urgent changes that is needed, and I think it is urgent, I 
think there is an urgency attached to this, is we have got to 
give whoever the commissioner is a sufficient amount of 
management authority that can actually run the agency. I think 
you do a good job of managing inside of the current law, but 
the law makes it difficult for you to do everything that you 
need to do. Is that fair?
    Mr. Dolan. I think it is a fair statement.
    Senator Kerrey. Can you comment on a couple of other 
things. I mean, have you had, first of all, a chance to examine 
the third section of my bill dealing with taxpayer protections?
    Electronic filing is fairly uncontroversial, I presume you 
would say. Although, again, some people understand the error 
rate in electronic filing is less than 1 percent and paper 
filing is 25 percent.
    You are talking about real dollars and a real issue here 
and we need to support you in that effort. It is relatively 
uncontroversial, but it is a very important part of managing 
this thing, especially in the new economic paradigm of 
electronic commercial transactions.
    Mr. Dolan. We are signing on to that 1,000 percent. The 
thing we have squabbled some about were the potential impacts 
on filing dates.
    Senator Kerrey. I understand.
    Mr. Dolan. I think there is some work to be done there 
potentially, but the thrust of that and what it invites by way 
of the objective to get electronic with the filing and the 
payment, is entirely, again, right-headed, I think.
    Senator Kerrey. I appreciate that.
    Under the taxpayer protection and rights section, which is 
the third section, and that is much of what we have heard 
today, and it is a tough balance. It is a very tough balance 
between giving the taxpayer a sufficient amount of rights and 
authority so that they cannot be unfairly abused. While 
maintaining your ability to collect taxes owed.
    The taxpayers also need to understand that there has been 
no claim of corruption inside of the IRS, that is to say, 
somebody taking a bribe. Fifty years ago, that was quite 
common.
    One of the things we have done with the law is we have 
reduced the amount of discretion that a revenue agent has to 
bring common sense to bear upon a judgment and, as a 
consequence, the law looks very rigid out there on the other 
end of the line. To a taxpayer, it gets very, very rigid 
because there is not much discretion.
    That lack of discretion came as a consequence of wanting to 
make sure that we have zero tolerance for bribes, which we 
have. As I said, it is one of the few tax collection agencies 
in the world that can lay claim to that rather high standard 
and that rather high quality.
    One of the suggestions that was made that we did not 
actually include in your bill, and I liked your comment on it, 
was to provide for an exemption from anti-injunctions acts so 
that a person could go into a district court and get a 
temporary injunction against the IRS, and it would have to be 
temporary, against the IRS attaching a lien, and all that sort 
of thing. We heard a number of people earlier talking about it, 
and in our deliberation we also heard that.
    Can you comment on that authority?
    Mr. Dolan. I think my worries would run a little bit along 
the lines you just described. It is this delicate balance of 
creating access and relief and remedies, while at the same time 
not inviting, by definition the way you style those remedies, 
another level of litigation, in effect.
    So what I think I would want to be circumspect about is 
something that rose to injunctive relief and invited more 
process into the courts, as contrasted with looking either at 
the appeals process or looking at some of the other devices 
that might----
    Senator Kerrey. You have to shorten up the time in which 
the documents have to be produced and the thing has to be 
settled.
    I wanted to talk a little bit about the problem resolution 
officer and the advocate. That has also been an issue raised. 
What about the idea, and we did not include it in the 
legislation but we did, by the way, as you know, remove the 
Problem Resolution office and create even more independence 
than it currently has.
    What about the idea of creating some kind of national 
problem resolution team that could, in the 100, 200, or 300 
cases where the possibility of an override is needed, that this 
team could come out there and make some kind of a quick 
evaluation and resolve these things a bit faster?
    Mr. Dolan. You know, I do not know we have ever worked the 
idea of a team, Senator. But certainly the notion of the 
advocate getting increased ability to intervene, step in, 
override, stop, look at, I mean, really would be the kind of 
independent intervention that I think both Taxpayer Bills of 
Rights envision. That is something that we generally are pretty 
supportive of.
    Senator Kerrey. Well, I appreciate that. My time is up. The 
case I am trying to make, and I am trying to make with you and 
the committee as well, is though I am in 100 percent agreement 
with the Chairman when he earlier this morning said that no 
single piece of legislation is going to solve all this, and I 
could not agree with you more, but I do think there are some 
things that we know--there is broad agreement, by the way, 
between the executive branch and the legislative branch--will 
work and would improve the operations of the IRS.
    I am hopeful that these 3 days of hearings, which have 
shown the American people we have got problems as well as shown 
the American people we have got dedicated employees trying to 
do the job right, my hope is that we can change the law so that 
we can say that these three hearing actually produced something 
in the short term, even though it does not solve every problem, 
but did something towards solving those problems that we know 
we can get at. Thank you.
    The Chairman. Thank you, Senator Kerrey.
    Senator Moynihan?
    Senator Moynihan. Mr. Chairman, just one thing which we 
touched on this morning, Senator Kerrey touched on this 
morning, Mr. Dolan.
    Mr. Dolan. Senator.
    Senator Moynihan. Which is that we go back at least to 1962 
when we had a 97 percent voluntary compliance rate, and some 
40,000 members of the IRS 35 years ago, and we are down to an 
83 percent voluntary compliance rate, with 72,000 employees.
    Could I ask you, not off the top of your head but if 
someone would think about that and give us a feeling for what 
may have happened? It speaks to a difficulty which can be 
complex, probably more than one thing, but I think we would 
like to know more about it as we proceed to the legislation 
that Senator Kerrey is talking about.
    Mr. Dolan. Senator, I appreciate your kindness. I heard you 
frame the question this morning and I thought I was going to 
get an open book test here this afternoon. I would gladly take 
you up on your offer of maybe giving you something more 
thoughtful than what I would come up with off the top of my 
head this afternoon.
    Senator Moynihan. Sure. We appreciate it very much. It is 
the kind of thing I know you care about, and maybe you can 
figure out for us.
    Mr. Dolan. Thank you.
    Senator Moynihan. There will not be a simple answer, I am 
sure.
    Mr. Dolan. Thank you.
    Senator Moynihan. Thank you, sir.
    [The information appears in the appendix at page 280.]
    The Chairman. Mr. Dolan, you are almost at the end of your 
ordeal.
    Mr. Dolan. Thank you, Senator.
    The Chairman. But let me ask one final question on the 
Savage case. You started your testimony today by apologizing 
for the four cases we heard about yesterday. My question is, 
are you prepared to make restitution to Mr. Savage for taxes 
wrongfully collected from him now? I do not think that this 
question in any way violates Section 6103.
    Mr. Dolan. No, I do not think it does either. But I think 
there would be a need, Senator, for me to understand better the 
theory by which Mr. Savage believes the restitution is due.
    I do not for one second take back anything I said about the 
way these cases were handled, and I understand and saw very 
graphically in his testimony how he felt about this. So the 
concern I have is that the settlement or the dollars involved, 
the dollars that flowed to the government in this case, were 
dollars associated with the liabilities about which I am not 
able to speak here.
    I think the conclusion was that those dollars appropriately 
flowed there as a result of the court settlement. As a 
consequence, I am hard pressed, if restitution is meant to 
reverse that, I think my answer at this point would have to be 
that I am not prepared to do that.
    The Chairman. Just let me make it very clear that I think 
it is outrageous what happened to him. Totally unfair, 
inequitable. You had a letter--not you, personally, but the 
local IRS people--from the Justice Department saying that the 
lien was wrongful. That may have been the basis of the 
settlement.
    Mr. Dolan. Senator, if you would permit me, when I get a 
response from the Justice Department to the letter I mentioned 
earlier, I would clearly want to share that with you and with 
the staff.
    The Chairman. Well, I just think the facts are such that it 
is outrageous treatment of a very responsible taxpaying 
individual. I hope you will get back to me promptly.
    Mr. Dolan. I will, sir.
    The Chairman. I do want to thank you for being here today. 
I think these hearings are important, not only for the American 
taxpayer, but I think for the welfare and future of the agency 
and its employees.
    I appreciate, as I said, that you have at least agreed, in 
part, that there are some serious problems that have to be 
addressed and I cannot tell you how important I think it is 
that we seek to work together, the Secretary of the Treasury, 
yourself, the House and the Senate, the administration, in 
taking what steps are necessary to make this a service-oriented 
agency in fact, and not just in name.
    Mr. Dolan. Senator, I take your invitation very seriously, 
and I know Secretary Rubin does as well.
    The Chairman. So, in closing, as far as you are concerned, 
I do want you to know that these oversight hearings will 
periodically continue, because we think it is important that 
the Congress make certain that the agency is operated in a 
manner of the best interest to the taxpayer and the American 
government.
    So thank you very much for coming here today.
    Mr. Dolan. Thank you.
    Senator Moynihan. Thank you, Mr. Dolan.
    Mr. Dolan. Thank you, sir.
    The Chairman. Our final witness, and we will have to be 
relatively brief because I have other appointments, but I am 
particularly pleased to welcome Ms. Lynda D. Willis, who is the 
Director of Tax Policy and Administration Issues for the 
General Accounting Office here in Washington.
    Ms. Willis, will you please come forward. I want to 
apologize to you. You have been shifted around from time to 
time in these hearings. It is not a lack of any interest or 
importance we attach to your work, because the study you 
accomplished was most important.
    Would you raise your right hand?
    [Whereupon, Ms. Willis was duly sworn.]
    The Chairman. Please be seated and proceed.

   STATEMENT OF LYNDA D. WILLIS, DIRECTOR OF TAX POLICY AND 
    ADMINISTRATION ISSUES, U.S. GENERAL ACCOUNTING OFFICE, 
                         WASHINGTON, DC

    Ms. Willis. Thank you, Mr. Chairman. I appreciate being 
invited here today to talk about the work that we have done for 
this committee related to IRS's use of liens, levies and 
seizures.
    I will make my statement brief. We will continue working 
with your staff through the upcoming months as we pursue this 
issue with IRS.
    Briefly, let me summarize the points that my testimony 
makes, and then I will be ready to answer any questions that 
you may have. You asked us to look at the extent of use, and 
potentially inappropriate use, of IRS's collection enforcement 
authorities. Basically, we found that, while IRS has some 
limited data about its use and misuse of collection 
authorities, that data is not complete.
    Because that data is not complete and because of certain 
recordkeeping inadequacies within the IRS, we are unable to go 
in and determine either the extent of IRS' misuse of its 
collection authorities or the characteristics of the taxpayers, 
as you requested, who have been subjected to inappropriate use 
of these authorities.
    We looked at data from a variety of sources, including that 
from the taxpayer advocate, the Office of the Inspector 
General, et cetera, and found that IRS does not require that 
information on the resolution of the complaints be recorded, as 
well as some other specifics, such as whether it was an 
inappropriate use of an enforcement authority that generated 
the complaint.
    Finally, I would just like to say that because of these 
inadequacies it is impossible for us, IRS, or the Congress to 
have the data that would permit us to readily resolve 
reasonable questions about IRS's use of collection enforcement 
authorities, the causes of any misuse or the characteristics of 
taxpayers involved.
    We discussed this with IRS and at that time they told us 
that they believed that they had adequate checks and balances 
in place to identify misuse of collection authorities and that 
they did not need to put additional systems or data gathering 
efforts in place to further pursue these cases.
    We disagree with that. We testified a number of years ago, 
I think in 1988, as well as in reports issued in 1994, and a 
report to you in 1996, that we thought IRS needed to improve 
its recordkeeping systems on potential agency employee 
misconduct so that they would have the ability to track these 
allegations and to determine root causes of the problems and 
devise ways to deal with them effectively.
    [The prepared statement of Ms. Willis appears in the 
appendix.]
    The Chairman. Thank you, Ms. Willis.
    Are you telling me, in effect, that not only Congress, but 
the agency itself, really does not have the records to enable 
us to determine whether or not the collection tactics are 
proper or improper?
    Ms. Willis. It would be very difficult to go systematically 
and determine whether IRS across the board is using these 
enforcement authorities appropriately.
    The Chairman. Now, you mentioned that locating closed 
collection files sent to the Federal Records Center is 
impractical.
    Ms. Willis. Yes, sir.
    The Chairman. With the state of records as you have 
described, is it possible for anyone to determine how 
widespread the problems regarding liens, levies, and seizures 
really are?
    Ms. Willis. Not without a great deal of work. It would take 
an extended period of time and a lot of resources to be able to 
identify and find enough case files that you could make that 
determination, and even then you would be dependent upon the 
information being in the case files, and that is not always the 
case.
    The Chairman. Senator Moynihan?
    Senator Moynihan. Yes. Being conscious of your pressing 
time now, I just want to make one comment and ask one question. 
We have a voluntary system of tax payment and a still high 
level of compliance at 83 percent. It is declining, but it is 
high.
    Most of the taxes owed that are not paid voluntarily, some 
resolution takes place and they are collected, 93 percent, I 
gather. But then to get the remaining 7 percent----
    Ms. Willis. I think it is actually about 87 percent that is 
owed is actually collected.
    Senator Moynihan. Oh, I see. Then to get up to a little 
higher number, there are 750,000 liens, 3.1 million levies, and 
10,000 seizures. That is an annual rate?
    Ms. Willis. That was the number for 1996. Now, not all of 
those liens and levies resulted in additional money flowing 
into the Treasury. Not all of those enforcement actions are 
productive.
    Senator Moynihan. But that is about 4 million families 
getting caught up in essentially punitive action by the Federal 
Government, is it not?
    Ms. Willis. It is a high number. You cannot directly 
translate the number of enforcement actions taken to taxpayers. 
You might have more than one levy on one taxpayer.
    Senator Moynihan. On one taxpayer.
    Ms. Willis. More than one lien on one taxpayer.
    Senator Moynihan. But one could attempt to get a number of 
that sort, could you not? Yes, the GAO could attempt to do 
anything.
    Ms. Willis. We could attempt to look at that number through 
the IRS systems, but that would require a lot of programming 
because IRS' recordkeeping systems are not set up to produce 
that information.
    Senator Moynihan. All right. But we could ask you to do it 
on the back of an envelope someday and get a feel for it.
    Ms. Willis. I could talk to IRS about it and see what we 
could do.
    Senator Moynihan. Yes. Yes.
    Now, what did you say, we have 87 percent of taxes owed 
that are now collected?
    Ms. Willis. Right. The numbers that I have seen, indicate 
that about 83 percent are paid without enforcement action.
    Senator Moynihan. They open the mail, and there it is.
    Ms. Willis. And another 4 percent comes in as a result of 
IRS enforcement actions.
    Senator Moynihan. Really, I do not want to sound absurd 
here, but we have 70,000 IRS employees to collect 4 percent of 
the taxes. In a sense, the 83 percent gets mailed in and the 
enforcement procedure, or whatever, produces a rather small 
result. But perhaps, absent of that, it would be a different 
situation.
    Ms. Willis. Senator, that is one of the reasons why we 
think it is very important that IRS know which of its 
enforcement actions are effective in which cases. We have 
testified any number of times that IRS does not have this 
information, that we do not know which enforcement actions are 
most productive, under which circumstances.
    Senator Moynihan. Good questions.
    Ms. Willis. Right. And until we know more about both the 
systemic causes of the problems, and we heard some interesting 
testimony over the last 3 days about causes, such as erroneous 
assessments, as well as mishandling after that. But until we 
know more about where the problem is originating and what works 
to fix the problem, it is difficult to target resources most 
effectively.
    Senator Moynihan. Right. So the first thing to do is to ask 
the question.
    Ms. Willis. The first thing to do is to ask the question.
    Senator Moynihan. Yes. Yes.
    Would you have some feeling for those numbers I recited 
this morning, that in 1962 we had a 97 percent compliance rate, 
and we are now down to 83 percent voluntary compliance.
    Ms. Willis. Senator, I have never heard the 97 percent 
compliance rate figure before, so I do not know what that is 
based on. I am familiar with where the 83 percent comes from, 
but not the 97 percent.
    Senator Moynihan. I am just informed by Mr. Giardano that 
that is IRS data.
    Ms. Willis. I would be more than happy to look at that and 
provide an answer for the record.
    Senator Moynihan. Excuse me just a second. The person who 
knows all about this is sitting behind me.
    [Pause.]
    Senator Moynihan. Oh, I see. There is a publication here 
called ``The Income Tax of 1862-1962: A History of the Internal 
Revenue Service.'' It is obviously an official history. So it 
says, at this point we have a 97 percent compliance rate.
    Ms. Willis. I am not familiar with the number. I would be 
happy to look into it and see what the difference is.
    Senator Moynihan. Our copy comes from the Legislative 
Research Service.
    That speaks of a decline. It could speak to the question of 
complexity, it could speak to the question of trust in 
government, it could speak to the question of the quality of 
grammar school education, do people learn to add or learn to 
use adding machines, which is different. I do not know. But it 
is a question we should address.
    I think that one of the indicators of social and political 
vitality is that the citizens assume that their taxes are owed 
and pay them. When they stop doing that, you have trouble. You 
often have revolutions. We had one in the first instance. You 
would agree on that, I am sure.
    Ms. Willis. Senator Moynihan, having a high compliance rate 
is very important and having people pay their taxes when they 
are due is key, obviously, to the economic well-being of this 
country.
    Senator Moynihan. Oh, I would go much further than that. 
No, no. I would say the social fabric and vitality of a country 
is, do you know what your duties as a citizen are, accept them, 
and comply. That speaks to the morale of a society.
    Ms. Willis. The compliance rate varies over time and it 
also varies amongst different groups of taxpayers. As the 
economy changes, that may be part of the reason why the 
compliance rate changes.
    Senator Moynihan. Yes.
    Ms. Willis. When you look at wage earners who file tax 
returns, they have a very high compliance rate, over 95 
percent.
    Senator Moynihan. Yes.
    Ms. Willis. That is primarily because of withholding and 
information reporting. When you look at income that is subject 
only to information reporting you still have a high compliance 
rate. But when you move away from income that is subject only 
to either withholding or information reporting, the compliance 
rate drops.
    So if we have shifts in our economy where we have less of 
the tax base subject to withholding or information reporting, 
that is one possible reason.
    Senator Moynihan. Right. And a good subject, something the 
IRS should be interested in in the first instance.
    Ms. Willis. Something they are very interested in.
    Senator Moynihan. Yes. I was surprised. In my early life on 
this committee I would cite that 97 percent rate and say, what 
a good republic we have here, only to look up and find, well, 
something has gone astray.
    It may be the complexity of the Tax Code. The numbers of 
the employees has increased 70 percent since 1962. The 
population has increased by about 43 percent, so it is 
disproportionate, not just following the number of taxpayer. 
Well, we are embarked on this.
    One last question if I can, Senator Grassley. The year 
2000. This is a subject that just preoccupies me and to which 
more attention is beginning to be paid. The present computers, 
which were just going on-line in 1962, will not work unless 
they are reprogrammed, and we are hours away. I do not have to 
tell you about. I think Joel Woolenson is working on it there 
at the GAO.
    But one of the problems with saying the year 2000 is you 
get the impression that, by the year 2000, you better have done 
something. No. By January 1, 1998 it may be your drop-dead 
date, because after that there is just not enough time to catch 
up.
    What is your feeling about the IRS?
    Ms. Willis. Senator, the group that I head is doing the IRS 
work related to the year 2000 problem for GAO, and we are 
within a couple of weeks of being ready to brief the various 
committees on what we are finding. It is a very, very large 
problem for IRS.
    I believe IRS is the largest civilian agency year 2000 
conversion, at least in this country, and possibly in the 
world, and they are dealing with very old computers. They have 
established a project office which is aware of the severity of 
the problem, but obviously they face major challenges in 
successfully converting their systems, in part because some of 
the systems are going to have to be replaced. They are so old, 
they cannot be made compliant. They are going to have to go 
through and replace hardware as well as operating systems.
    IRS has a large team of people working on this. They are 
aware of the problem, but they have a very long way to go and 
time is running out. Like I said, in a couple of weeks we will 
be in a better position to come back and give you a better 
assessment.
    Senator Moynihan. All right. I hope you will, because this 
could bring the whole system crashing down.
    Ms. Willis. It could be catastrophic.
    Senator Moynihan. Yes, it could be catastrophic. Now, the 
General Accounting Office does not use words like that often, 
but we have a catastrophe facing us. It is not going to happen 
for 3 years. Grown-ups do not say, oh, well, let us go out to 
dinner. Maybe we could get some sense of what you think is 
needed. They are going to need billions of dollars, are they 
not?
    Ms. Willis. The last numbers I saw were about $800 and some 
million, but not all of the mission-critical systems have been 
identified yet.
    Senator Moynihan. So it is a billion dollars.
    Ms. Willis. It rounds to a billion.
    Senator Moynihan. Yes. Yes. If we do not do this, we will 
have the whole system crash, what has just been described by 
Ms. Willis as a catastrophe. It is one of those nice problems, 
because it does not have to happen.You can do everything you 
need to do, you just do it on time. But there comes a moment 
where it is too late to have gotten it done on time and the 
catastrophe comes no matter what you do then.
    Senator Grassley. We are almost there.
    Senator Moynihan. I would think we are getting close to 
there. Gardania, the economist in New York, says there is a 35 
percent chance of a global recession just for the whole world 
not being up to speed on these things. But our job is to see to 
the U.S. Government. Well, not just the U.S. Government, but 
certainly the Internal Revenue Service. The Defense Department 
must have a tremendous problem. But there you are.
    In about 2, 3 weeks you will let us know?
    Ms. Willis. Yes.
    Senator Moynihan. I certainly appreciate that.
    Ms. Willis. We will be able to give you a status report.
    Senator Moynihan. We will get some of your thoughts on, why 
the compliance rate at the time.
    Ms. Willis. Yes.
    Senator Moynihan. I have to admit that, for such a young 
person, 1962 seems a long way in the past, but they do start 
then and we were obviously in a very different order of public 
attitudes towards the Revenue Service.
    Ms. Willis. Senator, I think the other question is whether 
that number is calculated the same way that we calculate it 
today.
    Senator Moynihan. Of course.
    Ms. Willis. And we will look at that as well.
    Senator Moynihan. All of those good, orderly questions.
    Ms. Willis. We will look at that and see if we cannot give 
you a comparison and some suggestions.
    Senator Moynihan. Yes. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Grassley. Before I ask one question, and I only 
have one, there are a couple of administrative matters to take 
care of for Senator Roth, the Chairman of the committee.
    Ms. Willis, your statement will be included in the record, 
your entire printed statement.
    Ms. Willis. Thank you.
    Senator Grassley. Then also I would request from the 
committee that the various exhibits discussed during our 
hearing, and that would be for the 3 days, be included in the 
record.
    First of all, before I ask one question, I should 
compliment the General Accounting Office, you, and others who 
helped us on the Restructuring Commission through your 
testimony and a lot of hard work there, and I think you 
contributed a great deal towards the Kerrey-Grassley bill and 
the report of the recommendations of that commission so that we 
will be able to follow up on this hearing with some real 
changes at the IRS to make it more user-friendly and more 
responsible and have better management.
    Ms. Willis. Thank you.
    Senator Grassley. But the question is this, and it comes 
from your testimony. You mentioned that even if collection 
records contained relevant information, there are still 
obstacles to retrieving those records for a systematic review. 
Explain what those obstacles are.
    Ms. Willis. Well, basically part of the problem is finding 
the case files, and once you find them, making sure that the 
information is in there and that you are able to build an 
entire case file for a particular enforcement action.
    I recall over the past couple of days one of the issues has 
involved erroneous assessments. A collection case file will not 
contain information on the origin of the assessment. That would 
be in a different location, in a different office where the 
assessment was made. It is very difficult to tie those case 
files together and also make sure that you have the complete 
record.
    Senator Grassley. So the problem is basically the inability 
to find all of the information available in the file.
    Ms. Willis. To pull it all together in any kind of timely 
fashion, yes.
    Senator Grassley. I call on Senator Murkowski.
    Senator Murkowski. I will be very brief. Let me thank you, 
Senator Grassley, and thank you, Senator Moynihan.
    Ms. Willis, I am going to have one question that has 
probably got a couple of parts to it. But on page 2 of your 
testimony you say, ``The IRS system, both manually and 
automated, have not been designed to capture and report 
comprehensive information on the use and possible misuse of 
collection authorities.'' So it was not designed. So we assume 
it was designed intentionally as opposed to having been 
designed unintentionally. But it was not designed to do that.
    Then on page 11 you say, ``IRS cannot readily produce data 
on the overall use or misuse of collection enforcement 
authorities or on the characteristics of affected taxpayers,'' 
which reinforces that you have a system that was not designed 
to do what we are concerned about.
    On page 13 you say, ``If a taxpayer complains about 
enforced collection actions, the complaint is to be handled 
initially by the office responsible for the action. These 
offices do not routinely keep automated or even summary records 
on the complaints or on the appropriateness of lien, levy, or 
seizure actions taken,'' which again suggests there is some 
intentional effort here in the way the system is set up.
    So my question is, in effect are you not saying that the 
system that the IRS has put in balance is really designed to 
ensure that there is no way--no way--for the IRS personnel to 
be held accountable for any erroneous actions?
    Ms. Willis. Senator, I do not believe they were designed 
with that intent. The systems were designed as financial 
accounting systems, so they are transaction-based. They are 
designed to determine whether the taxpayer owes money, whether 
the money has been paid.
    They are not designed to collect information on how the 
money came in or whether there was an effective lien, levy and 
seizure. The basic accounting system of the IRS is like that.
    That is one of the reasons why it is difficult to determine 
how many taxpayers are involved, it is because their systems 
are transaction based, not taxpayer-based. So you may have 10, 
12, 15 modules for an individual taxpayer on an account which 
are separate and individual transactions.
    In terms of these systems within the offices on collecting 
information on misconduct, those systems were never designed to 
collect that type of information, they were designed to collect 
information in a more aggregate sense in terms of complaints, 
et cetera.
    Senator Murkowski. Perhaps you are being more charitable 
than I am, but it would seem to me that they are clearly not 
designed for accountability; is that a fair statement?
    Ms. Willis. They are not designed for that, no.
    Senator Murkowski. And one would wonder why there should 
not be some consideration given for accountability because, as 
I understand it from your testimony, there is no way to 
determine how many times the IRS has made a mistake perhaps in 
sending out a collection notice, no way to determine how many 
complaints may have been received.
    You wonder if this was the way managers at IRS set up the 
system or set it up so that no one can trace questionable 
behavior because there is no accountability designed in it.
    Ms. Willis, if an agency wanted to cover up and hide its 
inappropriate behavior, would the IRS system not be one that 
would be appropriate to use as a model?
    Ms. Willis. I think as the statement says, with the IRS 
systems it would be very difficult to go in and identify cases 
systematically where there has been inappropriate behavior.
    I do not know if it would be the best system for avoiding 
that, but it certainly is not a system that facilitates 
identifying that type of behavior which, as I stated earlier, 
is why we have recommended on several occasions that IRS 
develop this capability, because only when people are held 
accountable and know they are going to be held accountable and 
know that complaints against them are going to be tracked do 
you send the message that this is important.
    Senator Murkowski. Yes. Well, it appears to be designed so 
that there is no paper trail of any consequence, records. If 
there is no accountability, why, you have the inconsistencies 
arising that we unfortunately see here today. You can imagine 
how a business, Mr. Chairman, would operate under that kind of 
a similar practice.
    I used to be in the banking business. When I became 
president of one organization I noticed that all of the notes 
that the loaning officers were making, they would initial 
because we wanted to know who made that loan, because all loans 
are good when you make them. But then I noticed that they were 
in pencil. So we changed that policy and put them in ink. You 
would be amazed. They got a little more careful.
    I want to thank you, Ms. Willis.
    Ms. Willis. Thank you.
    Senator Murkowski. Thank you, Senator. I think it has been 
revealing and rewarding. Hopefully the Finance Committee, under 
the chairmanship of Chairman Roth and the rest of us, are up to 
the challenges ahead.
    Thank you.
    Ms. Willis. We look forward to working with you and 
continue to support the efforts of this committee as you 
continue your oversight, especially in this area.
    Senator Moynihan. Well, we thank you, Ms. Willis.
    Senator Roth having had to go another matter, I will just 
presume on the occasion to declare the hearing closed.
    Again, great thanks to you. We look forward to, early on, 
that 2000 report.
    Ms. Willis. Yes. Yes, sir.
    [Whereupon, at 4:23 p.m., the hearing was concluded.]
                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


          Prepared Statement of Monsignor Lawrence F. Ballweg

    Good morning Chairman Roth and Members of the Senate Finance 
Committee. I am Monsignor Lawrence F. Ballweg. I have been a priest in 
the Catholic Church for over 57 years. I was retired in 1990 at the 
mandatory retirement age of 75. My mother, Elizabeth Ballweg, died in 
August 1988 and, in her will, established a Trust--the benefits of 
which go to charity. In the will I was named the Trustee and since her 
death I have faithfully and conscientiously performed my duties as 
Trustee. I have submitted an annual report of the Trust's activities to 
the IRS each year without any problems. During the year 1995, I made 
more numerous transactions than in previous years. In order to record 
all the income of the Trust, I listed the various items on separate 
sheets entitled Statement 1, Statement 2, etc., and then placed the 
totals in the appropriate spaces on the IRS Form 1041. I did this more 
for the convenience of the IRS than for my own convenience. Since I did 
not pay a professional to prepare the Trust's return, I spent hundreds 
of hours collecting the necessary papers and balancing the figures. I 
asked for an extension of time for 1995 so that I could be more 
confident that the report was as accurate as possible. Two months later 
the return that cost me so much time and effort was returned requesting 
that I put all my figures on the appropriate forms that were enclosed. 
My second report was done hurriedly and returned on July 7 to make sure 
that it reached the IRS office in the few days that were allowed. In my 
hurry to return this report on time, it may not have been done as 
perfectly as the first although all the figures were the same.
    I spend six months in Florida and six months in New York. The day 
after I arrived in Florida (November 4, 1996) I received a letter from 
the IRS Atlanta office stating that I owed more than $18,000 in taxes 
and penalties. Since I had left a copy of my final report in New York, 
I asked that a copy be sent to me. I was informed that I first had to 
request an application for a copy of my report and then return the 
application with a check for $14.00. When the application arrived I 
filled it out and enclosed the check. About 6-8 weeks later, I received 
a form that indicated that I could not receive the copy since my name, 
Lawrence F. Ballweg, was different from the name of the Trust which was 
Lawrence F. Ballweg Trustee U/W Elizabeth D. Ballweg, and reflected on 
line 1 of Form 1041, Elizabeth D. Ballweg, my mother who had died 8 
years before. I wrote a long letter, dated January 6, 1997, explaining 
that I had submitted annual reports since 1988 and that my name was the 
signature on each report At the same time I submitted another request 
for a copy of my file. My request was ignored. Instead I received a 
``Final Notice,'' dated January 20, 1997, in which I was told that the 
IRS intended to take steps to take my bank account, auto or other 
property if they had not already done so. I have read several stories 
about how threats of that kind have caused extreme physical and mental 
suffering to taxpayers in the past. I now began to understand what 
those stories meant.
    I must confess that I spent sleepless nights thinking of the 
possible consequences and not knowing where to turn since by this time 
I was certain that I would get no help from the IRS.
    Mr. Chairman, it was at this time that I heard of your 
investigation into the conduct of the IRS. I immediately wrote to you 
and received prompt action. CNN presented my case on television and the 
next day I received a call from an IRS Taxpayer Advocate, received a 
copy of my file and was advised how to make the necessary adjustments. 
On March 24, 1997, I received notice from the IRS' Atlanta Office that 
I did NOT owe any tax.
    For eight months I lived in constant worry, if not fear, that the 
Trust that my dear mother had established to help the poor would be 
penalized because of what I can only call the unprofessional, 
calloused, and indifferent behavior of IRS employees who are devious 
enough never to sign their names to any notices that they send out. The 
taxpayer is dealing with people who can do inestimable harm but cannot 
even be identified. I can only thank you, Senator Roth and the Senate 
Finance Committee, for trying to correct such abuses and I pray that, 
as a result, conscientious citizens will be spared the humiliation, 
embarrassment, fear and anxiety that I have experienced.

                               __________

                  Prepared Statement of David Burnham

    Mr. Chairman and members of the committee, thank you for requesting 
my testimony. I very much appreciate the opportunity to appear before 
this distinguished body
    The record clearly demonstrates that the lack of effective 
oversight of the Internal Revenue Service--by Congress, the courts, 
reporters, tax practitioners, and other concerned individuals--has done 
grievous harm to the American people for many years. While it has 
become a cliche, it nevertheless remains a basic truth: the price of 
liberty is eternal vigilance.
    Because we have routinely failed to hold the IRS accountable for 
its actions, the agency has too often operated in abusive, sloppy, 
unresponsive, improperly political and occasionally corrupt ways that 
are a threat to our society.
    The IRS's continuing problems are costly to the nation in two ways. 
First, a badly managed agency does not collect as much as might be 
expected of the relatively small, but still significant, portion of the 
federal taxes owed by noncomplying taxpayers. The second cost is harder 
to measure, but probably more important. A badly managed agency is 
unfair: substantial numbers of individual citizens are erratically 
subject to wrongful actions. Such treatment contributes to the growth 
of a corrosive public cynicism that undermines public confidence in 
government in a fundamentally dangerous way.
    My belief that strong oversight can have positive impact on 
government is not theoretical. It is based on direct experience. As a 
reporter who has investigated large powerful bureaucracies like the New 
York City Police Department, the National Security Agency, the FBI and 
the IRS for the last 30 years, I have seen clear and certain examples 
where public exposure of serious government problems has led to genuine 
improvements in government operations. We need the New York Police 
Department, we need the FBI, we need the IRS. But when such powerful 
organizations are allowed to operate without continuous constructive 
review, history tells us that almost certainly they will go wrong, 
sometimes in very serious ways.
    The IRS, of course, is the subject of the committee's hearings. 
More than ten years ago, I began an investigation of that agency that 
led to the 1989 publication of A Law Unto Itself: The IRS and the Abuse 
of Power. This book was a unique and highly praised examination of the 
agency's historic and continuing failure to well serve the American 
people. To my astonishment, shortly after its publication, Fred 
Goldberg, the IRS commissioner at the time, told a national television 
audience that my critique of the agency had got it right.
    Perhaps one reason the commissioner did not condemn my book is that 
it did not heap blame on the Bush Administration alone. My research, in 
fact, found that the IRS has suffered mishaps and misadventures under 
almost every president, Republican and Democrat, going back at least to 
Herbert Hoover. I found authoritative government documents clearing 
showing numerous multiple abuses:
   Herbert Hoover, irritated by political criticism of his 
        budget-cutting policies by an organization of weapons 
        manufacturers, ordered a secret FBI investigation of the group 
        that was partly based on supposedly confidential tax 
        information.
   Franklin Delano Roosevelt regularly used the IRS as a 
        political hit squad. He ordered the agency to mobilize its 
        enforcement powers against former Treasury Secretary Mellon, 
        Senator Huey Long, the singer Paul Robeson, Republican 
        Representative and neighbor Hamilton Fish, Father Charles 
        Coughlin and many others.
   During President Truman's watch, a massive and long-
        festering IRS corruption scandal erupted during which hundreds 
        of agency officials and agents were implicated, including one 
        secretary of treasury, one commissioner and one assistant 
        attorney general. A good number were convicted and sent to 
        prison for taking bribes or forced to resign from government 
        service.
   With the full knowledge of President Kennedy and his 
        brother, the IRS Commissioner of that administration 
        established a program to go after ``extremist organizations.'' 
        Although the memos describing the program said the extremists 
        of concern were on both the right and the left, it appears that 
        all of those who lost their tax exempt status in connection 
        with this program were fundamentalist conservatives who had 
        been criticizing the president.
   President Nixon, among other abuses, established within the 
        IRS the SSS--the Special Service Staff--to use tax records to 
        track ``dissident groups and individuals.'' One of the 
        impeachment counts approved by the House Judiciary Committee 
        involved the president's misuse of the IRS.
   During the Reagan years, the IRS forgot the lesson of the 
        Truman era, and cut back on agency efforts to discover and 
        punish corruption. The result was what appears to have been a 
        mini-surge in willingness of IRS officials and agents to use 
        their governmental powers for private gain in cities like 
        Philadelphia, Chicago and Los Angeles.
    Although it may not at first be obvious to you, my point here is 
not that the IRS is inevitably a corrupt and badly-run organization. On 
the contrary, growing out of the exposure of the problems of both the 
Truman and Nixon Administrations came periods of serious public concern 
and genuine reform.
    This truth--that large and powerful organizations desperately need 
outside review by informed critics--is one that Congress has often 
ignored. As the chairman and members of the Senate Finance Committee 
know, the historical record proves that oversight of the IRS has rarely 
been a major concern of this committee. It must be acknowledged--and it 
should be celebrated--that the breadth and depth of this hearing on the 
basic performance of the IRS is unusual, although perhaps not 
unprecedented. I contend that the record of the House Ways and Means 
Committee and the Joint Tax Committee and the General Accounting Office 
is not much better. For Congress, re-writing tax laws and imposing new 
sanctions to enhance the collection of tax dollars have almost always 
overwhelmed concerns about the fairness and effectiveness of the IRS.
    In America, however, oversight is not a Congressional monopoly. 
Thanks to the First Amendment of the Constitution, news organizations 
are free to investigate and publicize the failures of government. But 
when it comes to the IRS, the media has rivaled Congress in its failure 
to audit America's largest and in some ways most powerful enforcement 
agency. More than twenty years ago, two very good reporters from the 
Philadelphia Inquirer undertook a ground breaking and prizewinning 
investigation of the IRS. Very recently, the New York Times has 
assigned David Cay Johnston to focus on the agency and its enforcement 
activities. Other than that--and the flurry of IRS reporting after 
Watergate--coverage of this agency that touches the lives of almost 
every American has for many years been largely ignored by both print 
and television reporters.
    In some ways, the lack of effective oversight is not all that 
surprising. The IRS is a very large and very complicated agency that is 
not easy to understand. And there are many people--especially within 
the beltway--who truly do not understand that the nitty-gritty of how 
the government rubs up against individual citizens is more significant 
in many ways than the grandest and most publicized federal 
``initiative.'' A couple of years ago, the senior lobbyist for a major 
national organization in Washington made the astonishing statement to 
me that he was only interested in government ``policy,'' not government 
``enforcement.''
    This curiously obtuse attitude was a central reason why Susan Long, 
a professor at Syracuse University, and I decided in 1989 to form the 
Transactional Records Access Clearinghouse (TRAC). Our basic idea was 
that if Congressional committees, reporters, public interest groups, 
scholars and businesses were able to obtain comprehensive information 
about the day-to-day activities of federal enforcement agencies, they 
would undertake serious oversight studies. Since that time--with the 
support of Syracuse University, the Knight Foundation, the Rockefeller 
Family Fund and The New York Times Company Foundation and other 
organizations--TRAC has obtained internal administrative data tapes 
from the Justice Department and a number of federal enforcement 
agencies and provided it to the public in new and innovative ways.
    In the spring of 1996, and again in 1997, for example, TRAC created 
a special site on the World Wide Web that gave viewers all over the 
nation many thousands of pages of maps, charts, graphs and tables about 
the civil and criminal enforcement activities of the IRS. The address 
is http://trac.syr.edu/tracirs. For the first time ever, TRAC's site 
gives taxpayers, reporters, public interest groups, and scholars easy 
access to comprehensive and authoritative information about how, where 
and when the IRS is enforcing the law. With this information, it now is 
possible to examine and question the basic policies of the agency.
          DATA FACTS: From 1980 to 1995, IRS criminal enforcement 
        underwent a dramatic shift in emphasis. In 1980, more than 
        three quarters of all IRS prosecutions were aimed at 
        individuals accused of traditional tax crimes like failure to 
        file or the filing of a fraudulent return. By 1995, less than 
        half of IRS prosecutions involved traditional tax violations, 
        with crimes like money laundering, drugs and currency 
        violations taking their place. From 1988 to 1995, civil audit 
        rates for individual nonbusiness taxpayers with incomes over 
        $100,000 declined by a factor of four.
          POLICY QUESTIONS: The sharp decline in IRS activities against 
        wealthier individuals and traditional forms of tax violations 
        is a striking change in national tax enforcement policy that 
        has gone on under the Reagan, Bush and Clinton administrations. 
        Why were these changes instituted? Was this important shift the 
        product of conscious decisions by top policy makers or an 
        accident? Is there any evidence that the change has resulted in 
        the collection of more revenue? Or less?
          DATA FACTS: Government data show wide variations in the civil 
        and criminal enforcement patterns of the IRS, some of which 
        appear to make very little sense. The taxpayers in Manhattan, 
        Brooklyn and Las Vegas, for example, all have something in 
        common with taxpayers in northern Florida and the comparatively 
        rural areas around the North Carolina cities of Greensboro and 
        Ashville. In 1995, on a per capita basis, they all ranked among 
        the ten most active districts when it came to the prosecution 
        of IRS criminal cases. On the civil side, taxpayers in the 
        IRS's San Francisco district, Mississippi, Idaho and New York 
        City stood the highest chance of being audited. One curious 
        fact about the taxpayers in these very different districts 
        concerned their income. New York had the highest adjusted gross 
        income and Mississippi had the lowest.
          POLICY QUESTIONS: Does the IRS have an effective national 
        program to make sure that areas with the most problem taxpayers 
        have most enforcement resources? Or is the effort in fact a 
        random one involving the relative energy levels of different 
        district managers? Has the combined impact of various forms of 
        IRS enforcement actions--notices, audits, criminal 
        indictments--ever been studied? Given the high cost of moving 
        IRS staff, has the agency developed a plan to continually use 
        the natural forces of attrition to shift auditors and examiners 
        to areas where they are most needed?
          DATA FACTS: In March 1996, TRAC mounted its first web site on 
        the patterns and trends of IRS criminal enforcement. The 
        information was based on data obtained from the Justice 
        Department under the Freedom of Information Act. Although both 
        the IRS and the Justice Department were given access to the 
        site before it became publicly available, neither raised any 
        questions. When news organizations began to publish articles 
        based on the data, however, spokespersons for both agencies 
        questioned the validity of the government's own information. 
        The curious tactic of impeaching your own material prompted us 
        to separately ask the agencies to meet with us to resolve 
        whatever problems they had with our data analysis. Both 
        refused. At this point, we undertook a new study in which we 
        compared--where it was possible--the enforcement information 
        from the Justice Department, the courts and the IRS. This study 
        found that the portrait of criminal tax enforcement painted by 
        the Department and court data were highly consistent. 
        Surprisingly, however, the department and court data patterns 
        were very different than reported by the IRS. In 1995, for 
        example, the IRS claims it sent twice as many persons to prison 
        as was recorded by the department and the courts. This 
        discrepancy--and several others--led us to conclude that 
        important information provided the public in the IRS's annual 
        report about its criminal enforcement effort was 
        ``substantially misleading and inaccurate.''
          POLICY QUESTIONS: Why is the IRS, of all agencies, unable to 
        properly balance the books on what is in fact a low-volume part 
        of its activities? Given the failure of the IRS to account for 
        its criminal enforcement activities--even with parallel 
        information available from the Justice Department and the 
        courts--what faith can be placed in its accounting of civil 
        audits? If the IRS enforcement information is in fact seriously 
        flawed, how can Congress judge its basic competence? Has the 
        General Accounting Office ever conducted a detailed audit of 
        IRS enforcement counts published each year in the agency's 
        annual report?
    The hard numbers are there. The good questions are there. All that 
has been lacking are skeptical Congressional Committees, reporters, 
scholars and tax practitioners willing to invest the time and energy to 
understand the numbers and to ask questions.

                               __________

                 Prepared Statement of Shelley L. Davis

    Mr. Chairman and Members of the Senate Finance Committee, I am 
pleased to be able to share a few of my thoughts and experiences with 
you today as you explore specific issues of IRS abuse of those the tax 
agency likes to call its ``customers''--American taxpayers. For 16 
years I worked as an historian for the federal government. Nine of 
those years were with the Department of Defense and the final seven 
were spent as the first and unfortunately, the last, official historian 
for the Internal Revenue Service. At the end of 1995, I resigned from 
my federal career in protest over the unwillingness of the IRS, or the 
Treasury Department Inspector General, to investigate my complaint of 
illegal document destruction by the IRS. I learned that the same 
federal investigator to whom I originally reported my concerns 
regarding this, had turned around and opened an investigation of me on 
unfounded and false charges of ``wrongful release of confidential 
information.'' Later, I learned that this is a common tactic used 
against IRS employees who dare to speak up against management. I knew 
then that I had no alternative but to resign and try to raise awareness 
of the intransigence, arrogance, and abusive patterns of behavior that 
I found all too common inside the headquarters of the IRS. I decided to 
write a book which was published earlier this year entitled, 
``Unbridled Power.''
    My testimony today will touch briefly on three areas:
        1. The cultural climate of the IRS;
        2. List keeping at the IRS;
        3. The IRS definition of ``tax protester.''
    My introduction to the culture of the IRS came during my earliest 
days with the tax agency, in the fall of 1988. Although I had been 
hired as the first historian for the IRS, I found little interest or 
support for my efforts. I found even less history. By history I mean 
both an awareness of the heritage of the IRS as well as the raw 
material (the documentation) from which narrative history is distilled. 
Neither the documents nor the heritage were to be found. Initially, I 
found this curious. Later, I found it alarming.
    At the IRS National Headquarters, there seemed little connection 
between the work of employees and actual tax collection--what I 
presumed to be the mission of the IRS. Rather than possessing any basic 
curiosity about the past, the IRS employees I encountered exhibited a 
wariness, a suspicion--assuming that anyone looking for records must 
have some definite agenda. An agenda presumed to be negative.
    This reluctance to think about the past translated into routine 
day-to-day operations, meaning that all documents were tossed, 
shredded, whatever, when a program was completed--or shut down, as in 
the case of many IRS computer projects. No records. No paper trail. No 
history.
    As time went on, I realized that this not only made my job as 
historian virtually impossible, but that it guaranteed that the IRS 
could never be held accountable for its actions.
    With a sense of historical development, I came up with my own 
interpretation of this phenomenon. One could easily pass off the 
reluctance of the IRS to acknowledge its past as a reaction to a 
constant barrage of criticism. But the IRS is certainly not the only 
federal agency subjected to criticism from the press, Congress, or the 
public.
    Instead of reflecting on positive actions in response to criticism, 
the IRS proclaims that any criticism of the agency is ``IRS bashing'' 
and ``will only lead to more tax protesters.''
    Rather than respond with solid information, historical examples, 
and analysis, the IRS jumps around skittishly, telling Congress that 
this reorganization, or that new position, or another new task force 
will remedy the current problem. The IRS has learned that its most 
effective response to inquiring questions from Congress, from the 
press, or from the American people is to hide behind the privacy laws. 
These are the laws meant to protect taxpayers. But by endlessly citing 
restrictions on its authority to comment on taxpayer cases, the IRS 
deflects criticism for any and all actions. In essence, the response of 
the IRS to question about anything and everything is, ``Trust us. We're 
doing the right thing. We just can't tell you what that is because 
we're protecting American taxpayers.''
    A corollary to this defensive shield is the penchant of the IRS to 
destroy its paper trail. There were virtually no records of IRS actions 
throughout the twentieth century in any of the repositories where one 
would normally find federal records: the IRS itself, the National 
Archives (including the permanent archives in Washington, D.C., the 10 
records centers around the country, or the Presidential libraries.)
    In my early years with the IRS, a good question to ask was, ``Where 
are the records?'' What I learned was shocking. The records had been 
destroyed. Gone. Shredded. Tossed. They no longer exist due to a lack 
of attention to, or concern for, the law which requires all federal 
agencies to preserve records of what they do. It is as though the IRS 
assumed that laws which apply to the FBI, to the CIA, to every other 
part of the federal establishment can be ignored.
    No other agency of our government could get away with this. I 
questioned the reason why it had taken so long for anyone to realize 
that the records were not just missing, but destroyed.
    I believe the answer is based on fear. As taxpayers, why would we 
ever question the one agency that can truly bite back? Our fear of 
suffering a personal attack from the IRS generally keeps most of us in 
check. Our fear of being audited has allowed the IRS to theoretically 
eliminate any potential smoking guns by trashing its own records. This 
ensures that it can never be held accountable for its actions. How can 
you prove any wrongdoing when the evidence is already destroyed?
    The IRS has learned that the privacy protections are its best 
weapon in its war against its ``customers.'' There is an ``us against 
them'' mentality which is far too common among IRS employees. 1 
witnessed and experienced this attitude firsthand for over seven years 
working at the IRS headquarters. When I questioned the lack of record 
keeping by the IRS, it was made clear to me that I was a ``lone 
ranger,'' a ``loose cannon,'' and ``not a team player.'' Is it any 
wonder they investigated me?
    I'll conclude this section with a stark example from my personal 
experience. After my protest resignation at the end of 1995, admittedly 
I was not on the ``most favored'' list of IRS. But when I went to the 
IRS National Office on Monday, April 15, 1996, to meet a friend who had 
invited me for lunch to celebrate my birthday, I did not expect to be 
threatened with arrest. But that is what happened.
    While waiting for my friend to meet me at the entrance of the 
building, I was pulled aside by an IRS internal security agent who told 
me to leave immediately because I was officially ``banned'' from the 
building.
    I thought this was odd as I was standing in the front entrance, a 
public space. When I asked for an explanation, I was told that I was 
``banned'' because I ``did not turn in my official identification badge 
when I resigned four months earlier.''
    This was untrue.
    When the agent detaining me prepared to call for Federal Protective 
Service agents to carry out her threat to arrest me, I knew I had to 
make a quick decision: let them carry through with this absurd threat, 
or turn and leave. I left. To this day, I wish I had stayed and made 
them carry through with their threat.
    The IRS brought false charges against me, used government resources 
to pursue a false investigation of me, and continued to harass me even 
after I had resigned. With the IRS, as I am sure you will hear from 
others today, retaliation is prompt, swift and catastrophic.
    My years with the IRS were spent exclusively in the National 
Office, the headquarters of the tax agency. Throughout my tenure at the 
IRS, I often heard stories that different types of codes were used to 
identify taxpayers and returns.
    I have specific knowledge of one type of list maintained inside the 
IRS. It is a product of a secretive, cloistered unit of the IRS which 
existed from 1969 through 1973, known by the name ``Special Services 
Staff,'' or SSS.
    The SSS list had approximately 11,000 individuals and organizations 
designated as possible audit targets by the IRS. Who were these people 
and organizations? Some were names you will recognize: Shirley 
MacLaine? Joan Baez, John Lindsay, the Black Panthers, and the Student 
Nonviolent Coordinating Committee (SNCC).
    But most of those who made it onto the list were not household 
names but were individuals the SSS determined were of questionable 
character as determined by the SSS.
    Ten employees of the SSS dutifully clipped newspaper articles each 
day. The FBI willingly sent over its own files on political dissidents 
and protesters, an subscriptions were taken to radical publications 
which were perused for names and other leads. All in all, the SSS 
targeted individuals with no known tax problems for audit simply 
because of their political activities.
    The commissioner who abolished the SSS, Donald Alexander, actually 
testified before Congress in 1975 that he believed the SSS records 
should be taken ``out on the mall and burned.''
    Yet, despite the fact that the SSS files remain intact at the IRS 
(at least through my resignation at the end of 1995), the IRS 
steadfastly refuses to release the files to researchers or even to the 
National Archives for safekeeping. Why? Because they contain ``taxpayer 
information.'' Who is protecting whom, one has to wonder?
    What has all this got to do with the present? Today I believe there 
exist thousands of names of American taxpayers whose Master Files are 
coded as TC-148, which brands them as ``Illegal Tax Protesters.'' 
Whether this is a list, or compilation of files which bear that 
designation, is semantics. Just how many Americans bear this 
designation?
    At the very least, we need to know if we are on that list. We 
reserve that right. The IRS says we can't know and don't have a right 
to know while simultaneously claiming Congress wants it this way.
    The only thing being protected in this scenario is the IRS.
    Just what is a tax protester? Your definition, like mine, is 
probably different from the IRS definition. I learned that while inside 
the IRS.
    A tax protester, in my definition, is not someone who may oppose 
our system of taxation, but pays his taxes nonetheless. A tax protester 
is not someone who says that our tax system is broken and must be 
dismantled, but still files a Form 1040. A tax protester is not someone 
who merely criticizes the IRS. A tax protester is not someone who 
challenges an IRS assessment.
    But in the mind of the IRS, all of the above ideas fit the 
unofficial IRS profile of a tax protester. In the cloistered 
environment of the IRS, criticism of the IRS, or the income tax, equals 
tax protester. Anyone who has the misfortune of bearing that title is 
most likely going to witness first hand just what ``taxpayer abuse'' 
really means.
    Don't get me wrong. I am not in any way condoning the actions of 
those who, by one manner or another, attempt to cheat or not live up to 
their financial responsibilities as a U.S. citizen. But I do recognize 
the use of the label of ``Illegal Tax Protestor'' as another powerful 
weapon of the most powerful agency in America.
    It is time for Congress to compel the IRS to be more forthcoming 
about its audit procedures, even though the IRS would like us to 
believe that our system of taxation will collapse if the American 
people know how their tax collector goes about his or her business.
    The IRS gains too much benefit from the privacy laws to come clean 
on its own. The culture of the IRS, built over decades of learning to 
hide behind the privacy laws, will not change on its own. Without 
intervention from Congress, it will not happen.
    Last year, a top career IRS executive testified before Congress 
that, ``There is the general view that the more mysterious tax 
enforcement is, the more likely taxpayers will voluntarily comply.'' 
Mystery breeds distrust and contempt. It also breeds fear, which 
compels many taxpayers to comply with the tax laws because they are 
afraid of the consequences, but it does not breed voluntary compliance 
or trust.
    The arrogance of the IRS is outrageous and harmful. We lose more 
than gain by allowing the IRS to operate in this manner. Congress must 
demand accountability from the IRS. Congress must shine the spotlight 
on the IRS and never switch the power off.
    Thank you.

                               __________

                 Prepared Statement of Michael P. Dolan

     Chairman Roth and Distinguished Members of the Committee:
     With me today are Lee Monks, the Taxpayer Advocate, and Ron 
Rhodes, the Assistant Commissioner for Collection. We appreciate the 
opportunity to appear today and discuss important aspects of the way 
the Internal Revenue Service performs the mission which the Congress 
has assigned it. Given its jurisdiction and role in the establishment 
the nation's tax policy, it is crucial that this Committee be provided 
as complete a picture as possible of the way today's tax administration 
processes work.
     The IRS has worked hard during the past months to be responsive to 
the requests of the Committee's investigative staff. Early in their 
deliberations the investigators identified several cases for which the 
IRS has provided extensive case information, as well as access to the 
pertinent field and national office IRS employees. In the past few 
weeks, four of those cases were identified as probable subjects for 
this hearing. As we have reviewed those four cases, we identified 
mistakes in the way that two of the four cases were handled, and in a 
third case, we didn't provide the kind of assistance we should have in 
helping the taxpayer rectify an error they made when they filed their 
return. I am sorry we made those mistakes. The taxpayers involved 
certainly deserved better treatment than they received. In one instance 
we have had a chance to formally apologize and in the other two we have 
either solved the original problems or offered to help resolve a 
remaining taxpayer concern. Beyond wishing that we had not made the 
original mistake, I am also concerned that it took too long to identify 
and correct the errors. I intend to share these concerns and others 
identified in our preparation for this hearing when I meet with our key 
senior executives next month.
     As unacceptable as any mistake is, I hope this Committee will 
consider them in the context of IRS's performance of its overall 
responsibilities. During the days that have immediately preceded these 
hearings, a variety of allegations have found their way into the media. 
Unfortunately it is far too easy for an allegation of wrong doing or 
even an actual error to be mis-characterized in a way that impugns an 
entire organization and all its employees. As a career IRS employee, I 
know my IRS colleagues not only understand, but take very seriously the 
significant responsibilities with which we have been vested. Most chose 
careers in public service because they believed they could make an 
important contribution to the success of their country.
     This Committee is in a unique position to understand the 
complexity and sensitivity of the mission that has been assigned to the 
IRS. Each year the Service receives nearly 200 million tax returns, 
collects and accounts for well in excess of a trillion dollars, 
generates nearly 90 million refunds and receives millions of calls, 
letters and visits from taxpayers in need of help. In addition, a 
normal year will find the IRS involved in approximately 10 million 
``compliance contacts'' ranging from tax audits to collection of 
delinquent accounts and reconciliation of discrepancies between 
information supplied by third parties (i.e., employers, banks, mortgage 
companies, etc.) and the information reported on tax returns. Each of 
these millions of transactions is sensitive, whether it is the 
processing of a routine refund return or a compliance contact. The 
impact of these interactions on taxpayers is clearly influenced by the 
way in which the IRS performs its responsibilities. There are also a 
variety of issues outside the IRS control which influence the 
difficulty or ease with which these interactions occur. The economy, 
for example, often bears directly on the ease with which some taxpayers 
are able to pay the tax they owe. Likewise the introduction of 
significant tax law changes frequently challenges some taxpayers' 
abilities to correctly meet their tax obligations. Few organizations, 
public or private, perform their responsibilities in as sensitive an 
environment as that confronted daily by the employees of the Internal 
Revenue Service.
     One of the true strengths of the United States ``self assessment'' 
system is that the vast majority of U.S. taxpayers file their returns 
on time and pay the tax they owe. These taxpayers account for the 83-85 
percent compliance rate that exists today. For the most part, the 
contacts between these taxpayers and the IRS involve receiving the 
forms, assistance and education required to maintain their compliance. 
Because these taxpayers represent the backbone of our system, IRS has 
increasingly sought to offer them simpler ways of filing, paying and 
obtaining assistance. Likewise in the case of taxpayers who may owe tax 
but strive to resolve their non-compliance, the Service has 
significantly expanded its ability to solve problems over the 
telephone, improved the tone and clarity of correspondence it sends and 
increased the alternatives available to resolve tax delinquencies. In 
addition to these improvements, there is currently underway a major 
effort to further improve the customer service effectiveness of the 
IRS. A group of front-line employees and managers from the IRS, 
Treasury and the Vice President's National Performance Review staff 
have spent the last three months reviewing virtually every aspect of 
customer service and will next month present a comprehensive set of 
improvement options.
     In contrast to the majority of compliant taxpayers, however, are 
those people who do not meet their tax obligations. Out of fairness to 
those taxpayers who do, the IRS seeks to collect overdue taxes from 
those who have not voluntarily filed and paid.
     We do not treat all who have not complied the same. The type of 
IRS contact and the enforcement actions we use depends upon the 
willingness and ability of taxpayers to correct their noncompliance.
                        nonpayment of taxes owed
     While a minority overall, a significant number of taxpayers do not 
pay the full amount of taxes owed. At the end of FY 1996, the 
cumulative unpaid taxes owed which we record as accounts receivable 
exceeded $216 billion. Payment delinquency can occur for a variety of 
reasons. A taxpayer may file a return on time but not pay the full 
liability. A taxpayer may make a math error on the return that 
increases the tax liability. In addition, examinations and matching of 
information returns to tax returns frequently identify a liability 
which is not fully paid.
     The first contact with a taxpayer who owes back taxes is a notice 
or a ``tax bill'' which is sent to all taxpayers who owe. Currently, 
individual taxpayers who owe can receive up to 4 notices issued over a 
16 week period before the IRS attempts to contact the taxpayer by 
telephone or in person. Business taxpayers who owe can receive up to 2 
notices issued over 6 weeks. Recently, these notices were re-written in 
clearer language so that taxpayers would be able to easily understand 
what they have and have not paid. With any notice of a balance due, 
taxpayers also automatically receive a publication entitled ``Your 
Rights As a Taxpayer'' (Publication 1). A publication entitled 
``Understanding the Collection Process'' is sent with the final notice 
(Publication 594). (These publications are included as an appendix to 
my testimony.)
                        nonfiling of tax returns
     Another group of taxpayers fail to file tax returns for which they 
are liable. Some do not file because they are not aware that they need 
to file. Others fail to file because of a traumatic event in their 
life, such as a divorce or loss of a job. Still others do not file 
because they cannot pay the entire amount they owe. We estimate that 
over $13 billion is owed annually by taxpayers who do not voluntarily 
and timely file required tax returns; this is known as the nonfiling 
gap.
     The IRS identifies potential individual nonfilers primarily from 
information documents showing payments made by third parties, such as 
Forms W-2 and 1099. Potential business nonfilers are identified based 
on information the business provided when it applied for an employer 
identification number and its prior return filing history. When 
information documents reflect that an individual taxpayer had income 
sufficient to require a return but did not file a return or when our 
information indicates a business has not filed a required return, we 
send a notice requesting that the taxpayer either file the required 
return or explain why they are not required to file. Those we believe 
should have filed but did not receive either 2 notices over an 8 week 
period or 1 notice depending on the amount of tax likely due.
                  those who will correct noncompliance
    Many taxpayers respond when they receive one or more notices from 
the IRS regarding their nonpayment of taxes owed or their nonfiling of 
required tax returns. For example, in FY 1996, taxpayers paid $14.7 
billion after receiving a notice; $11.7 billion was similarly paid in 
FY 1995. In FY 1995 and in FY 1996, over 1.1 million delinquent returns 
were filed each year by taxpayers receiving a nonfiler notice.
     Other taxpayers will call us after receiving a notice because they 
do not have the money to pay the tax due. If the taxpayer cannot fully 
pay, telephone assistors will work with the taxpayer to help resolve 
the problem. Taxpayers may be asked to provide financial information so 
that the correct course of action can be determined. Our telephone tax 
assistors have the authority to recommend adjustments to the tax bill, 
to allow the taxpayer additional time to secure funds from a bank or 
third party, to temporarily suspend collection action, or to establish 
a payment agreement; known as an installment agreement.
     Installment agreements offer the IRS a unique opportunity to keep 
taxpayers in the tax system who would otherwise not be able to meet 
their full tax obligations while assisting taxpayers in correcting the 
cause of the delinquency. In FY 1992, 1.52 million taxpayers entered 
into installment agreements. As a result of IRS efforts to expand the 
use of installment agreements, the number entering into installment 
agreements increased to 2.67 million taxpayers in FY 1996.
     When the tax debt cannot be resolved through an installment 
agreement, an Offer in Compromise may sometimes be an appropriate way 
to satisfy the debt. By law, taxpayers can submit an application for an 
Offer in Compromise when there is ``doubt as to liability for the 
amount owed'' or ``doubt as to ability to pay the full amount owed.'' 
In FY 1992, we modified the Offer in Compromise policy and streamlined 
procedures to make it easier for a taxpayer to submit an offer and have 
it accepted. Reflective of this change is the comparison between FY 
1991 when the IRS accepted 1,995 offers from taxpayers to compromise 
their tax debt, and FY 1996, when this increased to over 27,600 
accepted offers. Our rate of accepting offers submitted has also 
steadily increased from 25 percent in FY 1991 to 48 percent in FY 1996. 
An offer is a reasonable alternative to declaring a case currently not 
collectible or to proposing a lengthy installment agreement. Our 
ultimate goal is to collect what is collectible as early and 
inexpensively as possible--reaching agreements that are in the best 
interest of both taxpayers and the government. Accepting reasonable 
offers not only resolves past delinquencies; it gives taxpayers a 
``fresh start'' from which to manage their future filing and payment 
requirements. As a condition for accepting an offer, taxpayers who have 
an offer accepted agree to comply with all filing and payment 
requirements for five years--thus, enhancing voluntary compliance.
              some taxpayers make no arrangement to comply
     There are, unfortunately, some taxpayers who choose not to take 
advantage of these arrangements, and who continue to refuse to pay 
their taxes. In their unwillingness to pay their fair share of taxes, 
these taxpayers impose extra--and unfair--loss on those who do comply 
with the law.
     When a taxpayer does not respond to our notices by filing a 
delinquent return, paying the full amount owed, establishing a payment 
agreement or filing an offer in compromise, the IRS attempts to make 
further contact with the taxpayer either through telephone or face-to-
face contact. Upon contact with the taxpayer, we will try to work with 
the taxpayer to resolve the nonfiling and/or the delinquent tax debt.
     In addition to the various ways in which arrangements can be made 
to pay delinquent tax, collection personnel can determine, at any step 
in the process, that the tax debt is not currently collectible because 
such collection would result in a significant hardship. A significant 
hardship may occur if the taxpayer cannot maintain necessities, such as 
food, clothing, shelter, and medical treatment. At the end of FY 1996, 
collection personnel determined that taxpayers could not currently pay 
$29.2 billion of the $216 billion in accounts receivable due to 
hardship.
     If we cannot contact the taxpayer, or the taxpayer is unwilling to 
make arrangements to pay or unwilling to file a delinquent return, we 
utilize enforcement tools that the Congress has authorized. In the case 
of nonpayment, we may place a lien or levy on the taxpayer's assets. We 
may levy against wages, funds on deposit at a bank, rental income, 
dividends, demand notes or securities. Before the IRS takes levy 
action, however, we must send the taxpayer a final notice of intent to 
levy at least 30 days in advance of the levy. We may give this notice 
in person, leave it at the taxpayer's dwelling or usual place of 
business, or send it by certified or registered mail. We must release a 
levy if: the amount owed is paid in full; documentation is provided to 
us to determine that releasing the levy will help collect the tax; the 
taxpayer enters into an approved, current installment agreement and the 
IRS and the taxpayer have agreed to release the levy; or the levy is 
creating an economic hardship.
     In appropriate situations and usually after other collection 
actions have been exhausted, the seizure and sale of property may be 
used to collect delinquent tax debt. Among other rights, a taxpayer has 
the right to an administrative review of our seizure action. Before 
selling the property, public notice usually appears in a newspaper in 
the county where the sale will be held. The original notice of sale is 
personally delivered to the taxpayer or sent by certified mail. We must 
wait at least 10 days after giving notice before conducting the sale. 
Before the sale, the property can be released if the taxpayer: pays the 
amount of the government's interest in the property; enters into an 
escrow arrangement; provides an acceptable bond; or makes an acceptable 
agreement for payment of the tax. Taxpayers can ``buy back'' personal 
property at any time before the sale by paying the tax due, including 
penalties and interest, and paying the expenses of seizure. Taxpayers 
can also request that we sell the seized property within 60 days. 
Seizure of a personal residence requires the approval of the District 
Director and taxpayers have 180 days to redeem their personal residence 
after the sale. In FY 1996, $164.7 million was collected from 
approximately 10,000 seizures. Notably, in only about 2500 of these 
seizures, were the taxpayers' assets required to be sold. Over the past 
5 years, the number of seizures has remained fairly constant--about 
10,000 seizures per year. Seizures were used in less than 0.2 percent 
of the 6.6 million delinquent cases closed in FY 1996.
     In those cases in which no return has been filed despite the 
issuance of several requests to the taxpayer, our enforcement efforts 
may include ``substitute for return'' assessments. In a ``substitute 
for return'' assessment, we determine the taxpayer's liability based on 
available third party information and write to the taxpayer proposing 
assessment of this amount unless they respond by filing a correct 
return; by explaining they are not required to file a return; by 
explaining that some of the income reported by their parties is not 
their income; or by appealing our proposed assessment. A taxpayer can 
appeal the proposed assessment within the IRS through our Appeals 
Office. Most differences can be settled through the appeals system 
without expensive and time-consuming court trials. If the matter cannot 
be settled to the taxpayer's satisfaction in Appeals, the taxpayer can 
take the case to court. If the taxpayer fails to respond to our letter, 
we pursue assessment using deficiency procedures.
                       collection appeals process
     At any step of the collection process, taxpayers who believe that 
they have been treated unfairly have administrative remedies available 
to them. Taxpayers can request an administrative review of the 
employee's actions with the employee's manager.
     On April 1, 1996, the IRS put into place additional administrative 
appeal rights by establishing new procedures that give taxpayers the 
right to appeal liens, levies, and seizures proposed by the IRS. Also, 
the Taxpayer Bill of Rights 2 required the IRS to provide an 
independent administrative review of terminations of installment 
agreements for taxpayers who request such a review. This new appeal 
right was made effective January 1, 1997. Taxpayers subject to a lien, 
levy, seizure or termination of an installment agreement receive 
Publication 1660, ``Collection Appeal Rights for Liens, Levies, and 
Seizures,'' which explains their right to make such an appeal and the 
procedures for requesting an appeal. Publication 1660 and Form 9423 
(Collection Appeal Request) are included as appendix to my testimony. 
The IRS has trained its collection personnel in this new appeals 
procedure. Since April 1996, approximately 1,800 taxpayers have 
utilized this administrative appeals process. Our Appeals function has 
fully sustained the collection action in 75 percent of these cases and 
fully reversed the collection action in 13 percent of these cases.
           taxpayer advocate plays key problem resolution role
     The Service has had a Taxpayer Advocate (formerly called the 
Taxpayer Ombudsman) since 1979. As the current advocate for taxpayers 
within the Service, Mr. Monks' responsibility is to ensure that 
taxpayers are provided the assistance necessary to resolve their issues 
or, at least, are provided the information they are seeking on their 
inquiry. Taxpayers who are experiencing problems that they cannot clear 
up through normal channels, or that may be experiencing significant 
hardship as a result of IRS action, or that want to register a 
complaint about treatment by IRS can contact the local taxpayer 
advocate in the district in which they reside or at the service center 
with which they may be corresponding. Taxpayers may also communicate 
directly with Mr. Monks here in Washington, D.C. In helping resolve 
difficult individual cases, the Taxpayer Advocate's office compiles and 
tracks data on the types of problems taxpayers experience with the IRS 
and then works with appropriate IRS officials to correct any system 
deficiencies contributing to those problems.
     The Advocates' office is also frequently involved in cases in 
which complying with the law may constitute a hardship for an 
individual taxpayer. In those instances, taxpayers can apply for 
hardship relief by filing an application (Form 911) for a Taxpayer 
Assistance Order. In addition, employees can refer a taxpayer's case to 
the advocate's office for hardship consideration. Approximately 35 
percent of all Taxpayer Assistance Orders are initiated by employees. A 
local taxpayer advocate will review the application and, if 
appropriate, takes steps to relieve a hardship or to stop a collection 
action until a review determines that the action is appropriate. In 
addition, our problem resolution program provides an avenue for 
taxpayers who have been unable to resolve their problem with IRS; when 
a significant matter or event is not being considered; or if their 
rights have been violated.
     As you are aware, Mr. Chairman, in February 1997, after reading 
the announcement that this Committee was establishing an investigative 
team to review IRS' treatment of taxpayers and that a number of 
taxpayers had come to the Committee with a variety of problems that 
they had experienced with the IRS, Mr. Monks wrote you offering the 
assistance of his office in handling any of the taxpayer issues 
identified by the Committee. The Committee did refer one case to the 
Taxpayer Advocate and I was pleased that the advocate's office was able 
to resolve this taxpayer's matter expeditiously.
                         specific taxpayer cases
     In May and June 1997, the Chairman requested that IRS provide to 
designated Committee staff the tax returns and other relating to 
disagreements between the IRS and taxpayers associated with the cases 
that I mentioned earlier in my testimony.
     Section 6103 of the Internal Revenue Code, which prohibits 
disclosure of taxpayer information, prevents my discussing the specific 
facts of each of these cases in a public hearing without a taxpayer's 
written consent. It is anticipated, however, that the Committee staff 
will obtain authorizations which will permit me to respond to questions 
that Committee members may have about the specific cases which we have 
reviewed. Before I respond to any specific case, however, I do want to 
stress that we strive to maintain consistent and fair treatment of all 
taxpayers. At the same time, given the very specific nature of many of 
the cases our employees encounter, we consciously vest employees with 
sufficient discretion to treat each taxpayer's situation on its own 
merit. There is obviously some tension between wanting absolute 
guarantees of consistency and empowering front-line employees to use 
their professional judgment. I would like to be able to tell you today 
that all 100,000 IRS employees--myself included--always exercise our 
judgment correctly in every one of the millions of taxpayers' cases we 
work. We do make mistakes just like employees in other government 
agencies or in any other large business that deals with the public. As 
I said earlier, three of the cases submitted to the Committee staff 
include mistakes which we made. I am both disturbed and sorry for how 
our failure to correct these mistakes timely has disrupted these 
taxpayers' lives. While I want to apologize for the frustration, 
inconvenience, and hardship caused by our actions, I also want to 
commit to doing everything possible to see that other taxpayers do not 
experience what these taxpayers experienced. The Service does take 
these situations seriously and we do want instances like these brought 
to our attention.
                               conclusion
     Day in and day out, our employees confront a very challenging job. 
In the vast majority of cases, I believe they exercise their 
responsibilities with extreme care and concern for the rights of 
taxpayers. Through their efforts, we ensure that the millions of 
Americans who willingly meet their tax obligations are required to pay 
only their fair share. Their efforts also help ensure that the tax 
revenues contemplated by our tax laws are collected and made available 
to enable our nation to meet its crucial spending and deficit 
management objectives. On behalf of my colleagues at the IRS, I commit 
to you a redoubled effort at ensuring that we exercise our 
responsibilities with the utmost professionalism and respect for the 
public we serve.
    Mr Chairman, that concludes my remarks. We would be happy to answer 
any questions.

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          Responses to Questions Submitted by Senator Nickles

Re: Shelley Davis--

    Question: Mr. Dolan, this committee heard sworn testimony yesterday 
from Shelley Davis, former historian for the IRS, that the agency 
routinely destroys documents relating to critical management decisions. 
She further testified that when she tried to stop this practice, she 
was attacked from within the agency and left with no option but to 
resign. How do you respond to these claims?
    Answer: The IRS has not routinely destroyed documents relating to 
critical management decisions. Admittedly, there have been records 
management problems, however, in December 1995, the National Archives 
and Records Administration (NARA) made 58 recommendations to improve 
our records management practices and in May 1997, NARA agreed that we 
had successfully implemented 47 of the recommendations. As of September 
1997, we reported to NARA that we took actions to implement the 
remaining 11; however, NARA has not yet concurred. Also, in response to 
the Chairman of the House Committee on Ways and Means and the Chairman 
of the Subcommittee on Oversight who requested that the General 
Accounting Office evaluate how IRS carries out its records management 
responsibilities, the GAO stated in an October 1997 report, that 
``Nara's 1995 review of the IRS records management program found that 
IRS had managed its overall records program according to NARA 
requirements.''
    As a result of the NARA evaluation, IRS has been working very 
closely with NARA to strengthen our records management 
responsibilities. In this regard, we have taken aggressive actions to 
ensure all records documenting changes in policy, organizational 
structure, and programs are identified, scheduled with NARA, and 
transferred to NARA according to each approved disposition authority.
    Some of the most proactive actions involve the preservation of 
approximately 790 cubic feet of records. The details of each action are 
set forth below:
          1. One valuable collection of historical records was 
        maintained by the former Historian (300 cubic feet). 
        Unfortunately, during her tenure, no actions were taken to 
        catalog, inventory, or schedule these records for eventual 
        transfer to NARA. After her resignation, it took 9 months to 
        complete a massive inventory because the records were left in 
        such disarray. Since the completion of the inventory, a Request 
        for Disposition Authority was submitted to NARA and the 
        appraisal process, which was initiated by NARA recently, will 
        take several months to complete.
          2. Program, policy, and reading files of former Commissioners 
        (1950-1992) have been retired to the Washington National 
        Records Center (240 cubic feet) and will be transferred to NARA 
        according to their approved disposition authority.
          3. Records created and maintained by former Chief Information 
         Officers and the Information Systems organization (1983-1990) 
        documenting Tax Systems Modernization (TSM) and other 
        management decisions are being prepared for retirement to the 
        Washington National Records Center (50 cubic feet). Additional 
        records created by Information Systems (1970-1990) in the 
        former Historian's collection are pending appraisal by NARA. 
        (The volume of 53 cubic feet is included in Item No. 1.)
          4. Reading Files and Subject Files of the former 
        Modernization Executive/Associate Commissioner (Modernization) 
        (1991-1996) have been appraised by NARA and are being prepared 
        for retirement (40 cubic feet).
          5. The records of the former Special Services Staff (1968-
        1973) are pending appraisal by NARA (140 cubic feet).
          6. Strategic Planning Documentation (1947-1960) has been 
        transferred to NARA (one cubic foot) and an additional cubic 
        foot (1960-1980) is being prepared for retirement.
          7. We have also offered for immediate transfer to NARA early 
        directives which document the policies and procedures of the 
        Service from 1861-1953 (19 cubic feet). These records are 
        awaiting NARA's approval for transfer.

    I have no knowledge nor evidence of Ms. Davis' claim that she was 
``attacked'' from within the agency and it is my belief that her 
decision to resign was one made of her own volition.

Re: Oklahoma City office & seizures--

    Question: Mr. Dolan, according to information received by my 
office, the average number of seizures per revenue officer per year in 
the Oklahoma City office is 3.9, when the national average is 0.5. Can 
you explain this statistical anomaly? Does your office ever review 
these numbers and investigate their cause?
    Answer: The National Office does not maintain statistics on the 
average number of seizures per revenue officer. The total number of 
seizures nationwide and by district office are maintained by fiscal 
year. My office does review the seizure program, including the number 
of seizures by district office, to identify trends. Many variables 
impact the program's statistics, such as the demographics of the 
district, the economy, and taxpayer compliance. Other variables include 
state laws that impact property ownership and equity in assets, support 
from other agencies such as the United States Attorneys, and state 
governments' support. I believe the numbers quoted were developed 
locally by the Arkansas-Oklahoma District. Since we are not aware of 
the methodology used for the computation, we have been unable to arrive 
at the quoted numbers using data that is available to us. Thus, I am 
unable to explain the statistical anomaly. The number of seizures are 
not, in and of themselves, indicators of success or failure. They need 
to be considered in the context of individual case decisions and 
district trends.

                               __________

           Prepared Statement of Robert L. Goldstein, CPA and

                   James A. Woehlke, CPA, LL.M. (Tax)

Introduction
    The New York State Society of Certified Public Accountants 
(hereinafter ``Society'' or ``NYSSCPA'') is the nation's largest and 
oldest state CPA professional associations, serving over 32,000 
members. (We are celebrating our centennial this year.) Our members 
practice locally, regionally, nationally, and internationally as 
primary tax advisers to millions of individual and business taxpayers. 
It is our belief that the Congress, the Internal Revenue Service 
(``IRS'') and we have a common constituency: The American Taxpayer. It 
is from this unique vantagepoint that we appear here today.
    We are supportive of the basic mission of the IRS and are not among 
those calling for its abolition or the substantial weakening of its 
role. Though we have occasionally criticized and disagreed with the 
IRS, the Service plays a vital role in our self-assessment tax system. 
Through local liaison groups, we have been able to discuss our 
disagreements with the Service, point out systemic problems, which come 
to our attention, and resolve certain issues before they become major 
points of contention. For example, we recently were able to alert the 
Brookhaven Service Center to a problem concerning the IRS computer 
module for Federal Unemployment Insurance for household employees. 
Through this cooperation, the IRS was able to quickly correct the 
module and we were able to alert our members to the problem and the 
suggested manner in which to deal with it.
    We do, however, believe that the Congress' and the public's 
confidence in the Service's ability to carry out its mission has 
deteriorated. One has only to follow the newspaper and magazine 
articles and news broadcasts over the past several years, to read about 
billions spent on computer systems that do not meet their 
specifications or about ``economic reality audits'' (now called 
financial status audits) designed to ``persecute'' the American 
taxpayer. Even allowing for the excessive amount of hyperbole, the 
criticism has been intense. The IRS, more than almost any other 
government agency, must maintain Congressional and public trust. It 
must be viewed as fair, effective, and impartial. The Service cannot 
audit taxpayers and be unable itself to be audited. The IRS should only 
engender fear in those who flout the tax laws and thereby place an 
undue burden on their fellow citizens.
    As tax practitioners, we are in a unique position to testify both 
about the many IRS employees who perform their tasks admirably and 
those instances where the Service demonstrates an inability to carry 
out its mission.
Taxpayer Representation and Tax Law Complexity
    Taxpayers primarily choose to use a tax professional to prepare 
their tax returns and represent them before the IRS (in the eventuality 
that such representation is required) because of the complexity of the 
tax law. From 1986 to 1997, there have been eight yours with 
significant changes to the tax laws (1986, 1987, 1988, 1989, 1990, 
1993, 1996 and 1997). The Taxpayer Relief Act of 1997 alone contains:
   36 retroactive changes
   114 changes effective August 5, 1997
   69 changes effective January 1, 1998 and 5 changes effective 
        thereafter 
   285 new sections and 824 Internal Revenue Code amendments
    This new law even makes estimated tax requirements for individuals 
more complicated by changing the safe harbor provision for individuals 
with adjusted gross income of more than $150,000 from 110% of last 
year's liability to:
   100% of last year's liability for years beginning in 1998;
   105% of last year's liability for years beginning in 1999, 
        2000, and 2001; and
   112% of last year's liability for years beginning in 2002.
    While the complexity of the tax law is not at the root of 
controversies between the IRS and the practitioner community and 
taxpayers, it does serve to exacerbate the Service's challenges in 
administering the tax system and the taxpayers'' responsibilities in 
meeting their tax obligations.
    It should he noted that there is a very large backlog of Treasury 
Regulations. The IRS needs to issue regulations and other guidance so 
that taxpayers and representatives know the Service's position on 
issues to make compliance both more likely and consistent.
    Such complexity probably leads to inadvertent noncompliance and the 
creation of an adversarial atmosphere between the taxpayer and the 
Service. Over the past decade, the CPA and legal professions have 
submitted numerous, meaningful simplification proposals to the 
Congress. The AICPA developed a ``complexity index'' for use by policy 
makers in designing tax laws. Proposed tax law changes should not be 
enacted without Congress first securing from the IRS a draft of the tax 
form changes, which would be required. This procedure could help avoid 
complexity for both IRS administration and taxpayer compliance. The 
professional staffs of the Congress should consult with practitioner 
organizations, on a regular basis, in connection with writing of new 
tax legislation so that the compliance effect of dealing with such new 
legislation will be clearer to members of the staff. We suggest that 
such issues and procedures be revisited.
Responsibilities of Taxpayer Representatives and of IRS Personnel
    Treasury Department Circular 230, Regulations Governing the 
Practice of Attorneys, Certified Public Accountants, Enrolled Assents, 
Enrolled Actuaries, and Appraisers before the Service, sets out ethical 
and procedural matters governing tax practitioners. Of most immediate 
interest to practitioners is Subpart B, which outlines, (1) information 
to be furnished to the IRS (Section 10.20(a)), (2) knowledge of 
client's omissions (Section 10.21), (3) diligence as to accuracy 
(Section 10.22), and (4) the prompt disposition of pending matters 
(Section 10.23). The professional organizations that govern those 
practitioners listed in the title of Circular 230 each have their own 
additional ethical rules (for example, the AICPA has its Code of 
Professional Conduct and Statements on Responsibilities in Tax 
Practice).
    The National Commission on the Restructuring of the IRS (``National 
Commission'') stated that the workforce of the IRS should be of the 
highest quality and that the U.S. taxpayer deserves the highest-
quality, courteous service from the Internal Revenue Service. Former 
Commissioner Richardson identified the IRS Mission for the National 
Commission as follows:
        To collect the proper amount of tax revenue at the least cost; 
        serve the public by continually improving the quality of our 
        products and services; and perform in a manner warranting the 
        highest degree of public confidence in our integrity, 
        efficiency and fairness.
    While there appears no conflict between what practitioners and 
Service personnel should expect from one another, problems arise when 
the Service misconceives its own mission and role. Two recent examples 
are the testimony before the National Commission by the Deputy Chief, 
Taxpayer Service who said, the IRS is in the ``law enforcement business 
. . . combating financial crime'' and the Deputy Assistant Secretary 
(Departmental Finance and Management) who testified that as ``[a] law 
enforcement agency at heart, the IRS has been protected from improper 
influence on how it does its job. While such insulation is appropriate, 
the down side is that it can foster an inwardly focused culture . . . 
.'' It is clear from these examples that the IRS believes its primary 
role is law enforcement rather than the ``taxpayer service.'' We 
recognize that there is an important element of law enforcement in the 
role of the Service, but to view that as its primary function creates a 
level of insularity and heavy-handedness, which often makes it 
difficult to achieve its core customer service objectives. The success 
of the Problems Resolution Program others an example of how different 
attitudes by IRS personnel and taxpayers (and their representatives) 
emerge when the customer-service model is used. Our profession 
commended the work of Former Commissioners Gibbs, Goldberg, and 
Peterson to alter the IRS's culture by viewing the taxpayer as a 
``customer'' and not a ``tax cheat.''
    An example of this enforcement mentality exists in the increasing 
use of by-pass actions wherein the IRS examiner contacts the taxpayer 
in spite of the fact that a representative has been appointed pursuant 
to a power of attorney on file. We do recognize that, in certain 
circumstances, there are legitimate reasons for the use of by-pass 
letters, telephone calls or visits to taxpayers, such as undue delay in 
the process by the practitioner or failure of the practitioner to 
supply requested information in a reasonable amount of time. However, 
the bypass action is drastic, considering what should be a cooperative 
atmosphere between IRS examiners and representatives, and should be 
structured to apply when there are demonstrable circumstances of 
neglect.
Training Issues
    We understand that in the past, entry-level personnel were 
subjected to an examination and that this policy has been abandoned. 
While we understand that the IRS budget is stretched thin, we reject 
the thinking a reduced budget should lower the standards for hiring. 
Without an adequate number of properly skilled and highly trained 
employees, the success of the IRS's customer service mission will be 
impossible.
    An example of inappropriate training is the Financial Status 
(formerly Economic Reality) auditing program. Agents in this program 
were trained to use highly intrusive auditing techniques. Agents were 
indoctrinated using role-playing and game-training techniques that 
impugned the honesty of the average taxpayer.
    The tax law is taught to the professional practitioners by 
educators, including practicing CPAs and attorneys and other 
professional instructors. The IRS should reach out to universities, 
foundations, and processional organizations to assist in the 
development and teaching of continuing education programs.
    In those instances where the IRS has reached out to the 
practitioner community in its educational efforts, such as practitioner 
forums and workshops planned with collaboration between the IRS and 
practitioner groups, there has been tremendous benefit to all parties 
concerned. These programs unfailingly promote dialogue and increased 
understanding by each group of the other's positions and problems. 
These joint efforts go a long way toward dispelling the perception, and 
in some instances the reality, of insular paranoia attributed to the 
Service.
    The Problems Resolution Program has been a resounding success, 
winning plaudits from professional groups all over the country. It 
should he used as a model for training other IRS personnel. The very 
success of this program points to failures in the normal process. The 
IRS, then, is succeeding the second time around. With improved training 
and a customer service orientation, might it be possible to get it 
right the first time and avoid this duplication of effort?
    The examination and collection issues that we are going to discuss 
below may appear to be merely mechanical issues; however, they are 
symptomatic of the problems that exist within the service. For example, 
some of the issues indicate lack of devotion of proper resources or 
establishment of the proper attitudes to bring to a speedy and 
efficient conclusion. Addressing these issues will reduce the amount of 
redundant time required by both Service personnel and practitioners in 
dispatching taxpayer concerns.
Examination Issues
    Too much time is still required to complete audits. For example:
   An ``S'' corporation audit took in excess of 24 months. 
        resulting in a minimal adjustment.
   An ``S'' corporation audit has taken in excess of 18 months 
        from the initial audit notice to the issuance of the 30-day 
        letter.
   An individual audit covering a period of two tax years has 
        endured over 20 months and has just been taken into the 
        Problems Resolution Program.
   An examination was put on hold pending the decision in a 
        test curse involving prior years. The IRS waited thirteen years 
        after the test case was decided before it contacted the 
        taxpayer to conclude the examination.
    IRS personnel participating in FlexiPlace, the program wherein 
certain IRS personnel work at home for part of the workweek, cannot be 
reached by telephone while they are working at home. Often their office 
phones go unanswered. A modern voice mail system should be installed 
and personnel working at home should be required to monitor the voice 
mail several times a day. If such employees are out of the office for a 
significant time, provision should be made for them to receive their 
mail. (In this way, documents forwarded by a practitioner will not sit 
on a desk.)
    Netting of multi-year deficiencies and overpayments, for purposes 
of interest calculation, is almost never done on the initial 
processing. This then requires complicated corrections after the fact.
Collection Issues
    IRS personnel often refuse to deal with a problem (tangential or 
related period) which is not officially on their desk, despite the fact 
that the adjustments to such year are a direct product of the case 
settlement involving a year which is on that IRS agent's desk.
    The automated collection system (ACS) is particularly frustrating. 
When dealing with ACS, the practitioner rarely gets the same person on 
the telephone more than once. Each time that the practitioner needs to 
speak to the IRS to either impart requested information or to request 
the status of the matter, the practitioner must wait for the agent to 
read what the previous agent has entered into the computer and often 
the same ground must be covered again. If the ACS person responding is 
from a different area than the one with whom the practitioner 
previously dealt, communications may be even more difficult. This 
procedure is hardly an efficient use of either IRS personnel or 
practitioner time.
Suggestion Box
    Address, with all due speed, the issues raised by the National 
Commission. The National Commission's extensive hearings and 
deliberations resulted, in the main, in a well-reasoned report 
identifying a number of serious issues at the IRS. You should not 
permit the fine effort of the Commission, its witnesses, and staff go 
for naught.
    Interim extensions (July 15, for partnerships and trusts and August 
15, for individuals) should be eliminated and the initial extensions 
should be for 6 months. There is already only one six-month extension 
for corporations. This change would have no cash flow effect to the 
government, as any tax due for trusts or individuals is paid with the 
initial extension. Second extensions create no pressure for early 
filing, as the practitioner can sign them and they are routinely 
granted. These second extensions must be signed and mailed by the 
practitioner, received by the IRS, posted to the system, stamped 
approved, and mailed back to the taxpayer or the representative. This 
entire process is a complete waste of time and cost for both the IRS 
and the practitioner. The elimination of these extensions would also be 
consistent with the Paperwork Reduction Act.
    Powers of Attorney are a perennial source of irritation in 
relations between the Service and the practitioner community. We 
recognize the absolute right of every taxpayer to privacy and 
confidentiality, as well as the great care the Service must give to 
these issues. These issues are problems nonetheless. Consideration 
should be given to a ``check the box'' power of attorney or ``tax 
information authorization,'' whereby the taxpayer can check a box on 
the tax return at the time of filing giving the IRS permission to 
discuss the contents of the tax return with the preparer who has signed 
the tax return. In the event that the taxpayer changes accountants and 
such communications are required, a standard power of attorney can he 
filed superseding the one on the tax return.
    We thank the committee for allowing the NYSSCPA to present the 
views and suggestions of our members. We are prepared to assist you in 
any way that you deem relevant to reform the IRS into a true taxpayer 
service agency.

                               __________

             Prepared Statement of Hon. Charles E. Grassley

                          [september 23, 1997]
    Mr. Chairman, members of the Committee, thank you for the 
invitation to share my views with you. I do so as a senior member of 
this committee, as a senior member and active participant of the 
National Commission on Restructuring the IRS, as a chief sponsor of 
Taxpayer Bill of Rights I and II, as a Senator representing millions of 
taxpaying constituents, and as a taxpaying citizen myself.
    In a sense, I represent both sides of the equation. As a member of 
the United States Senate, I am part of the functioning of government. 
And part of that functioning is the raising of revenues to finance the 
goods and services provided for the public. Yet, I also pay taxes, and 
I represent millions in my state who also pay or should pay their fair 
share.
    The issue is one of balance, in my view. The Federal Government 
needs to collect its revenue, which taxpayers are obliged to pay. But 
taxpayers have certain rights that should not be abused. All of us 
should support a proper balance between these two needs. Yet, over the 
years, it appears such a proper balance has been lacking.
    It is for this reason that some of us seem to be advocates for the 
taxpayers, without being mindful of the importance of the revenue-
collection functions of the IRS. Any serious, objective observer should 
acknowledge the necessity of balance. But when evidence mounts of IRS 
abuses and mismanagement, it's time to look beneath the surface and 
search for systemic, cultural problems. We did that and we found them. 
Both on the Commission, and, I believe, on this Committee as we will 
see later this week. A ``we vs. they'' mentality seems to exist. And 
that is not a healthy situation.
    Having said that, this is not an indictment of the dedicated, 
front-line IRS employees in the field. Typically, they do an 
outstanding yet thankless job in the service of the public. It is not 
they who should be the targets of scorn. Rather, it is a management 
culture mindless of the fact that they are servants of the people. If 
allowed to persist, such a mindset often leads to arrogance, 
unresponsiveness, disregard for one's rights, and the very kinds of 
things we have been hearing from constituents for decades.
    When we in the Congress attempt to investigate, we're often 
derailed. A cloak of secrecy goes up. It's more veiled than even the 
most elaborate secrecy arrangements at Langley. In the language of the 
federal government, it's called ``6103.'' That's the Section of the Tax 
Code that prevents disclosure of taxpayer-related information. Designed 
to protect taxpayers' privacy, it does much more. It also protects the 
privacy of those who abuse taxpayers' rights, who mislead Congress, and 
who might use collection quotas in tax enforcement despite their 
illegality.
    In my experience, Mr. Chairman, such abuses occur when independent 
oversight is lacking. Oversight has a rather antiseptic quality about 
it. That is the concept behind the Commission's recommendation for an 
independent oversight board over the IRS. This board would set 
appropriate performance standards, would measure performance, and then 
reward or discipline managers according to their performance.
    An important part of oversight is more general openness. The 
Commission found that the IRS is a very closed and insular 
organization. As a result, we have put forward a first step to make the 
IRS more open to Congress and to the press. If we are to be successful 
in changing the culture of the IRS, a key ingredient is greater 
openness.
    I think my colleague and Chairman of the Commission, Senator Bob 
Kerrey, was absolutely right when he noted at one of our hearings a 
point about the media. He said the media and press are one of the key 
ways in which Congress finds out what is going on at government 
agencies.
    And so the Commission, to encourage more openness, as well as more 
accountability, proscribed the following three remedies in the IRS 
Restructuring and Reform Act (S. 1096):
    (1) The IRS must be more timely and responsive in Freedom of 
Information (FOIA) requests;
    (2) The IRS must not abuse its authority under Section 6103. The 
Commission found that the IRS did abuse this authority in hiding from 
the press the fact that the agency had provided false information to 
Congress. We would call on a panel of experts to recommend changes to 
prevent such abuses;
    (3) The IRS must maintain and preserve records. It has not. Many 
requests by the Commission for documents and data were met with a 
statement that such data no longer existed, or the documents could not 
be found.
    Addressing these three areas of openness may not be headline 
grabbing. But in my experience, together with other measures, these 
will help bring more accountability to the IRS. The IRS should be held 
to the same high standards that the agency itself applies to the 
American taxpayer.
    I am also pleased that the Commission did not call for the easy 
solution--more money. The IRS, until two years ago, had seen continual 
increases in its budget for 40 years. Indeed, the Commission uncovered 
that hundreds of millions of taxpayer dollars have been wasted. 
Clearly, the problem at the IRS is management, not money.
    One Treasury official admitted privately that the IRS wouldn't be 
serious about reform if Congress kept throning more money at them. This 
has been my experience as well in overseeing federal agencies over the 
years.
    S. 1096 is designed to address many of the management failures we 
detected. I urge the Committee and my colleagues to look favorably upon 
it. Meanwhile, the Commission did not conduct serious oversight 
investigations to root out cultural pathologies within the IRS. That is 
where the Commission's job ended, and the job of this Committee begins, 
with this week's hearings.
    Understandably, these are controversial hearings. The IRS is not 
used to being overseen Untoward motives are assigned to the oversight 
efforts. Like partisanship. But that's a tired argument. I intend to be 
an active participant in these hearings. In the 1980s, I was hardly 
partisan when I clashed with a Republican Administration over defense 
issues. The same with the Chairman of this Committee. And I've been 
overseeing IRS abuses as far back as the Reagan and Bush 
Administrations as well.
    In addition, when I launched my efforts to oversee the IRS, I was 
joined by my close friend David Pryor, a Democrat and a close friend of 
the President's. We chose to make our critiques responsible instead of 
partisan. I believe the record reflects that.
    The charge of partisanship has no credibility with respect to this 
oversight effort. It will be a fair airing of questionable practices by 
an agency abusing its trust.
    I have learned over the years that oversight of the IRS is a step-
by-step process, and a long-term commitment. We learned of the agency's 
quota system back in the 1980s and we outlawed it. Suddenly, we find 
there might be an unofficial, back-door quota system still in place. It 
seems like you put out a brush fire here, and it pops up somewhere 
else. The moral of the story is, there's a need for constant vigilance 
over the IRS. History teaches us so.
    Mr. Chairman, let me conclude by commending you for your leadership 
in holding these much needed hearings. I would also like to say 
publicly how much I appreciated working on the Commission with my 
colleague, Senator Kerrey. His guidance and leadership produced a 
solid, credible effort, and I am pleased to have served with him.
    Again, Mr. Chairman, thank you for the opportunity to express my 
views. I look forward to any questions you may have. 

                               __________

             Prepared Statement of Hon. Charles E. Grassley

                          [september 24, 1997]
    Mr. Chairman, thank you for this second day of hearings to reform 
the IRS. My goal in these hearings, like yours, is to trigger 
meaningful legislative reform. Congress must  foster a new culture of 
IRS respect for taxpayers. It is up to Congress to reshape the culture 
of the IRS. We need to go from a culture of intimidation, and to a 
culture of customer service. Congress must again make the IRS a place 
where talented people will want to work and serve. Congress must also 
make the IRS a place where honest taxpayers will want to go to solve 
their problems.
    Let me solve one problem right now. Some people have been saying, 
in the press and elsewhere, that these hearings ``bash'' the IRS. They 
have said that we undermine taxpayer confidence in the system . . . 
They are wrong.
    It isn't our speaking about IRS abuse that undermines public 
confidence in the system, it's the IRS abuse that undermines public 
confidence in the system. Indeed, as elected officials, we have a duty 
to look for abuse, speak about it when we see it, and then end it.
    The process started in the National Commission to Restructure the 
IRS, on which I served with Senator Kerrey. Based on the bi-partisan 
Commission report, we have introduced reform legislation. Now, this 
committee has picked up the baton, as has our sister committee in the 
House. There will be more hearings. I anticipate that we will 
ultimately report out legislation. This legislation will eventually 
become law and change the way things are done at the IRS. No one 
inside-the-beltway can avoid real IRS reform. The people want it.
    I have a message for anyone who opposes reform. If you are not part 
of the solution, then you are part of the problem. You can either join 
us, or get out of the way. Either way, the taxpayers will have their 
reform.

                               __________

               Prepared Statement of Hon. Orrin G. Hatch

    I commend the Chairman for holding this series of hearings. The 
question of the practices and procedures of the Internal Revenue 
Service is a serious one that will require a comprehensive review 
before we can adequately evaluate proposals for change.
    The most common complaint that I hear from my constituents in Utah 
is about the policies and procedures of the IRS. Whenever I meet with 
Utah families, whether it be in town meetings or other forums, I hear 
about both real and perceived abuses suffered at the hands of the IRS. 
I am sure my colleagues on this Committee hear the same thing. You 
don't have to go very far to hear these horror stories--it seems that 
everyone has either experienced this rough treatment by the IRS or 
knows someone who has.
    The problem is not unique to Utah. Taxpayers throughout the country 
are complaining of a checklist mentality, regional inconsistencies in 
interpretation and enforcement, and Service personnel who coerce, 
mislead, or misinform the taxpayers.
    The behavior of the IRS is not a new problem. The IRS has been 
accused of, and is sometimes guilty of, operating in an abusive, 
unresponsive, improperly political and occasionally corrupt way for 
decades.
    The so-called ``voluntary'' tax system we operate in this country 
does not seem to be so voluntary. Indeed, it seems to be based on fear. 
It has been said that there is hardly an American citizen above the 
poverty level whose tax conscience is so clear that he isn't scared of 
being audited. The fear of suffering a personal attack by the IRS is 
the thing that seems to be keeping most of the taxpayers in this 
country in line.
    This is a particularly serious problem. The IRS plays a vital role 
in our tax system. As such an important part of a tax system based on 
self-assessment, the IRS must maintain both Congressional and public 
trust. One needs only to read the newspaper or listen to taxpayer 
accounts, to see that this is not the case. The IRS must work harder to 
be perceived as fair, effective and impartial.
    While some of my colleagues have argued that the only way to do 
this is to dismantle the IRS, I do not agree. The IRS should not be 
abolished. It is a necessary tool in the collection of taxes. The 
American taxpayer is not going to fork over a chunk of his hard earned 
money without some sort of focused collection and enforcement system in 
place. For example, just look at how many of the drivers on our 
highways comply with the posted speed limits.
    Like the drivers on the roads, not all American taxpayers should be 
treated in a gentler, kinder fashion. Those willfully ignoring the 
rules should be handled with an iron fist. Most Americans, however, are 
trying to comply with the complicated tax laws and are acting in good 
faith. These taxpayers should be treated with respect and have a level 
playing field.
    Because of its role in collecting taxes, there will always be 
complaints about the IRS. It will always be an unpopular place. The IRS 
is a very large and complicated agency that few understand. Its 
workload is staggering. Like the taxpayers, most IRS tax collectors are 
decent, yet overworked people with an unpopular job who are trying to 
do the best they can.
    However, there is an aura of unaccountability that must be changed. 
The process is broken and must be fixed if we are to maintain public 
faith in the government. There must be little or no room for the type 
of abuses I am hearing about from my constituents on a regular basis. I 
am extremely concerned about the lack of good judgment that is being 
exhibited in these cases.
    The problem of fixing the system is further compounded by the fact 
that there is not sufficient data to evaluate the extent or depth of 
the improper actions taken by the IRS. We will hear testimony today 
stating that this information is just not collected at all, destroyed, 
or simply unable to be retrieved. This is not the way to run a public 
agency. How can Congress adequately evaluate the validity of the 
complaints we see if the data is not available? Both Congress and the 
Administration need these tools to evaluate the behavior of the IRS. We 
must be able to determine if these complaints are isolated instances, 
the acts of a few rogue agents, or the result of some systemic problem 
at the Agency itself. Without this data, we are left to assume that the 
improper actions are somewhat proportionate to the complaints we are 
receiving.
    I am looking forward to hearing from the witnesses we will hear 
this week. Their testimony will expand the information we have at hand 
to aid us in our evaluation of the Internal Revenue Service, its role 
and place in the federal government structure, and how to reform the 
Agency to ensure fair and efficient tax collection in the future.

                               __________

               Prepared Statement of Katherine Lund Hicks

     Chairman Roth, and Members of the Senate Finance Committee, thank 
you for allowing me this opportunity to appear here this morning to 
relate to you my experience with the Internal Revenue Service.
     Like many women who have gone through a divorce, I was the one 
stuck with the tax bill for our last joint return for tax year 1983. 
The IRS assessed that return for additional taxes of $7,000, but sent 
all the notices to my former spouse. Unfortunately, it took him over a 
year to notify me of the assessment. I immediately contacted the IRS. 
The IRS had ceased to be willing to examine my records and was 
demanding that I pay them $16,000 instantly. At the time, my former 
spouse was earning in excess of $40,000 a year as a glazier and had no 
dependents. My income was approximately $15,000 a year as a newly hired 
bank employee with a dependent 14 year old daughter. For the two years 
following my divorce, I was financially destitute. I had just managed 
to get an apartment--a real home for the two of us.
     I mention this to remind you good people that when an IRS 
collection procedure gets out of control, the victim of that collection 
still has to deal with all the other traumas of their life. An honest 
collection by the IRS, with no snafus, of an amount actually owed is 
incredibly stressful in itself. Therefore, it is critical that the IRS 
not be allowed, whether by design or accident, to pursue taxpayers for 
erroneous debts. At present, there are no effective protections against 
this.
     In my case, I had to file a Tax Court Petition to force the IRS to 
examine my records, which I did in 1988. This is not unusual if the IRS 
does not get a response to early requests for records, and I did not 
feel resentful or persecuted. However, it did cause problems and added 
to my stress. I had to use my rent money to pay the accountant and 
lawyer, and so I lost my apartment. My daughter and I were reduced to 
sharing a rented room. I consoled myself with the thought that we had 
survived worse and we would get another apartment later.
     It is important to note here that my ex-husband was not a party to 
this petition in tax court. We settled out of court and the IRS agreed 
to a reduced tax from $7,000 to $2,709, a reduced total demand from 
about $16,000 to approximately $3,500. I went to the meeting in July 
1988 to sign the agreement and, check book in hand, prepared to pay the 
amount in full at that time.
    The IRS refused my payment until they had sent me a bill because 
they would not have anywhere to credit the money without the bill and 
they claimed they needed time to calculate the exact interest due. I 
wanted the payment properly credited. I wanted this to go well and to 
be permanently resolved. I thought, in a few weeks, I'll have a bill. 
But, the IRS said that the bill would take six months to prepare and 
arrive no later than January 1989. Six months! I recall asking if I was 
going to be charged interest for the six month waiting period and the 
IRS attorney, through my accountant, said no. The interest would be 
calculated through the date of the agreement and as long as I paid it 
right away in January, there would be no additional interest. He said 
it would be about $3,500 total. I never understood why they could not 
just whip out their calculator and tell me what I owed right then and 
get this whole thing over with.
     The bill never came and in February 1989, I started calling the 
IRS asking where it was. I called the Fresno office and they suggested 
I also call Laguna Niguel. Both offices had no record of any taxes owed 
by me. I found this hard to believe. I wanted to be absolutely certain 
they were correct. I wanted to remarry and I did not want to bring this 
tax bill into the marriage. I called both offices again in March and 
again before July. I was told the same thing, that I owed nothing for 
1983. I asked for a receipt or something to show this was paid because 
I was simple minded enough to believe this was as a reasonable request. 
The IRS employees all said that they ``don't do that.'' I had to take 
the word of the IRS that I owed nothing. In this, I had no choice. At 
the time, I was not aware that my account had been set up on a separate 
bookkeeping system to which the IRS employees with whom I spoke did not 
have ready access.
    It works like this: when you file a tax return, it is recorded in a 
Master-File. This is what the IRS clerks pull up on their computer when 
you call and ask if you owe money. However, at some point in 1989, the 
IRS ``split'' the Master-File of our joint 1983 return and transferred 
separate assessments into two Non-Master Files, in each of our 
individual names and respective social security numbers. This was due 
to the fact that I had gone to tax court and my ex-husband had not. 
Therefore, the IRS set up separate files.
    These Non-Master Files do not show up on the computer when the IRS 
clerks check a taxpayer's social security number for a balance owed. 
According to the attorney who explained this to me in 1997, the Master-
File continues to exist, but may show as a zero balance, until the IRS 
recombines those accounts. It will then reflect the correct amount owed 
according to the agreement. Until that happens, every time the IRS 
clerk pulled up my or my joint signer's social security number, they 
will see a zero balance and conclude that no taxes are owed. To add to 
the confusion, there is no notation in the Master-File that it has been 
``split.'' Therefore, there is no way for the IRS clerk to know that 
you might have an outstanding collection in a Non-Master File. As a 
result, I was repeatedly told by IRS clerks that I owed nothing. So far 
as I know, to this very day, these accounts have not been recombined 
and the Master File continues to exist with a zero balance while the 
Non-Master Files shows a balance owed. Yet, the IRS has been aware of 
this error at least since I notified them of it earlier this year--if 
not even earlier. I have made repeated requests of the IRS to recombine 
these accounts ever since I learned of the problem. As far as I know, 
it has not been done.
     It is incredible to me that Non-Master Files are allowed to co-
exist with Master-Files at all! It creates two accounts under the same 
name with the same social security number, that can reflect conflicting 
balances due for the same tax year for the same person. Such a practice 
substantially increases the potential for error and confusion inside 
the IRS while simultaneously making it impossible for a taxpayer to get 
reliable information from the IRS. The taxpayer either gets conflicting 
information, or in my case, consistent but incorrect information. Every 
day the taxpayer is unable to get accurate information from the IRS 
about a balance owed, is another day's interest added to the debt. Even 
while the taxpayer is wandering around in this IRS maze of multiple 
accounts the clock never stops running. This is incredibly frustrating 
and unfair to any taxpayer. Unable to overcome this obstacle to 
compliance through no fault of the taxpayer, he or she is charged 
penalties as well for that failure! Much of my misery was caused 
because the IRS could not answer accurately the simple question, ``How 
much money do I owe?'' As far as I know, that condition has not 
changed.
     To add to the confusion, my former spouse telephoned my fiance to 
complain that he had paid the tax and now the IRS was after him for it 
again. He refused to share his records with me, but, his story and the 
IRS story both matched. Still, I had no independent records to prove 
either one. I requested his payment records from the IRS in 1988, 
records to which I believed I was entitled. I made a second request for 
those records in 1997. The IRS has refused me these records or even a 
statement as to their content. Why, if my joint signer has never paid 
anything on this tax, is the IRS hiding that information from me? How 
can I know, for certain, what my liability is without the records of my 
joint signer? Perhaps he has paid nothing, but if that is so, then 
their refusal to share that information with me makes no sense.
     Mr. Chairman, I did everything humanly possible to obtain correct 
information. I made every attempt to get this tax paid and every 
conceivable request for some kind of record to evidence what the IRS 
was telling me. I know of nothing else I could have done.
     So, after being wrongfully informed that there was nothing owed, I 
remarried in July 1989. I carried on business with the IRS without 
incident and my new husband and I filed a joint return in 1990 and 
received a refund. We were now convinced, of course, that if I owed any 
money to the IRS, the IRS would never have issued a refund, so now we 
were confident that the IRS information was correct. It was not.
    In September 1990, without any notice and without our knowledge, 
the IRS filed a tax lien against me.
    On December 19, 1990, the first lien holder on our home sued us as 
a result of that Federal Tax Lien in the sum of $6,161.41. The lender 
threatened to call our loan if we did not immediately get the IRS lien 
released. We would have lost our home. A home, by the way, that my new 
husband bought for himself 6 years before he met me. So, the real 
damage was being done to him, an entirely innocent spouse.
    All of this, after I had been so careful to pester the IRS 
repeatedly for as a bill and been repeatedly told that no money was 
owed!
     Worse than that, the lien did not reflect the terms of our earlier 
settlement agreement! The tax lien reflected an assessment nearly twice 
that of the IRS agreement and the IRS refused to discuss that fact with 
me. Meanwhile, while the assessment was ``ripening'' it had gone up to 
over $8,000!
     I tried to reopen my tax case and was told that the Federal Tax 
Court did not enforce out of court settlements made with the IRS! How 
convenient this is! Only the taxpayer is held to the agreement, not the 
IRS! I was adamant that this was just morally wrong! I was very upset!
     I fought this collection for two reasons: (1) because, based on 
information provided by the IRS itself, I sincerely believed I owed 
nothing and (2) because I believed the IRS, even if they intended to 
collect twice, was obligated to calculate my collection in accordance 
with our agreement.
     My new husband contacted the Revenue Officer who had filed the 
lien. The Revenue Officer informed my husband, and later me, that he 
had my former spouse's file ``. . . right here on my desk . . . '' and 
he knew that my former spouse ``. . . had paid the taxes . . .'' but 
that it was not ``. . . relevant . . .'' because these were separate 
collections. He insisted that if we wanted my former husband's payments 
to offset my liability, we would have to produce those records, 
otherwise we would have to pay it again. The duplicate payment would 
balance the IRS books and he would help us file for a refund of the 
overage.
     Imagine my new husband's frustration at the prospect of 
effectively paying $8,000 dollars that we believed had already been 
paid.
     At this point, which was early 1991, I requested a Problems 
Resolution Officer who, after some inquiry into my account, came to the 
conclusion that I, indeed, did not owe anything for the 1983 taxes and 
that, once she got a written confirmation of this from the Fresno 
office she could get everything ``abated to zero.'' Meanwhile, she 
said, the IRS agent should stop collection activity--which he did not. 
However, I thought, ``Great! This is all going to get straightened out 
soon!'' I was wrong. A few days later she called me and informed me 
that the IRS Fresno Office had changed its mind about providing her 
with the necessary documents and, without those, there was nothing she 
could do.
     I made one final attempt at reasoning with the collection agent. 
He merely repeated that he knew the tax had been paid, and he knew I 
didn't owe the money, but it didn't matter. The only way to get rid of 
the tax lien was to pay the $8,000 whether we owed it or not.
     The collection agent then offered to assist us with regard to the 
refund application. He knew we were being sued by the bank because the 
IRS was a co-defendant. So, he just refused to do anything and let the 
bank force us to pay what we did not owe. With the bank about to call 
the loan, we had no choice but to pay the IRS demand in full.
     Mr. Chairman, although I am giving you a rather general 
description of these events for the sake of overall continuity, it is 
important for me to tell you that both my husband's and my own physical 
and emotional well being suffered tremendously under the constant 
strain of these repeated attempts to get the IRS to honor their 
agreement and collect only what I owed. It was physically exhausting. 
We almost never slept. Every conversation had to be memorialized in a 
letter. There were the visits to the attorneys and the accountants, 
their bills and their depressing advice, ``pay it, it's cheaper than 
fighting'' and the very real prospect of loosing our home to the bank 
if they called the loan. You don't eat, you don't sleep, you're afraid 
to talk too much to each other for fear you'll take it out on your 
spouse. If you do talk, it's about the IRS. We were newlyweds! I cannot 
describe the guilt, knowing that I had brought my new husband into 
this.
     My parents became so concerned for my health that they cashed in a 
retirement CD and loaned us the money to pay the IRS. Since they were 
living on a fixed income, this was a big deal for them to do. I know 
they made sacrifices to do this. It was as a selfless act of love.
     On February 21, 1991, we handed a cashier's check for the entire 
amount they demanded, $8,194.73. Please keep in mind the original 
underlying tax was $2,709 and that the original amount due was supposed 
to be no greater than $3,500. The balance was interest that accrued 
from July 1988 to February 1991, a period of 18 months. In that time 
frame, the ``bill'' that I could not get anyone to give me to pay 
nearly tripled from the original amount! I was forced to pay $4,500 for 
their mistakes!
     In exchange for this payment, we were given a Certificate of 
Release of Federal Tax Lien. My cashier's check reflected my name, my 
social security number, the tax year to which it was being applied--
1983, as well as my tax court docket number. In other words, the IRS 
had everything it needed to properly credit the payment. I could not 
have made it any clearer where to apply the proceeds of the check.
     In February, 1992, a letter arrived from the IRS office in 
Maryland signed by a woman with the authoritative title of ``Chief, 
Accounting Branch.'' The letter said the IRS had received a payment 
and, if we had made this payment, please send the IRS a copy of the 
check with an explanation, which we did. We also asked her in that 
letter not to refund the money or any portion of it unless she first 
made sure neither of us owed any money anywhere for any year.
     In March 1992, we received an unsigned IRS form letter indicating 
that the payment had been applied to our 1990 joint return. I actually 
telephoned the IRS and asked about this and was told simply that, if 
the Accounting Branch determined that there were no taxes owed for any 
year, the only way to refund the money was to credit it to the most 
recent tax year.
     In other words, they could not credit the payment to my 1983 tax 
year unless there was a balance due. Therefore, we logically concluded 
that the Accounting Branch did what we asked, checked out our taxes, 
found nothing owed and was merely refunding us the overpayment in 
accordance with their own bookkeeping system. We had absolutely no 
reason to think that the refund was in any way erroneous.
     In November of 1996, nearly 5 years later, out of the blue without 
so much as one prior notice, we received a certified letter from the 
IRS containing a Notice of Intent to Levy. The particulars of the tax 
being levied were identical to the particulars of the tax lien that had 
been released in 1992. For reasons unknown to us, they changed their 
mind and wanted more money again. Why? I telephoned the agent who sent 
the letter and was told it was a different assessment because, even 
though everything else was identical--the tax year, the amount, the 
assessment date--there was an ``N'' after my social security number on 
this assessment and therefore, I had to pay it again. The ``N,'' I 
later learned, is a tag for ``Non-Master'' File. Remember those? The 
separate collections that nobody seems to know about? Well, this was 
one of them. Whether the IRS failed to close it at the time we paid it 
in 1991, or whether they reopened it because they wanted to get the 
refund back they gave us in 1992 doesn't really matter much to me. 
Whichever one occurred, the fact remains, the IRS had made yet another 
error. Once again, they demanded that I balance their books and pay for 
their mistakes. How many times was this going to happen, I wondered? A 
tax attorney informed me that my release of lien was meaningless 
adding, ``. . . the IRS refiles these all the time. I cannot tell you 
how many people come in here clutching these things (release of lien) 
for dear life thinking that they offer some kind of protection . . . 
.'' He stated the Taxpayers Bill of Rights did not allow the IRS to 
collect interest from the taxpayers based on its own errors, and even 
suggested that I write to my Congressman but cautioned me not to expect 
a significant outcome because, ``. . . they (Congress) can't really do 
anything . . . ,'' Congress is less than effective when dealing with 
the IRS on behalf of taxpayers.
    I gave Problems Resolution another try. This time, they were less 
an advocate for me than an arm of the IRS collection office. It was, in 
fact, the Problems Resolution Officer who told me ``. . . you know, you 
kept a refund to which you knew you were not entitled . . . .'' Her 
tone of voice was not friendly. Keeping a refund that you know you are 
not entitled to is a crime. She demanded I pay back the refund. So much 
for the Problems Resolution Office.
    After a brief hospitalization for surgery resulting from a freeway 
pile up that totaled our car, my husband resumed work in January 1997, 
only to discover that while he was recovering from surgery the IRS had 
levied against his salary. My husband would be allowed to keep $18 a 
week to support me and the children for approximately two months. 
Anyone entering a grocery store today knows that is tantamount to 
condemning us to a soup kitchen for our meals. Two months of being 
unable to meet our financial obligations would have sent us into 
bankruptcy and foreclosure. Again, the innocent spouse was going to be 
punished for my old tax problem.
    To protect his ability to provide for his children and myself, my 
husband set up a separate residence in San Clemente and filed for 
divorce on February 3, 1997. In California, the day you file for 
divorce your salary is your sole and separate property. The IRS ignored 
that fact and left the levy in place. In an unusual determination, the 
county refused to comply with the second levy and my husband's income 
was safe. However, his retirement fund was not. That was community 
property and we fully expected the IRS to swoop in the next day and 
take the whole thing. So, on the 5th of February 1997, I filed 
bankruptcy to stop the IRS long enough for us to figure out what to do 
about this.
     My bankruptcy notice was hand delivered the same day. The 
following day the IRS notified me that my schedule C's for 1993, 1994 
and 1995 were ``questionable,'' and asked me to reconsider them. We 
took this as a thinly veiled threat to punitively audit our returns.
    The IRS refiled the lien for which I had a release. We discovered 
this in March of 1997. I am informed that this is common practice. The 
liens threatened my husband's residence which was his separate property 
but the IRS ignores this in community property states. I have been 
informed that the liens would survive the bankruptcy, as all liens do. 
So even though this was his sole and separate property, it was 
possible.
    My now widowed mother could not bear watching us go through this 
and took out a loan against her retirement so we could pay the IRS and 
get this over with. However, my husband and I knew that paying the 
demand would never resolve this. We tried that in 1991. They would 
screw this payment up too and in a few years be back for more ``with 
interest.'' We needed closure, some way to end this forever.
     Since the real problem occurred back in 1989, and the IRS never 
correctly set up my account for $3,500, and because every penny over 
that amount was a result of that error, we determined that under the 
Taxpayer's Bill of Rights provision that the IRS could not make us pay 
interest for their mistakes. We should not owe more than $3,500. If we 
could get the IRS to correct their errors we should be able to pay 
$3,500 and be done with it. So, that's what we did. We made a directed 
voluntary payment of $3,500. We put the rest of the money in a CD in 
case the IRS swooped in to destroy us unannounced. We waited.
    Our lives are now forever altered. Joint tenancy, joint bank 
accounts, joint tax returns are no longer a part of our life. We will 
pay additional taxes every year as a result. Our confidence in the 
integrity of the IRS has been completely shattered. This year we got a 
refund on our 1996 taxes and sits in a CD as does the $3,500 that the 
IRS recently returned to us without any explanation. We don't dare cash 
refund checks anymore. My credit is completely destroyed, and my 
husband's credit is seriously damaged. We will suffer the effects of 
this IRS collection for the rest of our lives.
    I originally wrote to you, Mr. Chairman, because the IRS should not 
be above the law. Couples should not have to divorce because of the 
IRS. Once you became involved, the IRS released all the liens and sent 
us back the $3,500. Senator Roth, your effort saved us from being 
forced to live apart, and preserved our ability to provide for our 
children. For this, we will be forever grateful. However, the conduct 
of the IRS remains the same, and for thousands of other taxpayers, 
there is no help. Ours is a hollow victory if the IRS is allowed to 
continue this type of conduct.
     People tell us how terrified they would be to do what we have 
done. They are convinced that the IRS will target us for punitive 
audits. One person put it this way, when she learned we had written to 
Congress, ``. . . that's like painting a bull's eye on your chest and 
giving the IRS a loaded gun . . . .'' She believes the IRS will never 
forget this and someday get back at us in retaliation. Mr. Chairman, 
she could very well be right. The IRS is judge, jury and executioner--
answerable to none. We do not believe that our experience is isolated. 
For over 10 years the IRS has conducted itself as a legalized extortion 
operation willing to commit abusive acts to collect money, even that 
which they know is not owed.
     An agency of the United States Government, allowed such sweeping 
authority as that granted to the IRS, should be held to the highest 
standards of honesty and integrity. The IRS is not. Those of us subject 
to that authority should be guaranteed an accessible and effective 
remedy for its abuse. We are not.
    It is a disgrace to our nation that an arm of our democratic 
government is allowed to behave as if it were an extension of a police 
state. I hope that Congress can act to end this national shame.
     Thank you for allowing me this time.

                               __________

                 Prepared Statement of Hon. Steny Hoyer

    Mr. Chairman, Senator Moynihan, and Members of the Committee, 
pleased to be able to testify today on the practices and procedures of 
the Internal Revenue Service. As Chairman, and now as Ranking Member of 
the House Appropriations Subcommittee on Treasury, Postal Service, and 
General Government,  have spent a great deal of time on the issues of 
tax compliance, IRS management, and customer service.
    It is a subject where the Members of this Committee have shown 
great leadership. I would like to commend Senator Kerrey, Senator 
Grassley, and the other members of the Commission on Restructuring the 
IRS for their leadership on this issue.
    IRS employees are called upon to do an extremely difficult job. The 
102,000 men and women of the IRS who are responsible for collecting 97 
percent of the nation's revenues have one of the most difficult jobs in 
government.
    They collect the funds that pay to defend our freedom, educate our 
children, and take care of our old. At the same time that Congress has 
constrained their funding, it has also broadened their mission.
    It is often said that it took an accountant to catch Al Capone. In 
recent years, because the profits of illicit activities such as drug 
smuggling and money laundering are often the best trail to those who 
perform them, the IRS has been given responsibility for assisting in 
criminal investigations.
    Each year, the IRS participates in some 5,000 criminal 
investigations.
    If anything, the trend is asking the IRS to broaden its mission 
further.
    Recently, for example, Congress instructed the IRS to help in the 
important work of recovering child support payments from deadbeat 
parents who have refused to pay chisel support.
    Against this backdrop, the Commission wisely recommended that 
``Congress provide the IRS certainty in its operational budget in the 
near future'' and call for ``greater stability'' with funding levels.
    As the Commission has pointed out, Congress' failure to pursue 
consistent policies regarding funding, its frequent changes of the tax 
code, and its efforts to micro-manage the IRS have all undermined the 
ability of the agency to manage efficiently in the long or short term.
    In recent years, attacks on the agency's budget, while partially 
restored in Conference, have hurt morale and distracted management from 
the task at hand.
                    the challenges faced by the irs
    The vast majority of taxpayers pay their full taxes on time. 
Nevertheless, the IRS only collects about 83 percent of taxes owed 
through voluntary compliance. There is currently a balance due equal to 
$216 billion. When some do not pay their fair share, this increases the 
deficit and raises the burden for everyone else. From the point of view 
of fairness alone, it is necessary for the IRS to carry out 
enforcement.
    Last year, of 119 million individual returns filed, 2.1 million or 
1.6 percent of the total were selected for examination.
    Of the 89.4 million corporate returns filed, only 2.38 percent were 
selected for examination. In general, the vast majority of taxpayers 
are not subjected to any examination or collection measures at all.
    Nevertheless, in any large organization with significant powers 
there will be instances each year where individuals behave improperly. 
Such abuses cannot be tolerated.
    Two years ago, Congress revisited the problem of IRS abuse with the 
passage of the Omnibus Taxpayer Bill of Rights 2. In its report, ``A 
Vision for a New IRS,'' the IRS Commission on Restructuring found that 
this law has ``had an important effect on changing the culture of the 
IRS.'' The Commission went on to find ``very few examples of IRS 
personnel abusing power.''
    Yet even one instance of abuse is one too many.
    The IRS, the IRS employee's union, and the Department of the 
Treasury have stated that they are committed to a policy of zero-
tolerance for taxpayer abuse. IRS management is following up on cases 
aggressively to determine what went wrong and to take appropriate 
action.
    But I believe that even appropriate action after-the-fact cannot 
erase the pain that some taxpayers have experienced.
    I am therefore encouraged that the IRS is following up with a 
Service-wide program to stop this kind of abuse before it happens.
    This program includes centralizing and improving training on the 
provisions of both the first and the second Taxpayer Bill of Rights; 
creating taxpayer surveys that rate employees' treatment of taxpayers; 
eliminating unnecessary notices and clarifying those that remain so 
that taxpayers clearly understand their responsibilities; and 
implementing the modernization blueprint which will prevent the kinds 
of systems glitches that made these and other cases far more painful 
than they ever needed to be.
    Treasury and IRS have reaffirmed their commitment to the original 
Taxpayer Bill of Rights which made it illegal to use records of tax 
enforcement results to evaluate employees or their supervisors.
    A joint Treasury, IRS, National Performance Review task force is 
conducting a 90-day study of customer service.
    And evaluations of both revenue officers and agents include 
measures of performance against a customer relations standard.
    These changes underway are clearly steps in the right direction.
                               governance
    Ultimately, however, I believe that a solution to the problem of 
taxpayer abuse cannot be separated from the larger task of building the 
IRS of the future.
    The Treasury Department, the IRS, the employees' union, and the IRS 
Commission on Restructuring have identified a common set of concerns. 
To build the IRS of the 21st Century, they have identified the need for 
a renewed focus on Oversight, Leadership, Flexibility, Improved 
Budgeting and Tax Simplification.
    The Internal Revenue Service has been rightly criticized in recent 
years for its failure to manage its operations well. Particular focus 
has been directed at the attempt to modernize its information systems, 
an area severely criticized by the General Accounting Office until 
quite recently.
    The Treasury has also taken a new role in exercising oversight of 
the IRS. For the first time in the fifteen years that I have been 
reviewing IRS budgets, the Secretary of the Treasury and his Deputy are 
giving personal attention to IRS management issues.
    This new focus is clearly making a difference.
    I am encouraged that Secretary Rubin has identified a candidate to 
head the IRS who has a non-traditional background in management and 
information technology--Charles Rosotti. New leadership at the IRS that 
focuses on modernization will help create the systems and practices 
needed to stop abuse of taxpayers before it happens.
    The enhanced oversight that the Treasury has begun to exert through 
the IRS Management Board and will exert through the new IRS Advisory 
Board will provide continuity, accountability and access to outside 
input from the public and private sectors.
    By preserving the ability of the Secretary of the Treasury, who is 
accountable to the President, to choose the Commissioner, Treasury's 
plan preserves accountability to the American people.
    This program is embodied in legislation that I introduced together 
with Senator Moynihan, Congressman Rangel, Congressman Coyne, 
Congressman Waxman, and others at the Administration's request.
    This legislation incorporates many of the findings of the IRS 
Commission on Restructuring and will give the IRS the new leadership 
and flexibility it needs to prepare for the future. Our legislation 
shares many provisions with legislation proposed by Senator Kerrey, 
Congressman Portman, and others.
    And, based on conversations yesterday, we will soon be adding 
taxpayer rights provisions to our legislation. One example of that is 
equitable tolling, or in layman's terms, relaxing the expiration of the 
right to claim refunds after three years.
    Let me note, however, that I am frankly concerned about one 
proposal embodied in their legislation. That provision would remove the 
IRS from Treasury oversight and make it accountable in part to private 
sector executives with loyalties to organizations other than the IRS.
    This proposal would raise difficult constitutional and conflict of 
interest concerns that might well provoke litigation. I am concerned 
that this proposal would place at risk the 97 percent of our federal 
revenues that are collected through taxes, at a time when we have just 
completed a historic agreement to balance the budget and put an end to 
federal deficits.
                               conclusion
    In conclusion, Mr. Chairman, the abuses that have come to light are 
intolerable and steps must be taken to end them.
    At the same time, however, these abuses should not keep us from 
recalling the valuable service provided by the 102,000 dedicated men 
and women of the IRS who perform one of the most difficult jobs in 
government. It is important to point a spotlight on areas of abuse in 
tax collection activities.
    Our constituents rightly expect us to protect them from abusive and 
illegal actions. This objective is particularly important when such 
actions are done in the name of law enforcement. At the same time, we 
must do so in the way that does not undermine those who are performing 
crucial law enforcement missions.
    As I stated, I believe that the measures underway at the IRS are an 
important step in the right direction.
    Ultimately, these problems cannot be separated from the broader 
challenge of continuing to reform the Service in which the Treasury 
Department, the IRS, the IRS employees' union, and the Congress are now 
engaged. I therefore thank the Committee for its leadership in this 
arena and for the opportunity to testify this morning.
    I would be happy to answer any questions that you may have.

                               __________

                   Prepared Statement of Nancy Jacobs

    Chairman Roth, and Senators of the Finance Committee, thank you for 
this opportunity to appear before you this morning to present my 
personal experience with the Internal Revenue Service.
    I am Mrs. Nancy Jacobs. My husband, Dr. Fredric Jacobs, is a 
practicing optometrist from Bakersfield, California and we have 
operated an office for approximately 30 years.
    When my husband first opened his practice in March 1965, in 
Stockton, California he was assigned an Employer Identification Number, 
or EIN, for reporting purposes to the IRS.
    Between 1977 and 1979, my husband closed his practice, but in 
November 1979, he re-opened in a new office in Riverside, California. 
We applied for a new EIN number since he was re-starting the practice 
at a new site and knew we needed an EIN for tax reporting purposes. 
What neither of us knew at the time was that an EIN is like a social 
security number, it never needs to be changed or renewed. The original 
EIN had been assigned to us forever. However, when we requested a new 
EIN from the IRS, it complied with the request and the IRS provided us 
with a second number. But what we didn't know at the time was that the 
EIN the IRS provided to us in 1979 actually belonged to someone else, 
someone we would not be aware of until 1992.
    By March of 1981, we were unexpectedly assigned yet a third EIN 
from the IRS, via a pre-printed label on a quarterly 941 tax return. 
However, we continued to use the number we were assigned in 1979 on all 
of our quarterly tax payments.
    In June 1981, out of the blue--without warning, the IRS placed a 
lien against us for $11,000 for unpaid payroll tax deposits. We 
couldn't find anyone with the IRS who would do us the courtesy of 
checking the lien against the EIN we had been using.
    After attempting to deal with the IRS, my husband and I were so 
intimidated by the tactics used by the IRS that we agreed to pay the 
IRS $250 a week until the balance was paid. For anyone who has not had 
to deal with the IRS under such circumstances, you probably cannot 
understand why we would agree to pay $11,000 that we knew we did not 
owe. Only after you have experienced what my husband and I endured 
would you consider paying an IRS bill that you don't owe.
    Even after the $11,000 was paid we continued to receive subsequent 
liens from the IRS. My husband and I were forced to comply with these 
IRS demands under the penalty of experiencing further enforcement 
actions with the possibility of the IRS closing down my husband's 
practicer We were forced into debt, our credit was damaged and the 
mental stress was overwhelming. During all this time we could not 
convince anyone at the IRS that we did not owe these taxes. In fact 
during one of our visits to the San Diego IRS Office we were flatly 
told by one IRS employee that she was too busy to help us anymore and 
refused any additional assistance in straightening out our account. We 
were then informed by her supervisor that this matter would be cleared 
up. It was a kind offer but that was all it was. Our nightmare 
continued. By 1987, we had received additional liens totaling roughly 
$15,000.
    In 1982, we did seek the assistance of a Congressional 
representative. He contacted the IRS on our behalf requesting that the 
IRS stop all collection efforts, and for them to contact us in an 
effort to straighten out the problem. We did hear from the IRS in 1982. 
We met with someone from the Laguna Nigel office who told us that we 
had received four refund checks. We assured him that we had only 
received one for approximately $3,600. He promised that he would get 
copies of the other checks, but unfortunately he never did.
    The only other consistent occurrence over the course of the years 
was the occasional appearance of the original EIN number on notices we 
received from the IRS, while all the others reflected my second EIN 
number. My husband and I began to wonder exactly where the taxes were 
going that we had been faithfully paying. No one with the California 
IRS offices that we contacted could explain it either, but they were 
adamant that whatever the reason, we owed those taxes!
    By 1987, we again contacted a Congressional representative seeking 
intervention on our behalf. This time we did hear from the IRS but 
that, too, lead to another dead end.
    In 1992, a patient of my husband's, a tax attorney, agreed to 
review our case and was the one who discovered the confusing EINs going 
back to 1979. Someone with a name quite similar to my husband's but 
with an entirely different social security number shared the EIN. Back 
in 1979, had the IRS employee properly informed us that we didn't need 
a ``new'' EIN, or at least checked the status of the number, this 17 
year nightmare would have been avoided.
    Mr. Chairman, since 1992, when we first discovered the mistake IRS 
had made, my husband and I have been trying to get our money back from 
the IRS--money that was wrongly taken from us by the IRS--but to no 
avail. We have never received the money from the IRS as we had been 
promised. We estimate the IRS still owes us over $10,000, if not more, 
plus interest, stemming from their wrongful liens, penalties and 
interest.
    Only in 1994, in an encounter with the IRS' Bakersfield Office did 
we meet the first truly helpful IRS employee who was willing to work 
with us and investigate the cause of our problem. We were informed that 
our problem was indeed due to a clear case of an erroneous Employment 
Identification Number. Unfortunately, this employee became ill and our 
case file was apparently ``lost.''
    After yet another Congressional inquiry on our behalf in 1996, we 
learned that our ``lost'' case file was really not ``lost'' at all but 
had been referred to an IRS employee at the IRS' Fresno Service Center. 
Unfortunately, she was not responsive to our case and almost another 
year languished without satisfaction. Out of sheer frustration, my 
husband and I went to our local newspaper, and told our story.
    Roughly 2 hours after the story appeared, that same IRS employee 
was on the telephone informing us that, ``. . . We discovered that you 
were right . . .'' and proceeded to discuss how our money would be 
resumed to us.
    We then received a fax from her stating that all liens had been 
lifted and the IRS was at fault for the incorrect EIN. However, when 
this IRS employee extended her ``. . . sincere apologies . . . ,'' in 
writing, she did not mention a refund of the money the IRS unfairly 
took from us. She did state, however, ``. . . The Liens previously 
filed under Employer Identification Number XXXX were not correct and 
should not have been on Dr. & Mrs. Jacobs' account. The liens were not 
for their liabilities. Within the next 6 to 8 weeks, Dr. & Mrs. Jacobs 
will be in full compliance on all taxes both individual and business. . 
. .''
    Mr. Chairman, both my husband and I are certainly pleased and 
greatly relieved that this 17 year confrontation with the IRS is almost 
over. But we cannot agree with the IRS that it is completely over. We 
would appreciate receiving our refund with the same enthusiasm and 
speed with which the IRS collected it. However, the real reason I am 
here this morning is to bring to light what my husband and I feel is an 
attitude that permeates the IRS. It is one of manipulation and control 
of the taxpayer. Both my husband and I were met with indifference when 
dealing with the IRS Offices. IRS employees were not interested in 
listening to us, much less investigating our assertions. They assumed 
we were guilty--that we owed the money! The IRS is beyond the law. 
Congressional inquiries on our behalf met with only limp responses. Mr. 
Chairman, an agency with this type of power over American citizens 
requires someone to rid it of such abusive conduct. My husband and I 
commend you for your effort here today to accomplish that goal.

                               __________

              Prepared Statement of Hon. J. Robert Kerrey

    Mr. Chairman, Americans do not have confidence in the IRS, and for 
good reason.
    The National Commission on Restructuring the Internal Revenue 
Service, which I co-chaired, was given unprecedented access to the 
inner workings of the IRS and its employees. After 12 days of public 
hearings, hundreds of hours of testimony from taxpayers and tax 
experts, and over 300 private interviews with front-line employees, the 
Commission found an agency that could not answer its phones, had no 
clear management strategy, and lacked technological sophistication.
    In short, we found an agency that was not serving the best 
interests of the American taxpayer.
    This agency--which ranks below the CIA in popularity with the 
American people--is responsible for collecting 95% of the nation's 
revenue. However, it is given little if any oversight from the Treasury 
Department and has murky lines of leadership and accountability. And 
although law enforcement measures are used to bring in only 3% of what 
is collected, the IRS's culture and atmosphere are such that all 
taxpayers are treated as if they were guilty of something, no matter 
the reason for contact.
    Our commission found, for the most part, that IRS employees were 
hardworking public servants. But with baffling management and oversight 
procedures and flawed computer systems, these employees are operating 
under stifling working conditions and are paralyzed by a monstrous tax 
code that has grown from a quarter inch thick when the IRS was created, 
to over a foot tall today.
    Mr. Chairman, it is important to point out that the growth of size 
and complexity is the product of both Republicans and Democrats and 
both Congress and Administrations past and present. We have written and 
passed the laws that create the code.
    For example, the alternative minimum tax (AMT), which was created 
to prevent affluent taxpayers from using tax shelters and deductions to 
avoid paying income tax, may raise the tax burden on middle-class 
single parents and families earning $50,000 to $75,000 under the new 
tax bill. No doubt, all involved had the best of intentions--to allow 
family and education tax credits to hardworking middle American 
taxpayers. Unfortunately, neither Congress or the Administration 
bothered to explore the effects this credit would have on the tax code 
and taxpayers. Thus, the result is a mess for the American Taxpayer and 
the IRS.
    Complexity is made worse by inconsistent management and oversight. 
The Commission did not find a distinct pattern of corruption with IRS 
employees or operations. We did find a culture and atmosphere which is 
ripe for the kind of harassment and inappropriate audits and seizures 
this Committee will hear about.
    We found that performance measures do not encourage employees to 
treat taxpayers fairly and respectfully. Furthermore, the computer 
system makes it nearly impossible for front line employees to assist 
taxpayers with their problems. If a taxpayer receives an erroneous 
notice from IRS and calls them for help and clarification, the IRS 
employee must access up to nine databases to get the taxpayer the 
needed information. An interaction with IRS is often like a wrestling 
match with a faceless, nameless computer, rather than an interaction 
with a helpful representative, aiming to serve the taxpayer.
    Senator Grassley and I are proposing legislation--S. 1096, the IRS 
Restructuring and Reform Act of 1997--that will comprehensively 
restructure and reform the IRS from customer service to oversight and 
management.
    Our goals are simple. We believe a citizen in Omaha, Nebraska, or 
Lincoln, Hastings, Kearney, Scottsbluff or any other city in America 
should get a helpful voice, not a busy signal, when they call the IRS 
for help. We believe it should be easy to file a tax return. And we 
believe the culture at the IRS should reflect a believe that the IRS 
works for the people, not the other way around.
    The abuses we will hear about this week are symptoms of a larger 
problem: The IRS is insulated from the citizens it is supposed to 
serve. For that reason, we propose making the IRS independent from 
Treasury to become more accountable to the people. We propose the 
forming of a citizen oversight board that would work with the Treasury 
Secretary and the Administration to ease the administrative and 
oversight burden placed on a Treasury Department already responsible 
for 11 other major operations, including the Secret Service and 
customs, not to mention our nation's economic policy.
    Critics of the oversight board have been misleading the public 
about the make-up of the board and have given false impressions of the 
content of the legislation.
    The oversight board is not designed to run the IRS, that is the job 
of the Commissioner. Rather, it would assure public accountability and 
assist the Treasury Secretary on oversight, management and budgeting 
issues. The IRS and Treasury have operated for too long in the shadows, 
unaccountable to the people. This public oversight board would ensure 
that knowledgeable citizens continually monitor the agency.
    A major--and false--criticism of the board is that it would turn 
the IRS over to a board of corporate CEO's. That is simply untrue.
    Our legislation clearly states: ``the Composition of the 
[oversight] board shall be nine members of whom seven shall be 
individuals who are not full-time Federal officers or employees who are 
appointed by the President, by and with the advice and consent of the 
Senate and who shall be considered special government employees. One 
shall be the Secretary of the Treasury, one shall be a representative 
of an organization that represents a substantial number of IRS 
employees who is appointed by the President.''
    Our legislation, as you can see, does not specify or mention 
``CEOs.'' The President would make the appointments and the Senate must 
confirm--plain and simple. I suggest that perhaps Treasury's concerns 
that our recommended board would be filled with corporate self-
interested CEOs is more of a statement of whom Treasury thinks our 
President will appoint, than on our legislation.
    This would be an oversight board made up taxpaying citizens, who 
aside from representation in Congress, have been denied a say in the 
tax collecting process for far too long.
    Treasury, on the other hand, recommends the appointment of an 
advisory board that would consist of 20 government officials and 
another board that would have no influence or power. And while our 
legislation attempts to give citizens a say in IRS oversight, the 
Administration feels that more government input--not citizen input--is 
the way to reform the IRS.
    It is important to note that our legislation, based on 
recommendations supported by a bipartisan majority of the Commissioners 
on the IRS Commission, has the support of a broad base of groups from 
the National Taxpayers Union to the IRS employees union--the National 
Treasury Employee Union (NTEU). They support it for the simple reason 
that more of the same will not take the IRS where it needs to go--into 
the 21st Century.
    Roughly 85% of Americans pay their taxes without IRS intervention, 
Mr. Chairman. Yet the IRS treats most taxpayers who come in contact 
with it as if 85% of Americans DO NOT pay their taxes unless the IRS 
intervenes.
    Americans don't have to like paying taxes, but it is not too much 
that the simplest of questions--what we owe, why we owe it, and how we 
should pay--get answered. Unfortunately for the past 50 years, nobody's 
been able to give those simple answers. Our legislation goes a long way 
toward doing just that, and I hope that after these hearings this 
Committee will begin proceedings on S. 1096, the IRS Restructuring and 
Reform Act of 1997.
    We can criticize the IRS all we want, Mr. Chairman, but Congress 
played a role in the agency's demise. So if we don't like what is going 
on at the IRS, we need to change the laws governing the IRS. These 
hearings are a good first step towards making IRS more accountable. 
But, we need structures in place which ensure IRS is accountable in the 
years to come.
    Our tax collector does not have to be our friend, but it should not 
be our enemy either. More Americans pay taxes than vote, and perhaps 
that is why so few Americans have faith that our system of government 
works for them.
    I believe reforming the IRS--improving phone service, payment 
options, filing procedures, management and oversight--will not only 
enhance compliance and customer service, but go a long way toward 
restoring faith that we truly are a government ``of, by and for the 
people.'' 

                               __________

                  Prepared Statement of Joseph F. Lane

     Chairman Roth, Ranking Member Moynihan, Committee Members, my name 
is Joseph F. Lane and I am an Enrolled Agent engaged in private 
practice in Menlo Park, California. I am appearing today on behalf of 
the National Association of Enrolled Agents.
     Enrolled Agents are tax professionals licensed by the Department 
of the Treasury to represent taxpayers before the Internal Revenue 
Service. The Enrolled Agent designation was created by Congress and 
signed into law by President Chester Arthur in 1884 to ensure ethical 
and professional representation of claims brought to the Treasury 
Department. Members of NAEA ascribe to a Code of Ethics and Rules of 
Professional Conduct and adhere to annual Continuing Professional 
Education standards which not only equal but exceed IRS requirements. 
Today, Enrolled Agents represent taxpayers at all administrative levels 
of the IRS.
     We understand the focus of the Committee's hearings over the next 
three days will be the practices and procedures of the IRS. The members 
of NAEA work with the employees of the Internal Revenue Service's 
Examination and Collection Divisions on a daily basis. Since we 
represent individuals and small business owners before the IRS, 
Enrolled Agents are uniquely positioned to provide substantive input to 
the Service on the effect its policies have on the average taxpayer and 
to provide feedback to Congress on the practical feasibility and 
administrability of the tax code sections it enacts into law. We offer 
in our statement today, some observations about what is working well 
within the Service as well as areas we feel need to be improved. We 
also offer some suggestions about possible structural realignments for 
the Committee to address with the new nominee for Commissioner of IRS 
in the upcoming confirmation hearing.
    We are pleased that the legislative recommendations of the National 
Commission on Restructuring the IRS are pending before the House and 
Senate tax writing committees at present. Representatives of NAEA 
testified at five public hearings conducted by the National Commission 
on Restructuring the IRS and we submitted written testimony for the 
record for a sixth hearing. In addition, our National staff attended 
numerous informal meetings with Commission staffers and Commissioners. 
We praised the work done by the Commission in focusing on constructive 
ways of improving our tax administration system and making the IRS more 
responsive to taxpayer input. We support the Commission's 
recommendations which have been incorporated into the pending 
legislation. We believe the true bipartisan nature of the Commission's 
deliberations and the earnest give and take of the democratic process 
have produced a set of recommendations which are carefully woven 
together and interdependent upon each other to bring about the change 
all agree is necessary in the way our tax administration system works. 
We urge the Senate to pass S. 1096, the Grassley-Kerrey bill, so the 
restructuring of our tax agency can proceed as soon as possible.
                      what is going right with irs?
     We believe the Service should be commended for the way it has 
embraced the recommendations for improvement which were contained in 
the National Commission's report. We understand that not every 
recommendation was welcomed with enthusiasm but we have been impressed 
with the open and nondefensive stance the Service has exhibited in 
deciding to implement as many recommendations of the Commission as are 
administratively permissible.
     We applaud the recent selection of Bob Barr as the new Assistant 
Commissioner for Electronic Tax Administration. The willingness to 
recruit knowledgeable outside expertise to fill critical positions is a 
mark of an agency willing to change. We hope to see more efforts to 
bring the best minds and best systems to bear in resolving the problems 
confronting the Service.
     We welcome the recently published Request for Proposals for ways 
to expand the electronic filing program. We believe as a result of the 
National Commission's efforts the IRS will now consider to a far 
greater degree and with much more responsiveness the feedback it 
receives from the tax practitioner community regarding the great 
potential of widespread electronic filing. We are concerned about the 
delay inherent in any RFP process and believe the Service could 
implement several recommendations already before it which would impact 
next year's filing season immediately.
     We can also applaud some of the initiatives the IRS field 
components are undertaking to increase their responsiveness to local 
practitioner and taxpayer input. In the past month, our Members have 
attended many sessions around the country with local IRS officials and 
reported back to us that they have seen some new willingness to open up 
the decision-making process where possible to factor in outside 
stakeholder input. We have seen this concept work very well for the 
past several years in the Central California District with its Win-Win 
teams composed of Service employees and tax practitioners. We are 
starting to see it work in the Pacific Northwest District with the 
Small Business Laboratory and in the Gulf States District's renewed 
practitioner outreach efforts.
     We can also report to you that the Service's National Office is 
making a concerted effort to communicate better with NAEA and all 
national tax professional organizations. Better communication creates a 
more positive atmosphere for constructive resolution of disputes and 
differences of opinion.
                employee morale issues of concern to naea
     We would like to discuss the current state of employee morale in 
the IRS. We have noted over the past several years an increasingly 
deteriorating esprit d'corps among Service employees.
     In our testimony before the House Ways and Means Oversight 
Subcommittee and the National Commission on Restructuring the IRS, we 
urged that Congress request that GAO study this issue. The reason we 
are concerned about this problem is that our voluntary compliance 
system depends on both sides of the table being staffed by competent, 
motivated individuals who share a responsibility to ensure that the 
laws are administered consistently and fairly. This means that 
individual taxpayers are entitled to the best representation possible 
before the Service when their individual tax returns are being audited 
or their individual taxes collected. It also means that all taxpayers, 
as a group, are entitled to the best possible people representing the 
public interest to ensure correct returns are filed and the correct 
amount of taxes are assessed and paid.
     The perception of all taxpayers about the fairness and 
impartiality of the tax administration system is dependent on 
confidence that their interests are adequately represented by the 
officers and agents of the Service. We believe the current state of 
employee morale is so low that it jeopardizes this perception of 
adequate representation of the public interest.
     Our Members continually provide us with information about 
dispirited employees and how their attitudes have detrimental effects 
on taxpayers. Government agents who feel put upon and victimized by 
continual criticism and harping in the media and political arenas 
easily develop a callousness when dealing with taxpayer cases assigned 
to them. This is a human reaction and is very understandable but it is 
as serious a threat to our voluntary system as anything else 
confronting it today.
     By the very nature of its function, the IRS is not a popular place 
to work and will always encounter problems in recruiting the best 
talent available. It is further hampered in its effort to bring in new 
talent when the esprit d'corps falls to the level where employees 
cannot recommend employment with the Service. This leaves the Service 
with the unenviable task of revising job criteria to fill jobs with the 
people available rather than recruiting choice personnel. Often those 
who are selected have limited promotion potential within the 
organization.
     We believe Congress should study the whole issue of employee 
morale and task the GAO to address what incentives could be pursued to 
bolster the IRS recruitment of competent, well educated, promotable 
individuals for government service. One suggestion might be to explore 
the possibility of paid internships for tax and accounting students to 
work within the Service for several years prior to commencing private 
practice. This would provide excellent on the job training and 
development experience of future practitioners; insure a steady supply 
of well educated government employees; regularly give the Service an 
infusion of new viewpoints with the end product being increased 
taxpayer confidence and satisfaction.
                            collection issues
     There are several Collection program policy areas we feel need to 
be reviewed by the Committee.
 The Use of Standard Expense Allowances in Determining Collection 
        Actions
     We have reviewed the legislative proposal drafted by the American 
Bar Association's Tax Section and concur with the concept that the 
Service should be barred from using statistically generated average 
expenses in favor of considering the unique facts and circumstances of 
each taxpayer's case in making collection case resolution decisions.
     We understand the Service's position that using the Bureau of 
Labor Statistics data provides a level playing field among all 
taxpayers. The Service maintains that the standards were developed to 
answer taxpayer and practitioner complaints about inconsistent 
treatment of taxpayers. We agree that if the result of the use of 
standards was consistent treatment it would be an acceptable result, 
but we are increasingly concerned about the lack of good judgment being 
exhibited in cases reported to us by our Members. Service employees, 
especially Revenue Officers, are compensated based on the complexity of 
their cases. When the National Office dictates that standard allowances 
be used, then more often than not the standard amount becomes the final 
answer despite the fact that the Internal Revenue Manual permits some 
deviation from the standards in exceptional cases with supervisory 
approval. This ``checklist mentality'' approach leads to as many 
inequities as the prior system of evaluating each taxpayer on their 
actual expenses and has caused some new concerns to crop up, notably in 
the areas of bankruptcy and offers in compromise.
     There has been a dramatic increase in the number of personal 
bankruptcies since January, 1996. The increase last year was in excess 
of 25% despite a very strong economy in almost every part of the 
country. In our opinion, many of these increased bankruptcies were the 
direct result of the IRS imposition of National and Local standard 
expense allowances for use in reaching Collection case determination 
decisions in October 1995. In many instances, these limits on what a 
taxpayer may claim as a necessary and reasonable monthly expense has 
benefitted the Service to the detriment of other unsecured creditors 
and, in some cases, secured creditors who enjoyed lien priority to the 
IRS liens. This is especially true with respect to real estate holdings 
of taxpayers.
     We do not believe this effect was ever intended by Congress when 
enacting the Federal Tax Lien statutes. These standards have a 
pervasive effect as they impact any case resolution decision relating 
to the ability of the taxpayer to secure an offer in compromise, an 
installment agreement or a determination that the tax is currently not 
collectible.
     In many geographical areas, the standard expense allowances for 
housing, utilities, property taxes, homeowners or renters insurance, 
association fees and property maintenance and repairs are absurdly low. 
As a consequence, many practitioners have been forced to recommend that 
their clients seek the protection of the bankruptcy court as there 
simply is no way to resolve the matter administratively within the IRS.
     When we raised this issue with IRS National Office Collection 
officials last summer, we were advised that their new policy had no 
impact they could discern on bankruptcies. We believe there is ample 
indication that there is a direct cause and effect and urge the 
Committee to ask that GAO examine the problem.
 Inconsistent Enforcement Policies Across the Nation
     The Service explained that the purpose for imposing the use of the 
reasonable and necessary expense allowances was to eliminate 
inconsistencies in application of enforcement criteria. We have long 
complained about these regional inconsistencies and we agreed with the 
Service that some effort at uniformity was needed at the national 
level.
     We now find, however, that new inconsistencies keep cropping up in 
the way the local districts are choosing to interpret the 
``standards,'' as if the term standard was open to debate. For example, 
some districts now hold out a policy that they will not permit an 
installment agreement to pay off back payroll tax obligations, even if 
the debtor business is now current and complying. This causes 
unnecessary business failures and bankruptcies, not to mention grievous 
equity losses to the small business owners involved.
     The Service made a point of restricting the allowable expense 
criteria to individual taxpayers, rightfully deciding that business 
entities had too diverse a group of necessary expenses to ever arrive 
at a fair allowance number. Despite this wise National Office policy, 
it has not prevented local districts from proceeding to limit expenses 
on business taxpayers who are self-employed.
     We have had complaints that Revenue Officers have not allowed 
legitimate business travel expenses where the taxpayer failed to secure 
a sale on the trip in question. This is a prime example of why 
decisions of field Revenue Officers need to be subjected to a real 
appellate review process.
     We have also heard of Revenue Officers allowing only the amount 
authorized by the local housing and utility standard to taxpayers who 
ran substantial businesses out of their homes and should have been 
permitted a higher amount of expense allowance to reflect the true cost 
of the business activity.
     We have also had complaints about Revenue Officers not allowing 
business expenses for automobile and truck costs incurred in the course 
of the taxpayer's business--but rather limiting the taxpayer to the 
local transportation standard expense allowance developed for 
individuals.
     All of these examples indicate we have a ``standard'' that is not 
a standard in the eyes of many local Revenue Officers.
 Collection Statute Extension Authority Questioned
     The Internal Revenue Code permits the Service to request 
taxpayers' agreement to extend the statutory period for collection of 
their tax debts. The current statutory period for collection is ten 
years from the date of the assessment. This ten year statute was 
increased from six years in October, 1990. In our opinion, current IRS 
procedures for seeking statute extension approvals from taxpayers need 
a total overhaul. It should be an exceptional case where the Service is 
not able to collect the assessment within the ten years permitted by 
statute.
     One would be reasonable to assume that requests for taxpayers to 
extend statutes were rare. In fact, the Collection Division Automated 
Collection Service (ACS) has begun requiring taxpayers who request 
installment agreements and cannot fully pay their tax obligation within 
ten years to sign extensions on the collection statute now even though 
there may be as much as 9.5 years left on the statute. For example, a 
taxpayer filed a 1996 return on April 15, 1997 owing $10,000.00. The 
IRS review of the taxpayer's financial condition revealed an ability to 
pay installments of $55.00 per month. The taxpayer was asked to sign an 
extension until the year 2012! In a contrasting situation, a taxpayer 
with no ability to pay monthly would have their case reported as 
``currently not collectible'' and suspended without being asked for the 
statute extension. We question if the current statute permitting 
extensions is still needed in light of the 10 years permitted to 
collect. After all, the Service always has the right to reduce its lien 
to a civil judgment if it feels additional time is warranted to effect 
collection.
     Congress should examine the whole issue of permitting the 
extension of Collection statutes and at the very least should consider 
establishing some dollar criteria threshold before a statute extension 
request could be made of a taxpayer. In the interim, we suggest that 
the Service be required to provide every taxpayer asked to sign a 
statute extension with a publication specifically addressing the 
implications of signing or refusing to sign such requests. 
Additionally, we think Service requests for extension ought to be in 
writing and that the taxpayer should be provided with a 5 business day 
``cooling off'' period to seek professional advice concerning the 
request for extension. Finally, in the event Service personnel coerce, 
mislead, or misinform taxpayers about the consequences of statute 
extensions then taxpayers should have the right to revoke the extension 
and the original statute date should be reinstated even if that means 
the Service becomes effectively barred from further Collection efforts. 
These changes would go a long way towards making taxpayers feel the 
Service is adhering to both the spirit and the letter of the law.
 Collection Appeals Process Isn't an Appeals Process
     The Service introduced an ``appeals'' process for Collection cases 
last winter and made much to do about how it afforded taxpayers the 
opportunity to seek an appellate review of such matters as the filing 
of the notice of federal tax lien, withdrawal or denial of a request 
for an installment agreement, and seizures of taxpayer assets.
     The scope of this program is so circumscribed by the procedural 
limitations imposed that it really does not constitute a true appellate 
process. The appeals function is limited to reviewing whether or note 
the decision by the Collection officer adhered to the procedural 
requirements of the Internal Revenue Manual only. It does not permit 
any appellate review of the judgment or conduct of the Collection 
officer.
     The one beneficial aspect of this process from our viewpoint is 
that it requires the involvement of the Collection group manager prior 
to the case going up to Appeals. This is a welcome sign that the 
National Office wants group managers to become more involved in the 
taxpayer case management and negotiation process, something which has 
been sorely neglected in the past decade.
     We believe the lack of taxpayer and practitioner use of this 
``appeals'' process is ample evidence that this program is not 
perceived as a fair and independent appellate procedure and believe the 
Committee ought to examine its intent and practice.
                           examination issues
 Use of Enforcement Statistics for Evaluative Purposes Jeopardizes 
        Taxpayer Rights
     We are very concerned about some provisions of the most recent 
Examination Program Letter issued by the Service for the current year. 
The program letter spells out for the field organization the goals and 
objectives established by the National Office for examination divisions 
nationwide. In the latest version at Appendix F, there is a discussion 
of new performance measures to be used in evaluating local district 
directors by using the amount of additional tax, penalty and interest 
proposed by their examination division, regardless of the validity of 
the assessments.
     We must point out the danger of this approach. Whenever an 
enforcement agency resorts to using production statistics for 
evaluative purposes, be they audit yields or traffic tickets, the first 
casualty is citizen rights. This is especially critical given our 
perception of the current state of employee morale in the Service.
     The Committee should inquire about the impact this emphasis has 
caused thus far this year and, we believe, should recommend to Congress 
that the Service be barred from using this data in the way suggested.
 Inappropriate Use of Financial Status Auditing Techniques
     We are still hearing complaints from our Members and taxpayers 
about the insistence of local Examination Division personnel using 
``economic reality'' auditing procedures when there is no information 
provided to the taxpayer or representative as to why the Service 
believes there is evidence to indicate unreported income. We are aware 
that the National Office issued instructions to the field organization 
in May, 1996 to use the financial status audit procedures only when 
appropriate but feel that this is being observed on a sporadic basis by 
the districts across the nation. We urge the Committee to delve into 
this problem during these hearings.
     One way of informing taxpayers and their representatives of the 
potential for this type of audit would be to require that the Service 
provide every taxpayer with a printout of all of the Information 
Returns Program (1099s, W92s, CTRs, etc.) data it has for the tax year 
in question along with the original examination notice sent to the 
taxpayer. This would permit taxpayers and their representatives to be 
prepared for any inconsistencies between the return and the reported 
information in the possession of the Service and eliminate the audit 
``gotcha'' game.
 Market Segment Specialization Program Audits
     We believe the Service should be recognized for the efforts it has 
made in the development of the Market Segment Specialization Program. 
In our opinion, it is one of the best approaches to identifying the 
root causes of taxpayer noncompliance introduced into tax 
administration in the past twenty-five years.
    The best example of the effectiveness of the MSSP approach is the 
important compliance program the Central California District has 
underway in the Central Valley of California. This program, which 
focuses on a major source of noncompliance with tax, labor and 
immigration laws by farm labor contractors, has yielded dramatic 
results in a relatively short time. The best thing about this program 
is that it has aided the legitimate businesses in the Central Valley 
who for years have been at a competitive disadvantage when faced with 
competitors who, by not paying taxes and offering benefits, were able 
to underbid them. This is exactly the type of program the Service 
should be focusing on to restore its reputation as a premier government 
agency and to reestablish their credibility with the legitimate 
business community. They should be applauded for this effort. We urge 
the Committee to hold a field hearing in the Fresno, California area to 
permit a first hand look at this success story.
    The traditional assumptions the Service made about its impact on 
taxpayer compliance behavior patterns have always been questionable in 
the minds of many tax professionals and academics. For the first time, 
through the use of the MSSP examination process, patterns of compliance 
and noncompliance can be tracked by industry and enforcement efforts 
targeted in appropriate directions.
     We think this is good news for taxpayers who are complying and 
paying their fair share as well as presenting the Service in the 
favorable light of channeling its enforcement dollars into those areas 
most in need of its attention.
 Examination Quality Review
     One of the consequences of the morale problem we discussed earlier 
in our statement is evident in the assessment of the outcome quality of 
entry level examinations. When the Service has to fill jobs with the 
bodies available rather than the best candidates the quality of the 
work product declines.
     We are consistently being told by our Members and by taxpayers via 
our Web site and America OnLine Tax Channel that they cannot resolve 
basic issues with the entry level examination staff; that group 
managers will not meet with them or, if they do, they always back the 
position taken by the subordinate; that the only way to resolve 
anything in favor of the taxpayer is to by-pass the examination staff 
and proceed to appeals on every case.
     These are disturbing complaints because there will never be enough 
staffing available for every case to proceed to appeals. We would like 
to see the Service make a renewed effort to involve Examination group 
managers in an informal conference process prior to a case going 
unagreed. We feel it would be in the best interests of the Service to 
resolve these cases at the lowest possible level and we know it would 
save taxpayers millions of dollars annually in representation fees. We 
have been delighted to learn that the Pacific Northwest District is 
proposing a pilot test of a district conference staff to help resolve 
exam cases more expeditiously. This is now a concept which has come 
full circle as district conference is where many exams were resolved in 
the 1960s and 1970s before it was abolished. We will be watching this 
pilot closely and will keep the Committee informed of the results from 
the practitioners' perspective.
                         taxpayer rights issues
 Protecting a Taxpayer's Right to Confidentiality
     We would like to see the Committee recommend legislation 
protecting a taxpayer's right to confidentiality for any tax counsel 
and advice. It should be a basic right of taxpayers not to have their 
own advisors used as witnesses against them. We believe that the IRS 
has overly broad summons authority which permits it to inquire into a 
taxpayer's thought processes and the tax advice they received. This 
violates the taxpayer's reasonable expectation of privacy and 
confidentiality and goes beyond IRS needs for factual information to 
determine proper tax liability. Under current law, taxpayers can 
protect nonfactual information such as analyses, advice and opinions 
only if they have the financial resources necessary to obtain legal 
counsel. This practice results in unequal treatment of taxpayers based 
on their financial status or choice of tax professional.
     We propose that the Committee consider the following proposal to 
provide all taxpayers fair and equal treatment:
           1. For all taxpayers, permit the IRS access to all factual 
        information upon which a return is based;
           2. if the IRS has a reasonable suspicion based on evidence 
        that the taxpayer failed to fully report income, the Service 
        would have authority to summon other factual information 
        relevant to the taxpayer's income; and
           3. if a taxpayer became the subject of a criminal 
        investigation, the IRS could employ the same broad summons 
        authority available today.
     This proposal removes the conditions and ambiguities regarding 
whether a taxpayer may keep tax advice confidential by linking that 
protection to the taxpayer, rather than the identity of the tax 
advisor. Taxpayers remain fully obligated to report every dollar of 
income and prove every deduction, exemption, expense, and credit 
claimed on the return. However, the IRS would not have access to 
nonfactual information, such as opinions, analyses, thoughts, theories, 
and mental impressions of the taxpayer and his or her advisor, without 
the taxpayer's consent.
 Register All Commercial Tax Return Preparers
    We would like to see the recommendations of the IRS Commissioner's 
Advisory Group (CAG) regarding the registration of all commercial tax 
return preparers enacted into law. We believe that a fundamental 
taxpayer right is to be able to rely on the expertise of the 
individuals who assist in helping citizens meet their tax obligations. 
We have, for too long, had an uneven playing field where those tax 
professionals who have made the most significant commitment to their 
profession--Enrolled Agents, attorneys and Certified Public 
Accountants--are the most regulated. Only those professions require 
continuing professional education. Only those professions have 
developed standards of professional practice and published standards of 
professional ethics. The tax laws of this country are too complex to 
permit commercial tax return preparers to offer services to taxpayers 
without requiring that they maintain a minimum level of technical 
proficiency and stand by their product in the event of error. Taxpayers 
deserve no less. We regulate barbers more than we regulate commercial 
tax preparers in this country and you can recover from a bad haircut in 
three weeks!
 Provide Full Credit for Social Security and Self-Employment Taxes Paid 
        In
     Current procedures followed by the IRS and the Social Security 
Administration (SSA) with respect to properly crediting the Social 
Security (FICA) and self-employment (SE) taxes paid by delinquent 
taxpayers need to be corrected by statute. If a taxpayer fails to file 
a tax return for more than three years, even if there is a refund due 
and all taxes are paid in timely, the taxpayer is not credited by the 
SSA for the FICA and SE taxes paid in, yet the IRS insists on 
collecting these same taxes. If the government is paid the taxes, it 
should credit the taxpayer's account.
 The Total Amount of Penalties Should Never Exceed 100% of the Tax
    As a general principle of fair and reasonable tax administration, 
we believe Congress should declare that the total amount of penalties 
asserted against taxpayers should never exceed the tax amount for the 
same period.
 Tax Penalties Should Not be Used for Revenue Raising
     We believe the current penalty statutes should be subject to a top 
down Congressional review. There are too many penalties for too many 
infractions and no one could reasonably expect taxpayers to comprehend 
their applicability. We think the current Code's proliferation of 
penalties has accomplished nothing but to create taxpayer perceptions 
of a system run amok and acts like a ``hidden tax rate.'' This feeling 
is reinforced by the fact the tax committees have taken to scoring 
penalties for revenue raising.
 The Number of Years to Claim Refunds Should be Lengthened
    We have seen some recent tax law cases where ample reasonable cause 
existed to permit longer periods for taxpayers to claim refunds and the 
Courts found themselves bound by statute to deny the claims. We believe 
this is wrong and Congress should extend the right to refund claims for 
a period longer than three years.
                   organizational structure of the irs
    As we stated in our opening remarks, we strongly endorse the 
recommendations of the National Commission. We originally proposed 
during testimony before the Commission last April that the Commission 
consider the division of the IRS into two separate agencies. While we 
recognized that was a radical suggestion, we made it to point out 
significant problems with the organizational culture of the Service. We 
think it would be beneficial for the incoming Commissioner to study the 
possibility of accomplishing the organizational schema we proposed 
within the existing agency. This could be accomplished by establishing 
two Deputy Commissioner positions--one filled by the Presidentially-
appointed Taxpayer Advocate and the other, also Presidentially 
appointed, to serve as Deputy Commissioner, Tax Enforcement. We could 
envision these two appointees serving the following roles:
 Deputy Commissioner, Taxpayer Advocacy
     The new Taxpayer Advocacy organization would be headed by the 
Taxpayer Advocate, nominated by the President and confirmed by the 
Senate. This would bring the degree of independence to the Advocate's 
role sought by Congress and the public. The field component would be 
headed by local Taxpayer Advocates under the local District Directors. 
This organization would be responsible for:
  --Taxpayer Advocacy function (taxpayer intervention, systemic 
        monitoring and legislative advocacy);
  --Taxpayer Communications (TDA and TDI notices, correspondence 
        examinations, information returns programs such as document 
        matching, underreporter program, etc.);
  --Taxpayer Service function (telephone assistance, taxpayer 
        education, small business education clinics, local walk-in 
        services);
  --Tax Forms (design, printing and distribution);
  --Electronic Tax Administration (electronic filing initiatives, 
        electronic tax payment programs, web site maintenance, 
        electronic commerce applications, electronic communications 
        applications);
  --Data Processing and Information Technology functions;
  --Appeals function, for resolution of disputed collection and 
        examination cases;
  --Technical function for issuance of Revenue Procedures, Rulings, 
        Technical Advice memorandums and private letter rulings--in 
        short anything that has to do with interpretation of the 
        Internal Revenue Code; and
  --Internal Audit and Internal Security Functions.

     Legal services to the Taxpayer Advocacy organization would also be 
provided by the Chief Counsel of the Treasury's Chief Counsel for Tax 
Administration function, thereby assuring coordination on Tax, 
District, Appeals, and Supreme Court cases as they progress through the 
system.
     The benefits derived from separating these functions from 
enforcement functions are numerous:
  --It permits recruitment of creative individuals with the temperament 
        for taxpayer service and provides a promotion ladder for 
        advancement up the taxpayer advocacy and customer service line;
  --It permits technology issues to be addressed by individuals with 
        technology expertise and broader business experience than 
        traditional IRS managers;
  --It permits technology decisions to be driven by overall business 
        judgment as it affects 200 million taxpayers;
  --It permits taxpayers to seek answers to their questions from an 
        organization the Congress has appropriately funded with an 
        adequate budget to serve citizens and it populates the 
        technical tax law interpretation function with individuals 
        driven by customer service motivations and not enforcement 
        attitudes;
  --It places the ability to enforce the Taxpayer Bill of Rights 
        legislation in the hands of truly independent Taxpayer 
        Advocates who will have the right to intervene in Tax 
        Enforcement organization cases when appropriate; and
  --It provides taxpayers with a truly independent appellate process 
        thereby improving perceptions of fair and impartial 
        administration of the tax laws.
 Deputy Commissioner, Tax Enforcement
     The tax law enforcement functions of Examination, Collection, and 
Criminal Investigation should be all that comprise the new Tax 
Enforcement organization. The head would also be nominated by the 
President and confirmed by the Senate. Its field component would be 
headed by local Tax Enforcement Chiefs under the local District 
Directors. The organization would take over responsibility for 
Collection cases once those cases have completed the notice cycles and 
the taxpayer had not adequately responded. The existing Automated 
Collection Service (ACS) would be part of this entity. The 
responsibility for examination cases would be assumed when the case 
required the taxpayer or his/her representative to appear. Thus, 
correspondence examinations questioning one or two items would remain 
with the Taxpayer Advocacy organization. Obviously, all criminal cases 
would originate in and be worked by the Tax Enforcement organization 
only. The Chief Counsel of the Treasury would still provide legal 
support services through a Chief Counsel for Tax Enforcement function. 
This organization would not have its own data processing operation, but 
would secure its information technology services from the Taxpayer 
Advocacy organization.
     The benefits of locating all law enforcement functions under one 
roof and permitting one organizational focus to dominate direction 
should improve morale of the individuals working in the agency, should 
concentrate efforts in combating the growing problems of taxpayer 
noncompliance, and permit innovative solutions to targeting law 
enforcement.
                                 summary
     We hope these ideas have proven useful to the Committee in its 
deliberations. I would be very happy to respond to questions you may 
have regarding our views.

                               __________

                  Prepared Statement of Darren Larsen

     My name is Darren Larsen. I am an attorney in private practice in 
Southern California, specializing in tax controversies and bankruptcy 
matters. From 1981 through 1994, I was employed as an attorney In the 
Office of Chief Counsel for the Internal Revenue Service in three 
different districts. I served my last three years in the position of 
Assistant District Counsel, including extensive duty as Acting District 
Counsel. I was personally involved in matters concerning all functions 
of the IRS: Examination, Collection, Criminal Investigation and 
Disclosure. From 1986 through 1994, I represented the IRS in Bankruptcy 
Court as a Special Assistant United States Attorney in the Alaska 
District and the Central District of California. I frequently served as 
a nationwide instructor for attorneys and managers as well as for IRS 
training and continuing education. I was a member of a joint Chief 
Counsel--IRS national task force on bankruptcy procedures through which 
I visited several districts throughout the country. Because of my 
particular expertise concerning IRS collection issues, I maintained 
close relationships with many individuals in the IRS, particularly 
revenue officers and managers in the Collection Division.
     I speak to you today as a tax professional who has spent may years 
representing the Internal Revenue Service in court and working with and 
advising IRS personnel on their cases. Over the past 2\1/2\ years I 
have also had the opportunity to deal with the IRS as a taxpayer's 
representative. My feelings toward the IRS as an institution are mixed.
     While it is sometimes easy to express frustration and even outrage 
at IRS conduct, I must state at the outset that there are many 
outstanding individuals currently employed by the IRS who have superior 
technical knowledge, commendable devotion to their jobs and a 
commitment to fairness. At the other end of the spectrum, however, are 
those employees whom I have encountered both as a government attorney, 
and as a practitioner, who lack technical skills, lack any sense of 
justice or fairness, and are interested only in remaining employed to 
receive a paycheck. That having been said, I will now move on to more 
specific examples of problem areas within the IRS as an institution.
    As an attorney for the IRS, I was often appalled by the lack of 
technical knowledge on the part of the front line managers. I knew 
group managers who had the responsibility to review and sign off on 
administrative summonses who did not know the basic requirements for 
content of the summons or the rules for service. The less experienced 
revenue officers unfortunately learned from these managers and 
consequently made mistakes. I knew one manager who did not understand 
the distinction between a lien and a levy. The revenue officers who 
knew the manager had these shortcomings were forced to use other 
resources for assistance. I was also dismayed at some of the ``on-the-
job instructors'' who were lacking in some of the legal fundamentals 
and passing on their incompetence to newer revenue officers.
     In addition to simple lack of knowledge, I also knew of revenue 
officers who understood the legal and procedural requirements for 
certain actions but consciously bypassed them. Specifically, I dealt 
with a revenue officer over a period of several years who, on more than 
one occasion, issued nominee or alter ego levies without the required 
pre-review. Typically he would receive payment of the tax and that 
would be the end of it. If there was a problem, only then would he go 
through the required steps. He was a ``good'' revenue officer in that 
he collected a lot of tax and closed a lot of difficult cases and, 
consequently, he was given a great deal of latitude in how he worked 
his cases. He felt justified in taking shortcuts because he felt he had 
good instincts and got what he felt were the right results, i.e.: 
payment of the tax. When he was later promoted to group manager, the 
revenue officers in his group were allowed to work their cases in a 
similar manner, as long as they didn't make a mistake. There was often 
a prevailing notion in the collection groups that if a summons or some 
other procedure was not exactly handled in accordance with the law that 
the taxpayers probably would not know the difference. And, if the 
taxpayer didn't comply and there was a problem down the road, it could 
always just be done over. The same attitude was taken with respect to 
other actions: if someone's watching, I'll take the time to do it 
right; otherwise I will do it the easiest way because it's unlikely my 
manager or the taxpayer will catch it.
     In one district in California, IRS Collection managers blatantly 
disregarded the law with respect to ownership of personal residences 
because they felt it was unlikely many taxpayers would know that the 
law protected them. In California, if married people hold title to real 
property as joint tenants it is presumed, under State law, that they do 
hold as joint tenants rather than as community property. The 
presumption may be overcome by a factual showing that the couple 
actually intended it to be community. The difference for IRS is 
significant: when only one spouse owes tax, only \1/2\ of joint tenancy 
property may be seized, while 100% of community property may be seized. 
In the district, the IRS took the position that all joint tenancy 
property would be presumed to be community, and it would be up to the 
taxpayer to prove otherwise. The result was the IRS treating 100% of a 
personal residence as being subject to the tax lien and insisting on 
payment accordingly, whether by seizure and sale or by settlement. The 
reality is that most taxpayers do not know the law regarding community 
property and they rely upon the IRS to ``do the right thing.'' However, 
in this situation the IRS was taking advantage of the ignorance of the 
general public on a technical legal issue to the detriment of the non-
owing spouse. The IRS advisors and managers I spoke with admitted 
knowledge of the State law, but justified this policy by stating that 
people usually think their property is community anyway so this is just 
more expedient. It's the ``mindset'' that allowed this to go on that 
concerns me.
    While reviewing the procedures followed in many districts in 
handling bankruptcy cases, it became apparent that in some offices the 
IRS was ignoring the law regarding the automatic stay in bankruptcy and 
the discharge injunction. Because it was not designated as a program 
area, and training was insufficient, some managers devoted few--if 
any--resources to stopping collection action upon filing of a 
bankruptcy petition, to monitoring bankruptcy cases for issuance of the 
discharge order, to properly adjusting taxpayer accounts after issuance 
of a discharge, or to the releasing of liens after discharge. This 
inattention to the most basic of tasks was also detrimental to the 
collection of the revenue.
     As a taxpayer representative, I am now even more aware of how 
important it is for the IRS representatives to follow the procedures 
established by the IRS and the law in collecting taxes. For the most 
part, taxpayers are intimidated by the IRS and will do whatever is 
asked of them. Because most taxpayers do not know much about tax law 
they rely on the IRS with respect to many issues and put their trust in 
them as public servants. Even if the taxpayer feels the IRS is not 
acting properly it is often too costly to hire representation to 
contest the action. The end result is that some taxpayers are paying 
more tax than they rightfully should and some individuals are paying 
tax which they are not actually liable to pay. I do believe that if a 
taxpayer presses an issue and takes it up through the system, and if 
that taxpayer is right, he or she will ultimately prevail. It's just 
that the process is costly in terms of fees, time and aggravation. It 
is important for the IRS to avoid procedural shortcuts and treat the 
taxpayers fairly up front, so that mistakes are not made and taxpayers 
are not put in the position of choosing whether to pay the wrong amount 
of tax or pay for assistance to fight it out. Either way the taxpayer 
loses.
     As an organization, the IRS has excellent technical resources 
which it does not use to its best advantage. Tax collection is a 
complex process given the number of applicable federal and state 
statutes. Revenue officers can be expected to require assistance in 
some cases. The Special Procedures function is designed to provide 
technical assistance to the tax collectors in the field, and in those 
districts where it is given the staffing and finding it needs, it has 
proven to be very valuable. However, each district is given the 
discretion to determine how its own Special Procedures will be staffed 
and how it will operate. In some districts, Special Procedures is 
under-achieving because the advisors have little experience and little 
support. Some districts view Special Procedures as a dumping ground for 
revenue officers and even managers who have had problems elsewhere. 
Some districts view Special Procedures as less important than the field 
groups so they rotate revenue officers in for only 18 months at a time. 
Consequently there is little institutional expertise. New advisors have 
nobody to train them. The field revenue officers have little confidence 
in their advisors. On the other hand, the districts with excellent 
Special Procedures have advisors who have worked in their program areas 
for many years, they work well together and learn from each other, and 
they are respected by the field officers. They maintain close 
communication with the field and provide effective assistance. The 
excellent Special Procedures staffs typically have close working 
relationships with District Counsel and have programs which allow them 
to stay current on developing issues. The IRS would be well served by 
requiring all districts to step up the level of the Special Procedures 
staffs so that the IRS, nationwide, can more effectively and justly 
collect the taxes owed.
    In conclusion, the IRS in my view has much room for improvement in 
the way it deals with taxpayers when collecting delinquent accounts. 
While there are many positive, productive forces and individuals at 
work inside the organization constantly trying to make improvements, 
some of the chronic problems remain. The IRS is there to enforce the 
tax laws. However, the IRS is also there to ensure that the law is 
applied fairly and consistently. The IRS representatives wear two hats: 
they are adversaries of the willfully non-compliant taxpayer, but they 
are at the same time public servants. There is no excuse for cutting 
procedural corners or establishing presumptions which place citizens at 
a practical or economic disadvantage. Better training of revenue 
officers, as well as managers, and an intolerance of blatant violations 
of the law would go a long way toward improving the overall quality of 
tax collection and improving the level of public trust in the IRS.

                               __________

                Prepared Statement of Lawrence G. Lilly

    Mr. Chairman and Committee members, my name is Lawrence G. Lilly. I 
have been a tax attorney for more than thirty years and I am currently 
in private practice in St. Augustine, Florida. Prior to opening my 
office in Florida, I worked for the IRS for 28 years in several 
different capacities. First, I was a Special Agent in the Intelligence 
Division (now known as the Criminal Investigation Division.) Then, I 
became a Criminal Tax attorney, an Assistant District Counsel in Miami, 
and I retired in 1990 from my final position as District Counsel for 
one of the larger districts, in San Jose, California.
    A fair and efficient tax collection agency is recognized by 
everyone as being vital to the future of our country. Although no one 
likes to pay taxes, all reasonable people know that our taxes are the 
price we pay for our liberty! No one can properly voice a legitimate 
complaint about shouldering a fair share of paying for our system of 
government.
    My purpose today is to present constructive criticism of the IRS 
for consideration by the Committee. It is my hope that, with your 
guidance, the credibility of the Service can be restored to the high 
level which prevailed at earlier times. It is vital to our system of 
taxation that the citizens who are paying the taxes have trust and 
confidence in the fairness of the system.
    I was extremely proud to be an employee of the IRS for the major 
portion of my career. During the 1980's however, I began to note what I 
considered to be significant deterioration of the Service and its 
concern with serving the public. It appeared to me that the IRS had 
decided, consciously or unconsciously, to drop the Service aspect of 
their job and to focus exclusively on making upper management look good 
statistically. This, I fear, has led to undermining the culture of the 
organization, lowered the self-esteem of many employees, and caused the 
organization to become unfair and oppressive in its treatment of 
taxpayers.
    Before proceeding, I should make it clear that I was not 
technically an employee of the IRS for most of my career. 
Organizationally, the attorneys who work with the IRS are not 
subordinate to the District Directors or even to the Commissioner of 
the IRS. IRS attorneys work within a parallel organization structure, 
which reports to the Chief Counsel of the IRS and the General Counsel 
of the Treasury Department.
    In view of this distinctive organizational structure, I had the 
opportunity to see the IRS from a viewpoint that is quite different 
than that of most former employees. Whereas most former employees 
worked within a particular area, such as Examination, Collection, or 
Criminal Investigation, I, as a manager of attorneys, was involved with 
all of those functional areas. From this perspective, I had the 
opportunity to make detailed observations about the Service's 
operations and also had the time to develop what I hope are a few, 
solid recommendations for its improvement.
    I believe there is too much focus set on achieving statistical 
goals set by upper management generally known as the Senior Executive 
Service (SES) goals. Goals are important and necessary in the 
management of the organization, but the goals, as currently drafted by 
management, too often focus on those things which are readily 
measurable numerically, such as the number of dollars collected or the 
number of cases closed. Generally, the goals do not place adequate 
focus on the quality of the work performed, or the acceptance of that 
work by the general public. The goals are not always sensitive to the 
perceptions of the average American taxpayer.
    The organizational structure of the IRS is still too decentralized. 
Directives from the top are implemented, or not implemented, in the 
manner decided upon locally. Directives with which local employees or 
managers disagree take considerable time before they are implemented. 
As just a single example, some time ago Commissioner Peggy Richardson 
issued a public announcement indicating that the Service would 
thereafter be more liberal in its consideration of Offers in 
Compromises. Several months later, the district in which I reside had 
not implemented her directive and it was necessary for me to directly 
confront local officials and to chastise them for failing to implement 
the Commissioner's directive.
    The regional offices of IRS, or at least the regional offices of 
the Chief Counsel, serve little or no purpose except to dilute the 
authority of the National Office and to delay the implementation of 
national directives. I recommend that consideration be given to 
eliminating all of these offices, or if they cannot be eliminated, they 
should all be physically located in Washington where they can become 
more responsive to national direction. At this time, each of the 
regions operates as a fiefdom, rather than as a necessary cog in the 
wheel of a national organization.
    Selections for managerial positions are made based upon whether the 
employee has performed well in his or her current position, i.e. was he 
or she was a ``good'' attorney, or a ``good'' agent. Little 
consideration is given to the ``people skills'' of the applicants or 
whether they are likely to be effective and skilled managers. This too 
frequently leads to situations where you loose a good employee and 
obtain a poor manager. Management skills of persons being considered 
for appointment to higher positions should receive greater scrutiny.
    The IRS organization is too insular, with little infusion of new 
blood. Traditionally, the Service promotes from within. While it is 
good for management to be loyal to employees, this frequently leads to 
situations where people are elevated based upon their willingness to go 
along with the entrenched views. Innovation and imagination are frowned 
upon.
    The Tax Section of the American Bar Association has too much 
influence over the selection process for the IRS Commissioner. Until 
recently it appeared that only those who were active in that selection 
had a realistic chance of being nominated for one of the topmost 
positions. Management skills rather than skills in other areas should 
be emphasized.
    Employee satisfaction with the IRS has been on a downward spiral, 
due at least in part to the slavish attention to numerical goals. 
Employees are given mandates by management to take positions known to 
be incorrect in order to obtain preordained results. I know many people 
who have retired from the IRS, or left before retirement, but I do not 
know of a single person who regrets that they no longer work for the 
organization. I personally left the Service at least eight years 
prematurely because of the poor management practices that were in vogue 
at that time and which, I understand, continue to this day.
    It is my considered opinion that some of the problems that I have 
addressed can be readily resolved.
    (1) The four remaining regional offices should be completely 
eliminated or physically relocated to Washington. This will enable the 
Commissioner to more readily make any needed changes in the direction 
of the organization.
    (2) IRS Management, or this Committee, can take action to insure 
that the SES goals in the future place greater focus on the quality of 
performance by IRS managers and employees. This should cause all IRS 
employees to become more cognizant of the sensitivity of their work and 
result in fair and equal treatment of all taxpayers
    (3) Selection boards for all positions above the first line 
management level should include at least one representative skilled in 
management skills and, at the same time, be a step in opening the 
organization to an infusion of new blood.
    I personally commend the many dedicated and responsible employees 
of the IRS for their valiant attempt to fairly administer the laws in 
an evenhanded manner. The culture of the IRS organization, however, has 
eroded to the point where the dedicated employees are leaving the 
agency as fast as possible. The management of the IRS must stop 
sacrificing the employees in order to make themselves look good.
    Mr. Chairman, thank you for this opportunity to appear before you 
and this Committee. I greatly appreciate being able to offer what I 
hope are constructive and positive comments regarding the future role 
of the IRS.

                               __________

                  Prepared Statement of Jennifer Long

     Mr. Chairman, Senators, thank you for allowing me to come before 
you this morning to provide an accounting of activities within the 
Internal Revenue Service. My name is Jennifer Long. I am currently a 
Revenue Agent with the IRS.
     Please be assured that I do not take any pleasure in what I am 
about to say. I regret that the untenable conditions permeating the IRS 
have compelled me to this point. I am here today, along with my 
colleagues, in hopes that by exposing some of the unauthorized, but 
tolerated, procedures that I personally have witnessed by members of 
the IRS Management, congressional oversight will bring a positive 
change. I can personally attest to the use of egregious tactics used by 
IRS Revenue Agents which are encouraged by members of the IRS 
Management. These tactics--which appear nowhere in the IRS Manual--are 
used to extract unfairly assessed taxes from taxpayers, literally 
ruining families, lives, and businesses--all unnecessarily and 
sometimes illegally.
     The IRS will often pursue a taxpayer who is viewed to be 
vulnerable. To the IRS, vulnerabilities can be based on a perception 
that the taxpayer has limited formal education, has suffered a personal 
tragedy, is having a financial crisis, or may not necessarily have a 
solid grasp of their legal rights. Please understand, many agents are 
encouraged by management to pursue tax assessments that have no basis 
in tax law from individuals who simply can't fight back. However, if 
that taxpayer does object or complain, every effort will be made by the 
IRS to run up their tax assessment, deplete their financial resources 
and force them to capitulate to IRS demands.
     The IRS's Mission of Examination states, ``. . . Reduce 
noncompliance by identifying and cost effectively allocating resources 
to those returns most in need of examination and taxpayer contact . . . 
'' As of late, we seem to be auditing only poor people. The current IRS 
Management does not believe anyone in this country can possibly live on 
less than $20,000 per year, insisting anyone below that level must be 
cheating by understating their true income. Currently, in a typical 
case assigned for audit, there are no assets, no signs of wealth--no 
evidence that would support a suspicion of higher, unreported income. 
So, when the IRS does initiate an audit on these people, these 
individuals are already only one short step away from being on the 
street. Clearly, such actions do not encourage or promote voluntary 
compliance, even in legitimate cases. Before we began to ruin their 
lives, these people were at least paying something. However, because of 
the tactics used in auditing and condoned by the IRS Management, abject 
fear compels many of these individuals to go completely underground 
and, as a direct result, pay nothing at all.
     In other cases, IRS Management can determine that a particular 
taxpayer is simply someone ``to get.'' In other words, they become a 
target of the IRS. Management will go about fabricating evidence 
against that taxpayer to demonstrate that he, or she, owes more taxes 
than was originally claimed. Clearly, it goes without saying that 
evidence should never, ever, be fabricated. It also goes without saying 
that any evidence used against a taxpayer should be examined first, 
before guilt or innocence is established. Not the other way around.
     In certain instances, the IRS Management has even employed its 
authority to intimidate the actual taxpayers into fabricating evidence 
against its own IRS employees. In return for their compliance, the 
taxpayer may be offered a reduction in their taxes or a ``no change 
case.'' I also know that Management uses this same power to extort 
fabricated evidence from IRS employees against their own colleagues by 
offering cash awards, promotions, and lightened work loads as rewards 
for their compliance. The unfavorable information assembled by 
Management against its own employees is used against those whom the IRS 
has identified as someone who is unsupportive of its unwieldy methods 
of collection.
     The IRS Inspection Division, which is somewhat akin to Internal 
Affairs in a Police Department, has also been used as a tool by 
Management to harass and intimidate its employees. However, complaints 
to the IRS Inspection Division about possible Management misconduct are 
routinely ignored, but often result in retaliation against the IRS 
employee reporting the problem. This is due to the fact that employees 
identities are disclosed when the Inspection Division reports the 
infraction to Management.
     The IRS Mission Statement states, ``The purpose of the Internal 
Revenue Service is to collect the proper amount of tax revenue at the 
least cost; serve the public by continually improving the quality of 
our products and services; and perform in a manner warranting the 
highest degree of public confidence in our integrity, efficiency and 
fairness.'' I have actually witnessed IRS Management manipulate income 
tax return figures just to increase their office or division collection 
statistics! It did this through various means including not permitting 
valid changes in a tax return that would favor the taxpayer. To allow 
those changes would wipe out the assessment placed by the IRS and run 
counter to the Management's collection numbers.
     For those who choose to fight, it automatically guarantees a 
significant financial and emotional toll.
     Mr. Chairman--the American taxpayers are not stupid. They clearly 
recognize unfairness. Under present IRS Management, it has become so 
distorted that when reviewing a tax case it is now our job to ``stick 
it'' to the taxpayer, rather than determine a substantially correct tax 
assessment for that taxpayer. In the past, the latter was our job. If 
our present task has changed, then the IRS Mission Statement needs to 
be revamped to reflect what the Service's current mission really is. 
And God help the taxpayers.
     The IRS Mission Statement of the IRS Examination Division states, 
``. . . Examination supports the mission of the Service by . . . 
encouraging the correct reporting by taxpayers of income . . . ''
     Yet, in reality, when valid changes could be made by the IRS on a 
taxpayer's return that favor that taxpayer, we are instructed not to 
make those changes.
     However, on the other hand, I know of certain IRS employees that 
have been instructed by IRS Management not to conduct audits of 
particular taxpayers who happen to be personal friends of someone in 
IRS Management.
     Far too often, the IRS Management automatically assumes that 
everyone is a criminal. When a taxpayer comes to the IRS to negotiate a 
tax payment issue in good faith, they are subjected to provocative 
behavior on the part of the IRS in order to ``set them off.'' 
Management will then use the taxpayer's response as proof that they 
are, in fact, a reactionary saying, ``See, this person's a 
troublemaker, a real hot head.'' Based on this pretext, the IRS can 
then justify taking severe action contrary to the law in order to 
pursue the collection. The immediate and direct consequence of these 
actions is the deprivation of the taxpayer's lawful rights.
     I look forward to your questions and I hope, that in some way, I 
will have assisted you in restoring the IRS to a level of integrity 
that will regain the respect of the American people.

                               __________

                 Prepared Statement of Hon. Connie Mack

    Mr. Chairman, I thank you for holding these important hearings. I 
look forward to participating in this bipartisan effort to clean up the 
IRS (a goal that is too important for politics). The IRS interacts with 
more Americans than almost every other government agency or private 
business in America. Therefore, it is critical that the word 
``service'' in Internal Revenue Service returns as a top priority.
    Unfortunately, too often we discover that hard-working American 
taxpayers do not receive topnotch professional service. This is 
unacceptable. We will not tolerate taxpayer abuse by the IRS. Examples 
of IRS snooping, billions of dollars in unjustified penalties, and 
wrong answers to taxpayers' questions are all too common. Simply 
stated, taxpayers who spend $8 billion to run the IRS deserve better 
service.
    Just like taxpayers are subjected to an audit, I think it is time 
we audit the IRS. We need to do a top to bottom inspection of what 
works and what doesn't--no stone should be left unturned. The work and 
recommendations of the Kerrey-Portman IRS Commission has been an 
important first step in this process. I trust these hearings will 
further our understanding of what needs to be done to make the IRS 
taxpayer-friendly.
    It's true that our complicated income tax system adds to the 
difficulties of administering and collecting taxes for both taxpayers 
and the IRS. Congress must also do its part to ensure the tax laws we 
enact are not overly complex. People should be able to calculate their 
tax liability with ease. Americans currently waste some $200 billion 
dollars and 6 billion man hours just to comply with the tax code. 
That's about equal to the amount of man hours it takes to produce all 
the cars, trucks, and airplanes in this country each year.
    The IRS cannot operate in a vacuum and disregard the rights and 
needs of taxpayers. Fiscal mismanagement and negligence only undermine 
taxpayers' faith in the fairness of any tax system. Outright abuse and 
harassment destroy this faith.
    I'm glad this committee has the chance over the next few days to 
hear from witnesses that will help us in our efforts to correct the 
many problems with the IRS. We are fortunate to have public-spirited 
former and current IRS employees who are willing to discuss candidly 
the corrosive culture of the IRS. As my Florida offices are flooded 
with telephone calls from taxpayers who are having a difficult time 
with the IRS, I am particularly thankful that we will be hearing from 
two former IRS employees from Florida, Mr. Lawrence G. Lilly and Mr. 
Bruce A. Strauss, who can shed some light on the source of these 
problems for my constituents.
    It is no surprise that legions of taxpayers have offered to tell 
their stories in public to this Committee, although it takes no small 
amount of courage to do so. The men and women who were selected to 
testify are performing a public service and deserve our commendation, 
although it hardly makes up for the circumstances that gave rise to 
this testimony. I welcome in particular Monsignor Lawrence Ballweg, who 
lives both in my state and the state of New York and thus can count 
four Finance Committee members in his corner.
    Over the next few days we will be hearing from historians and 
scholars, taxpayers and practitioners, IRS agents and apologists. These 
hearings promise to be both enlightening and infuriating. This is one 
story, however, in which we all know the ending before the first page 
has been read: The IRS has to be cleaned up for the sake of the 
American people.

                               __________

                   Prepared Statement of David Patnoe

     Good morning Mr. Chairman and members of the Finance Committee. My 
name is David Patnoe. I am currently an Enrolled Agent in Camarillo, 
California, representing taxpayers before the Collections Division of 
the Internal Revenue Service for over seven years. Prior to this, I was 
a Revenue Officer for the Internal Revenue Service for over ten years.
     During my tenure with the IRS, I was a Revenue Officer, an On-the-
Job Instructor for trainee Revenue Officers, an Instructor for Revenue 
Officer training schools Phase I and Phase II sessions, an ``Offer in 
Compromise'' Specialist and an advisor in the Special Procedures 
function. I have worked in the Anchorage, Alaska; Shreveport, 
Louisiana; and Brooklyn, New York IRS offices which provided me a great 
opportunity to see how collection worked in different areas of the 
country. Now working as a taxpayer's advocate, I have had the 
opportunity to see things from the other side. It is from this wide 
range of experience that I speak to you today.
     Despite what I believe to be a rather unique background, I have 
found dealing with IRS personnel to be quite disturbing in a few cases, 
and downright maddening in others. In particular I have had my worst 
experiences with people I believe had insufficient training to be 
performing the jobs they were assigned. In some instances their actions 
were outright illegal and highly abusive.
     The trouble with discussing ``abusive'' tax collection is that 
there is no line drawn between regular tax collection and abusive tax 
collection. When you consider that the very act of a Revenue Officer 
imposing their will on a taxpayer by use of a levy on wages or 
retirement funds or a seizure of assets, such as a personal residence, 
will probably be considered abusive by a lot of people, and surely by 
the taxpayer themselves. My definition of ``abusive'' tax collection is 
the illegal use of certain collection tools, or when the collection 
tool used is not warranted in that given situation.
     Let me give you an example that I think will demonstrate what I 
believe is occurring far more frequently than people may realize. I was 
hired to assist in a matter involving the improper use of a levy. A 
levy is generally the seizure of money in some form. The IRS had issued 
a levy on one of my client's receivables owed to his business, a sole 
proprietorship. But the tax that the IRS was trying to collect on the 
levy was not owed by my client, but was in fact owed by a company that 
my client had worked for at one time as an employee, with no ownership 
interest whatsoever.
     The Revenue Officer, who at the time was acting as an On-the-Job 
Instructor for another Revenue Officer, went to my client's business 
with seizure papers in hand. The client, being faced with the seizure 
of his new business, became very afraid and paid a payment of $7,000 to 
forestall the seizure. Now he paid this despite the fact that he did 
not owe any tax. The IRS basically scared this person or ``extorted'' 
him into paying money that he didn't owe with the threat of seizing his 
business for the debt of the company he had at one time worked for.
     After the initial payment of $7,000, this same Revenue Officer 
issued a levy on one of the client's accounts receivable for roughly 
$21,000. That money was going to be used to pay the client's payroll, 
and the seizure of those funds would have effectively put the client 
out of business. The levy itself was an amazing flight of fancy by that 
Revenue Officer. Remember, there was no relationship nor common 
ownership between these companies. The client simply had been an 
employee of the company that owed the tax. The IRS was well aware of 
these facts. Despite having the explanation laid out in black and 
white, the Revenue Officer would not release the levy nor refund the 
$7,000 she had collected illegally by scaring the taxpayer when she 
first showed up at his door.
     In fairness, let me add that there are instances when a tax can be 
collected from someone other than the taxpayer. A third party can 
become liable if there was a transfer of assets for less than fair 
consideration, or if a party is holding property in their name simply 
to evade the seizure of those assets for taxes due. However, prior to 
collecting from a transferee, or a nominee, the IRS must go through a 
number of steps involving a group called Special Procedures Function, 
and the office of the District Counsel.
     In this particular instance, none of this had been done. I 
informed the Revenue Officer that she had not taken any of the required 
steps and had acted without benefit of legal counsel. I added that her 
actions were not just abusive, but blatantly illegal. The Revenue 
Officer responded with one word: ``AND?''
     Only when the Revenue Officer realized that we would make every 
effort possible to expose this action, did she come back with a release 
of the levy. When you consider that this was an experienced Revenue 
Officer acting with her Group Manager's approval, and not to mention 
also trains other Revenue Officers, her actions were absolutely beyond 
comprehension. It is this type of action that is designed to intimidate 
and instill such fear that the IRS' actions can succeed without 
question.
     I would like to say that this type of action did not occur while I 
was a Revenue Officer. Unfortunately, it did. I know of seasoned tax 
collectors who were well aware of the law, take actions that were out 
of the realm of legal tax collection. In one instance, a Revenue 
Officer who made up a seizure document titled Nominee Levy on the spot 
prior to seizing assets from someone who was not the taxpayer, was soon 
after made a Group Manager. In another case, I dealt with a Revenue 
Officer who had accessed the IRS computer system to get information on 
a case I was assigned. When I questioned the Revenue Officer why he was 
accessing information on my case he stated, ``. . . my wife works for 
this company and if I can help her straighten this (company problem) 
out it will be a real feather in her cap . . . .'' I told the Revenue 
Officer to put the printouts away. That Revenue Officer also became a 
Group Manager. These actions were particularly annoying because I 
believed both these Revenue Officers knew what they were doing was 
outside the scope of correct tax collection.
     When I left the IRS in December of 1989, I considered writing my 
own thesis about tax collection. I wanted to suggest that IRS tax 
collectors be held to some standards of training prior to promotion. 
Not only should they be held to standards of training, but they should 
demonstrate their knowledge on proficiency tests. No Revenue Officer 
should be promoted or allowed to train others until they are able to 
pass increasingly difficult proficiency tests.
     While I was working for IRS I was seriously concerned about the 
Agency's escalating tendency to place unskilled collectors into 
management positions. I used to call these people the ``ninety day 
wonders''--ninety days being the span of time they spent doing Revenue 
Officer work between Phase I and Phase II Revenue Officer training 
classes.
     Basically, I found that people hired as Revenue Officers would be 
detailed to do special projects. Usually these projects were thought up 
by either first line Managers or by upper level Managers. More often 
than not the project was to justify some type of statistic related to 
cases closed or money collected. The projects were administrative work 
that did not lead to a knowledge of collection procedures, or 
requirements put on Revenue Officers by the laws and regulations.
     Because management had put these Revenue Officers on these 
projects these same Managers would not hold them back when it came time 
to be considered for promotion. Many times someone who had only 
attended the two phases of Revenue Officer training was promoted, even 
though that individual may never have actually knocked on a door, 
collected tax, or worked with others in the process of collecting 
taxes. his led to people being promoted who, in turn, qualified to be 
in management based solely on the fact that they were at the right 
grade level. I can't remember the number of times I heard, ``You don't 
have to know how to collect taxes to be a Manager, you just have to 
know how to Manage!'' It's amazing that someone who doesn't know much 
about collection is put in charge of people who are sent out to 
collect. The person the Revenue Officer is supposed to depend on for 
the first level of advice on difficult cases only needs to ``know how 
to manage,'' but not how to collect taxes. It is especially frightening 
because these Managers are required to review and approve certain 
actions of Revenue Officers based on their own understanding of what 
action is appropriate under the IRS policies, as well as the law.
     As a result of this training and promotion practice, new Revenue 
Officers have become less and less effective, while many of the current 
Managers do not know what the Revenue Officers are supposed to do. 
Additionally, many of these Managers are basing day to day decisions on 
whatever they determine important to their own supervisors in order to 
``look good.'' And what were these managers judged on? Sheer numbers. 
How many dollars collected or how many cases closed was--and is--the 
bottom line. Make no mistake about it, there are goals, quotas, that 
may be unstated but well known to the agent, that are driving many of 
the actions you will hear about today. So what we have now are Managers 
who are not thoroughly schooled in the collection of taxes but making 
decisions based on how they can get their numbers up.
     Now the cycle is complete. Managers, knowing little about what 
their employees are supposed to be doing, are evaluating their 
employees on how they could collect more tax or close more cases. Since 
these Managers do not know enough about tax collection, they have a 
tendency to require the Revenue Officer to take actions that might not 
be correct but which the Managers feel would lead to a higher closing 
rate or higher dollar collection. Sometimes the action might even be 
illegal but the Managers did not know it, simply recognizing that a 
particular action resulted in more closures. The newer Revenue Officers 
might not know a particular action is illegal because they haven't been 
around long enough, or are simply not sufficiently trained.
    The new Revenue Officers, who have been taking direction from these 
Managers, get promoted and are now placed in the position of an ``On 
the Job Instructor.'' So you see, the cycle continues and the quality 
of tax collection gets worse. As it gets worse, Congress gets more 
complaints from irate taxpayers.
    In closing I would like to add one thing. I know too many people 
who collect tax for the IRS that are fine, hard working, honest people 
to paint the IRS tax collection with a broad brush.
     To a great number of employees at the IRS, these abuses are not 
more tolerable than they are to this Committee. It's a shame that these 
abuses can cast a cloud over these same people. The number of abuses 
compared to number of cases worked is still small. It nonetheless, is 
way too large to be acceptable. No abuse is acceptable.
     There are many people with great technical knowledge and skill 
whose talent would be better utilized teaching and aiding others. The 
Managers who don't have the knowledge or skill to direct tax collection 
could learn a great deal from some of these people. They might not 
learn anything about management but they need to learn about tax 
collection. This may mean a reduction in production as far as closures 
and dollars collected for a few months or even a year, but over the 
course of one to two years, it should result in an increase in 
collection of revenues and less complaints for the members of Congress 
to address.
    The office of the Ombudsman and the offices of the Problem 
Resolution Program should be manned with highly skilled tax collectors 
who are capable of resolving these issues before they become highly 
contentious issues argued at higher levels.
     I want to thank you Mr. Chairman, and members of the Committee, 
for allowing me to speak here today about a few things that have been 
on my mind for the last several years.

                               __________

                 Prepared Statement of Hon. Harry Reid

    Mr. Chairman, thank you giving me the opportunity to submit 
testimony today during these hearings on IRS oversight. Ever since I 
have served in this body, I have been very concerned about the rights 
of the American taxpayer. I have listened with great interest to the 
testimony of the witnesses of the past few days and I would like to 
take this opportunity to offer my thoughts as to why the American 
taxpayer feels so much anger towards the IRS.
    The IRS is a huge, powerful bureaucracy with enormous control over 
American lives. The power vested in the IRS has led to overzealous tax 
collectors. As a member of the House of Representatives, I introduced a 
``Taxpayers' Bill of Rights'' to put taxpayers on equal footing with 
the Internal Revenue Service. In my maiden speech on the Senate floor, 
I continued my call for IRS reform.
    During debate of the bill, I reviewed countless horror stories of 
flagrant abuse by an overbearing and overzealous IRS. One Las Vegas 
motel manager had her salary garnished and a lien placed on her house 
because the IRS was trying to recover money her ex-husband incurred 
when she wasn't even married to him!
    One man had filled out 200 forms with the IRS, only to receive a 
bill for $50 PER FORM because he did not use a ten pitch typewriter. 
This man's company only owned one 12 pitch typewriter. The result of 
the IRS action: $10,000 in fines and $150 for a new typewriter.
    Yet another Nevada woman was audited because she filed late. She 
had misclassified expenses, so in August 1986 the IRS told her she owed 
between $4,000 and $6,000 without penalties. She waited to hear from 
the IRS for an exact amount, but no word came until January 1987, when 
she got a $22,000 IRS bill for reassessment and penalties.
    But perhaps the one of the most outrageous IRS abuses I ever 
witnessed was the failed IRS sting operation known in Las Vegas as 
``Project Layoff.'' From April 1984 to March 1985, the Reno office of 
the IRS wagered $22 million in Las Vegas as part of a sting operation 
designed to nab tax cheats and organized crime figures. But it turned 
out the only thing that got nabbed was thousands of dollars in profits 
by those running the operation. Thousands of dollars went unaccounted 
for, the IRS attempted to cover up its mistakes and lie to 
investigating authorities, documents were destroyed . . . it was a 
classic example of how not to run an investigation and the IRS's 
credibility was seriously impaired.
    After years of harping about IRS abuse, Congress passed my 
Taxpayers' Bill of Rights, and in 1988 it became law.
    The landmark law guarantees taxpayers the right to have an attorney 
represent them before the IRS, requires the IRS to clearly explain 
taxpayers' rights to them; forbids the IRS from using quotas for audits 
or property seizures; and allows taxpayers to recover financial damages 
caused by the IRS, among other provisions.
    The Taxpayer Bill of Rights has made great strides to put average, 
working Americans on a level field with the IRS. Now, we have expanded 
the original mandate to further strengthen taxpayer rights. The 
Taxpayer Bill of Rights II, written by Senator Grassley and Senator 
David Pryor, further strengthens citizens rights with the IRS by 
providing relief from retroactive Treasury Department regulations and 
setting up a taxpayer advocate office dedicated to enforcing the rights 
of taxpayers being pursued by tax collectors.
    I worked on the Taxpayer Bill of Rights I and II to give taxpayers 
more power in dealing with the collection agency. I am happy that 
Congress and the President have acted on these necessary measures. The 
door remains open for future improvements at the IRS and I count on 
receiving ideas and suggestions from this Committee to help make this 
agency more accountable to tax-paying Americans.
    Who knows, we could have the beginnings of a Tax Payers Bill of 
Rights III being written right here.
    But all the laws in the world won't fix what I believe is the real 
problem with the IRS . . . our current income tax system. We have a 
system which rewards the lazy and hurts those who work. Our tax code is 
so complex that we have built up an entire cottage industry of 
financial planners to decipher for us each year.
    It is a flawed system which is broken and I believe we need to 
start seriously exploring a new way to collect taxes. I favor a 
consumption based tax and have been researching several plans 
circulating through the halls of the Capitol.
    Mr. Chairman, oversight is a very important part of our job here in 
the Senate and I applaud you for providing the opportunity for the 
American people to air their grievances with the IRS. This kind of 
intense public scrutiny coupled with laws like the Taxpayers Bill of 
Rights I & II, and the support of both Democratic and Republican 
Presidents, will help keep the IRS on its toes and focused on its 
mission of serving the taxpayers, not serving them up.
    But I would also encourage you and your committee to explore ways 
to change a system which may be damaged beyond repair. Let's not be 
afraid to consider scrapping what we have in favor of something which 
will work for all of us.

                               __________

                Submitted by Hon. John D. Rockefeller IV
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            Prepared Statement of Hon. William V. Roth, Jr.

     This morning we begin the first of three days of oversight 
hearings into the tactics, management, and inner workings of the 
Internal Revenue Service. There is no other agency in this country that 
directly touches the lives of more Americans. Nor is there any agency 
which strikes more fear into their hearts. The threat of an audit--the 
awesome power of the IRS--looms like the sword of Damocles over the 
heads of taxpayers.
     As Chairman of the Senate Finance Committee, I wanted to know why. 
I wanted to understand where this fear came from. I wanted to know if 
it was justified. Our Committee's responsibility is to provide the 
oversight of this agency. This is a responsibility I take seriously. 
So, in January of this year--with the support of my friend and 
colleague, Senator Moynihan, I began an investigation into how this 
agency conducts business with the American people.
     There is no political bias--no partisan motive--behind our 
investigation and these hearings. As I said, they were initiated some 
eight months ago, and what we have discovered indicates that problems 
within the IRS are not recent. They cover several Administrations.
     Let me also say that the IRS is made up of many fine men and 
women--men and women of great character and integrity, who perform a 
vital and very difficult job for this country. In reflecting upon our 
investigation, I found this to be especially true, and I note that 
without the help of many such IRS employees, our investigation would 
have been incomplete.
     There is no doubt that the powers of the Internal Revenue Service 
are extraordinary. The IRS can seize property, paychecks, and even the 
residences of the people it serves. Businesses can be padlocked, 
sometimes causing hundreds of employees, who are also taxpayers, to be 
put out of work. In some instances, the first a taxpayer is aware of 
any enforcement action by the IRS is when his or her bank calls to 
notify that funds have been frozen. The IRS can take these actions, in 
many cases, without giving the taxpayer notice, or opportunity to be 
heard.
     This is an awesome amount of power to place in the hands of any 
governmental agency. Is it appropriate? Perhaps. But with such power 
there must be an effective counterbalance of responsibility. Why? 
Because the greater the power, the more extensive the damage that can 
be done if that power is abused. Any agency with such power must be 
above reproach--especially as that awesome power allows it to pervade 
the most sensitive aspects of our citizens' private lives.
     Congress has granted such power to the IRS. As a consequence, 
Congress has a fundamental responsibility to see that the IRS operates 
with the highest degree of integrity, honor and ethics. As the Good 
Book says, ``Where much is given . . . much is required.''
     Unfortunately, our investigation to date has found that in many 
cases such high standards are not being upheld. Over the course of the 
next three days we are going to see a picture of a troubled agency, one 
that is losing the confidence of the American people, and one that all 
too frequently acts as if it were above the law.
     This is unacceptable.
     Even high-ranking employees of the agency have come forward at 
some risk to themselves and their careers to speak with us. In 
consequence of such risks, employees who will testify have requested 
confidentiality, and we have honored that request. We have also talked 
with many private citizens whose lives have been altered by IRS 
actions. These men and women have related their sometimes tragic 
experiences, not out of vindictiveness, or mean-spiritedness, but out 
of deep concern and the fundamental belief that such a violation of 
their civil rights should not have taken place--not in America.
     We have listened to these men and women, and we are holding these 
hearings because one thing is certain: we can't fix the IRS without 
knowing what ails the IRS. What we seek is constructive criticism--
criticism with the intent to improve, not destroy--to protect, not 
denigrate. This is not IRS bashing; it is oversight. There will be no 
condoning of tax protestors, or any others who would misinterpret our 
objectives to legitimize anti-government attitudes or behavior. These 
hearings are about good government, about correcting problems within 
government--problems that are acknowledged by those whose lives are 
dedicated to public service.
     Responsible oversight is the best way to ensure that not only is 
the government meeting the needs of the people, but it's the surest way 
of letting the people know that they have influence over, and a strong 
voice in, their government. That's what these hearings are all about. 
Just as the IRS is quick to say that no honest taxpayer should fear an 
audit, no government agency should ever fear a Congressional 
investigation into its activities.
     While it is imperative that Americans pay their fair share of 
taxes in an effort to establish and maintain necessary government 
functions, it is equally imperative that the agency charged with the 
responsibility for this activity be fair, honest, open and accountable.
     With this introduction, I believe it's important to outline how we 
went about conducting our investigation. Our objective from the 
beginning was to keep our methodology fair, and yet still be able to 
get inside the agency to uncover the facts. In reviewing the treatment 
of taxpayers, we took various cases to the IRS and reviewed every 
document that we could obtain. We interviewed the IRS employees 
involved in the particular cases.
     Over the next three days, we'll hear about a number of these 
cases. We will hear from taxpayers and IRS employees. It is important 
to understand that these witnesses are typical of far greater numbers 
who have been moved to contact the committee. These individuals serve 
as a sampling which demonstrates the significance of problems and 
concerns within the agency.
     The facts will be startling.
     For instance, while the use of pseudonyms is forbidden by the 
Internal Revenue Manual--except for those in the law enforcement areas 
of Criminal Investigations and Inspections Divisions--many Revenue 
Officers have been issued false identification credentials. While the 
IRS suggests that this is to protect agents from assault, I'm concerned 
that it makes them unaccountable. Even members of the Metropolitan 
Police Force here in the District of Columbia, despite substantial 
danger, wear their true names on their uniforms.
     In the next three days, you will hear about an audit term called 
``Blue Sky Assessments.'' These are tax assessments made against 
Americans that have no basis in fact or tax law. They can either be 
designed to hurt the taxpayer, or simply raise the individual 
statistics of an IRS employee.
     You will hear a lot about statistics and quotas. We have learned 
that even at managerial levels, the drive to achieve the appropriate 
statistic has caused problems in many areas of the country. While the 
use of quotas is specifically prohibited in rating the success of 
agents or officers in their jobs, it appears to be commonplace. And 
this, I believe, is outrageous--a major problem that has become part of 
the agency's culture.
     Levies and seizures are also measurements of employee performance. 
In one case we learned a revenue officer was counseled for ``not 
keeping his statistics up'' so he seized several properties the next 
day. Some officers who are able to collect the full amount of taxes due 
are often rated lower than those who have seized property. Seizures may 
be done for status and promotion as much as for enforcement.
     Not only are levies and seizures measurements of an employee's 
performance, but so is the number of referrals of cases to the Criminal 
Division. In other words, while there may be no basis in fact for a 
criminal referral, a taxpayer's life may well be turned upside down 
simply to keep an employee's, or district's, performance statistics up.
     Liens and levies may be filed against those whom the IRS knows has 
no liability for a particular tax. Parents, relatives or a company 
employee may have liens filed against their property, or have a 
paycheck levied, in order to get the real taxpayer to comply. This is 
called the ``whipsaw technique.'' This practice was explained to us as, 
``When we go after everybody, we know someone will pay.'' We will 
present an example of that method during the course of this hearing.
     One of the most distressing things you will learn from this 
hearing is the preference to audit middle- and lower-income taxpayers, 
as well as mom and pop small businesses. This is almost incredible to 
understand. Certainly it's not for the high revenues that these kinds 
of audits bring to the Treasury. So why are these Americans audited? 
Because it's easy. Most often, these are the taxpayers who can't afford 
to fight back.
     Beyond learning about the fear taxpayers have concerning the IRS, 
I was very much concerned about how agency employees, themselves, feel. 
Many expressed fear of being retaliated against for speaking out 
against the kind of abuses I have mentioned here. We have heard in our 
investigation that the use of false allegations of wrongdoing against 
targeted employees takes place. In fact, just the number of times we 
heard the term ``targeting'' in relation to harassment of employees was 
stunning. Certainly if this treatment bothers the front-line employees 
of the IRS, it's devastating to the American taxpayer.
     Over the next three days we will hear more about these concerns. 
As Congress has given the IRS awesome power in an effort to help the 
agency carry out its tremendous responsibility, it is also Congress's 
responsibility to ensure that such power is being used prudently, 
constructively, and with regard for the taxpayer and employees of the 
agency. What we are learning suggests that there are problems and begs 
that Congress address three fundamental questions: First, does the IRS 
have too much power? Second, if Congress were to limit that power, what 
expectations do we have that the new limits will be more effective than 
the old limits? Third, how do we go about changing the culture of the 
IRS?
     What we seek to do is help the IRS get back to its mission 
statement. That statement reads: ``The purpose of the Internal Revenue 
Service is to collect the proper amount of tax revenue at the least 
cost; serve the public by continually improving the quality of our 
products and services; and perform in a manner warranting the highest 
degree of public confidence in our integrity, efficiency and 
fairness.''
     This is our desire. Improving the IRS is not only good for 
taxpayers; it's good for government.
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                    Prepared Statement of Tom Savage

     Good morning/afternoon. My name is Tom Savage. I run a 
small construction management company in Lewes, Delaware, which 
my wife and I own. I want to thank the Committee for the 
opportunity to share my story which has been no less than a 
true ``horror story'' for my wife and me.
     We were unfortunate to have been the subject of a zealous, 
unrelenting, and abusive pursuit by an IRS Revenue Officer with 
the assistance and complicity of attorneys, and particularly 
the lead attorney at the Department of Justice, who were 
charged with advising the IRS. They were in a position to stop 
the abuse and yet permitted it to continue, perhaps even 
causing much of it. In the interest of time, I will simply say 
that the emotional damage done to my wife and me outstrips the 
financial damage we suffered, which was not insubstantial. 
There were many sleepless nights. Believe me, when the sources 
of the government are unleashed on you, you are in trouble, no 
matter how good your case. Few people know what it is like to 
be in the cross-hairs of the IRS. We unfortunately do.
     I am here today in the hope that by telling my story, and 
participating in these hearings, I might help bring about real 
and lasting change at the IRS. For the sake of other taxpayers, 
I hope that this happens.
     The nightmare began when a subcontractor of Tom Savage 
Associates or TSA, my own company, fell behind in paying its 
employment taxes. The case ended with intense litigation in the 
United States District Court, which TSA was forced to bring in 
order to recover a payment check issued by the State which had 
been wrongfully seized from it by the IRS. In order to keep my 
company afloat, we had to settle the case, much as this 
offended our desire to ``stand on principle.'' We allowed the 
IRS to keep $50,000 of the check that was seized in order to 
get the case over, since the litigation was bankrupting our 
company financially and us emotionally. We regret not having 
pursued the case to the end but we had to save our business. 
The government had endless resources to drag the case out. We 
did not. In settling the case, the government extorted $50,000 
before giving back the check. The government attorneys knew 
that it was going to cost an additional $50,000 to litigate the 
case and used it to leverage the IRS' position.
     In brief, the subcontractor had tax problems that surfaced 
during the period it was working for my company, TSA, on a 
project for the State of Delaware. Unknown to TSA, the 
subcontractor had not been paying its employment taxes for 
approximately one year before the project commenced. TSA, with 
the subcontractor's assistance, was building a women's 
correctional facility. The subcontractor performed the 
construction while TSA oversaw the project and provided the 
performance bond for the project. Toward the end of the job, 
the subcontractor's tax problems came to light. The IRS 
investigated the subcontractor, but quickly concluded that the 
amount of taxes due were uncollectible. Since the IRS was 
unable to collect the money from the subcontractor, the Revenue 
Officer, in his zeal, set his sights on TSA. First he attempted 
to hold me personally responsible for the unpaid taxes, 
asserting that I was a ``responsible person'' representing the 
subcontractor. This approach failed when my tax advisors filed 
a legal memorandum explaining the severe deficiencies with this 
theory, so the IRS then went after my company. The IRS now 
asserted, falsely, that TSA and the subcontractor were partners 
and that the employees of the subcontractor working on the 
project were actually employees of this fictitious association 
between TSA and the subcontractor. My tax advisors pressed the 
Revenue Officer for some authority for asserting the existence 
of this fictitious ``partnership'' that he had established 
between TSA and the subcontractor. The Revenue Office pointed 
to a non-tax Delaware case that was totally inapplicable.
     Undaunted by challenges to provide authority in support of 
the fictitious ``partnership,'' the Revenue Officer caused the 
IRS to issue a ``30 day letter,'' which proposed as assessment 
against the fictitious ``partnership.'' We immediately filed a 
written protest with the IRS Appeals Office and eagerly awaited 
the Appeals Conference to put the case behind us. As things 
turned out, we were never given an opportunity to present our 
case to the Appeals Office. While waiting for the Appeals 
Conference to be scheduled, the IRS seized a large check paid 
to our company by the State of Delaware for the project. At the 
time of the seizure, and this is significant, there was no 
assessment entered against either TSA or the fictitious 
``partnership'' between TSA and the subcontractor. Even if one 
were to assume that the partnership existed, which is a 
generous assumption even for the sake of argument, the only 
assessment on the books allowing the IRS to enforce collection 
was against the subcontractor. The seizure of the check thus 
constituted a ``wrongful levy.'' Open and shut. Existing IRS 
revenue rulings clearly hold that the assets of a partnership 
or another partner may not be seized to satisfy the tax debts 
of another partner.
     It is a fundamental principle of the tax law that the 
government may not seize any taxpayer's property, or undertake 
any type of enforcement action against a taxpayer until there 
has been an assessment entered against the taxpayer. For those 
of you not versed in tax procedure, an assessment is the 
administrative equivalent of a judgment. In our case, the right 
to be free of government collection action until such time as 
an assessment has been entered was flagrantly violated. Not 
only was this right violated, as will be explained in a moment, 
the IRS would later attempt to sweep this fact under the rug in 
the US District Court. Indeed, the government attorneys were so 
hell bent on ``winning'' that they waged a behind-the-scenes 
campaign during the proceedings in District Court to sanitize 
the record presented to the judge. The government requested an 
extension of time to respond to the plaintiff's brief in 
support of its motion for summary judgment and then, during the 
extension, entered an assessment against the fictitious 
``partnership'' between TSA and the subcontractor by hand 
delivering a ``notice of demand'' the Saturday before the 
government's answering brief was due. The government attorneys 
then had the audacity to argue in their answering brief that an 
assessment had been entered against the fictitious partnership. 
No mention was made in the government's brief that the 
assessment was entered 25 weeks after the IRS seized the check 
and literally days before the answering brief was filed. And 
these were the attorneys we though would stop the abuse!
     When we instituted the suit, we were convinced that the 
case would be resolved quickly, that the government would 
concede the case once it got into the hands of a competent 
attorney. We guessed wrong. The government had my money and was 
not going to give it up without a fight. Faced with this ``win-
at-all-costs'' attitude, we were clearly in for a protracted 
battle with the IRS. As much as it offended my wife and me, we 
chose to settle the case and permitted the IRS to keep $50,000 
of the proceeds. We wanted to pursue the case to the end, but 
to do so would have destroyed our business.
     On top of the $50,000 that the IRS kept, I had other 
financial losses. Although my attorneys reduced their fee 
substantially in encouraging me to settle the case, their fees 
were substantial. We spent $51,000 in legal fees in connection 
with the case. We lost approximately $600,000 in business 
during the proceedings with the IRS and in its wake. And 
finally, we lost our sense of well being, confidence, and 
freedom from government intervention.
     I believe the IRS, the Revenue Officer, the District 
Counsel attorneys, and the attorneys with the Tax Division of 
the U.S. Department of Justice should be held accountable for 
their conduct. Unless abuses of this type committed by the IRS 
and its representatives are met with strong response, including 
legislation to compensate victims of IRS abuse, they will 
continue.
    I thank the Committee for the opportunity to be here today.

Attachments.
[GRAPHIC] [TIFF OMITTED] SH190.328

[GRAPHIC] [TIFF OMITTED] SH190.329

               Prepared Statement of Robert S. Schriebman

    Thank you for the opportunity to be of service and to express my 
views on the current state of the Internal Revenue Service. I am a 
practicing tax attorney in a suburb of Los Angeles. For the past 20 
years, my practice has been primarily limited to matters of tax 
collections, audits and tax litigation. I represent clients in all 
walks of life and in all tax brackets. I'm in the trenches everyday, 
eye-to-eye with IRS auditors and tax collectors.
    One of the high points of my legal career was the obtaining of U.S. 
veterans recognition for the American Volunteer Group, commonly known 
as the Flying Tigers of World War II fame. I am the author of several 
books on IRS practice and procedure with emphasis on audit and 
collection practices of the IRS. I wrote the first practitioner's 
manuals on IRS and California collection defense practice. I have also 
written books for business and individual taxpayers who are having IRS 
problems. I frequently speak at major tax institutes throughout the 
country such as the NYU and USC Tax Institutes, Northwest Tax Institute 
and annual meetings of the American Society of Attorneys-Certified 
Public Accountants. I am continuously educating and writing for 
attorneys, CPAs and tax practitioners on IRS and California practice 
and procedure.
    Most IRS tax collectors (Revenue Officers) are decent overworked 
people with an unpopular job. However, they do their utmost to follow 
the law and the provisions of the IRS Manual. Unfortunately, they do 
not keep current on changes within the IRS and very often their 
internal libraries are seriously outdated.
    Recently, Revenue Officers have informed me that the IRS is 
adopting a get-tough attitude with regard to tax collections. While the 
first Taxpayer Bill of Rights of 1989 did away with the keeping of 
formal internal statistics on collection, it still appears that the 
only way to make a name for yourself within the Collection Division is 
by the number of seizures under your belt. The remainder of my 
testimony will address an unpleasant example of this which I have been 
involved with over the course of the past few months.
    The IRS has fixed standards relating to allowable living expenses 
in order to grant the taxpayer a payment arrangement. A taxpayer has no 
right to a payment arrangement. These standards are unrealistic and do 
not take into consideration financial commitments made by people prior 
to their becoming delinquent in their taxes.
    The same unrealistic IRS standards apply to the cost of owning and 
operating a car and other essential living expenses such as food, 
clothing and personal maintenance. A taxpayer is not allowed 
educational expenses such as a child's private school or college 
education. A taxpayer is not allowed to support his or her place of 
worship.
    These unrealistic expense standards have driven many taxpayers into 
unnecessary bankruptcy in order to take advantage of the automatic stay 
from IRS seizures and wage garnishments and to work out long-term 
payment plans, some available without interest. However, these 
otherwise productive taxpayers now have the stigma of bankruptcy on 
their record. My colleagues around the country have expressed the same 
frustrations. The driving of normally solvent and productive taxpayers 
into bankruptcy because of unrealistic IRS expense standards is a 
national tragedy.
    The bottom line is the IRS would rather force a taxpayer into 
bankruptcy than to accept a fair payment arrangement or a settlement 
known as an offer in compromise.
    The IRS can take a taxpayer's home on just the signature of the 
District Director alone. There is no court hearing, no notice and no 
opportunity to litigate the merits of the IRS' claim.
    The IRS can close down a business and take away a taxpayer's 
livelihood by merely filing a few papers in federal court. The judge 
simply signs the seizure order and that's all there is to it. The 
taxpayer gets absolutely no notice or opportunity to contest the 
legality of the assessment or the amount the IRS claims is owed. In 
doing so, the IRS can commit perjury and get away with it. What is sad 
is this type of criminal conduct seems to be condoned by the tax 
collectors' superiors. To me, this violates not only the Fourth and 
Fifth Amendments and of our Constitution, but one's basic civil rights 
as well, it's just plain not fair!
    As an example, let me tell you about ``Joe.'' Joe operates a small 
business. In the early 1990's he owed the IRS. Because he couldn't pay 
in full, he made a deal with the IRS known as an offer in compromise. 
This was accepted by the IRS on the condition that regular payments be 
made. The IRS claims Joe breached the terms of the deal; Joe claims he 
paid in full. The IRS did not send Joe the required default warning 
letter. This IRS error entitles Joe to have the offer reinstated. Since 
the beginning of the year, the IRS, through seizures and wage 
garnishments, has taken more than the terms of the original offer 
allowed. Although repeated requests have been made for a copy of the 
warning letter, to date it has not been produced.
    For the past several years, Joe has been current on his filings and 
tax payments. When a taxpayer is current, the IRS directives require 
that the IRS work with the taxpayer in suspending collection due to 
economic hardship or establishing an installment payment arrangement.
    But Joe's assigned Revenue Officer does not want to discuss a 
hardship suspension or an installment payment arrangement. The Revenue 
Officer wants to close down Joe's business while Joe and his wife are 
barely able to provide an income to support their two children.
    In order to obtain a court order to close down a business, all that 
is needed is a formal application and a sworn declaration that the 
revenue officer followed very specific procedures to protect a 
taxpayer's Constitutional rights. It's all very secretive. The taxpayer 
is never given notice of these proceedings and is never afforded an 
opportunity to contest the merits of the IRS' claim. The Revenue 
Officer simply obtains the seizure order through the Court, represented 
by the U.S. Attorney's Office and serves the final court order along 
with the seizure notice to the taxpayer who must immediately vacate the 
business premises. The taxpayer's only recourse is a long and costly 
tax refund procedure which most likely will wind up in court. In the 
meantime, the IRS sells the business assets and the taxpayer's business 
is gone!
    One day I was negotiating a payment arrangement, and the very next 
day the Revenue Officer, without warning, showed up at Joe's place of 
business together with several IRS personnel and padlocked the entire 
premises. Two court orders were obtained against Joe personally and his 
wholly-owned corporation. Joe was not shown the court orders and the 
several attempts to request copies of the orders from the Revenue 
Officer and his supervisor went unanswered and still go unanswered!
    Two court orders were finally obtained from the District Court 
Clerk. Both supporting Revenue Officer declarations revealed blatant 
perjury. The Revenue Officer represented to the Court that he met with 
Joe and asked his permission to enter and seize his business. It was on 
these representations that two District Court judges issued the seizure 
orders. Joe never met with the Revenue Officer. In fact, during that 
week, Joe was out of the state and never spoke to anyone from the IRS.
    In obtaining perjured court orders, the IRS violated Joe's civil 
rights and rights under the Fourth and Fifth Amendments of the 
Constitution.
    The IRS allowed Joe back in his business a few days later but not 
before Joe paid $6,400 which he had to borrow from friends, a most 
humiliating experience. Before handing Joe back the keys to his 
business, and dangling the keys in front of Joe's face, the seizing 
Revenue Officer, the fellow who committed the perjury, insisted that 
Joe revoke my power of attorney and sign a paper waiving his rights to 
complain about any IRS misconduct. Feeling helpless, Joe complied but 
under duress.
    One week, the IRS told Joe he owed a little over $160,000. But, 
just three weeks later, Joe was told he owes close to $314,000--with no 
explanation.
    Some IRS auditors and tax collectors have taken the position that 
the Congressional directives set forth as statutes in the Internal 
Revenue Code are simply guidelines that are free to be rejected at 
will. If IRS employees do not follow the law and if they commit perjury 
before federal judges, their conduct is often condoned by their 
superiors, including those at the highest level.
    With increasing frequency, I find that I have to go over the 
Revenue Officer's head to his or her manager and even over the 
manager's head to the Branch Chief. It is getting increasingly more 
difficult to distinguish ignorance from bully tactics and 
overzealousness. I do believe that Revenue Officers are being pushed by 
their superiors to undertake more seizures in order to achieve 
promotions within the system.
    The example I have presented here today reflect a lack of 
accountability within the system, to the taxpayer, and to the taxpaying 
public and reflect an institutional arrogance. This is especially true 
in exceptional cases where a maverick or renegade tax collector throws 
aside the law and internal IRS procedures in order to achieve self-
promotion and recognition by his or her superiors.
     suggestions for improvement of irs service and taxpayer rights
    I.R.S. stands for Internal Revenue Service. We're not getting as 
much service as we should for our money these days. Taxpayer abuse will 
not stop by just putting in a new high tech computer system. While 
electronic technology is very important and necessary, we must keep in 
mind that these are just machines and machines can serve to further 
widen the distance and alienate the American people from their 
Government. Creating a new Board of Governors that sits in its 
insulated ivory towers is not the answer either.
    We need to put some real teeth into the Taxpayer Bill of Rights. Of 
primary importance, the IRS should not be allowed to take any property 
of any kind from a taxpayer without notice and an opportunity to be 
heard. The IRS should pay damages not only when its agents violate the 
statutes in the Internal Revenue Code, but should also pay damages for 
violating internal procedures set forth in their own Manuals. Punitive 
damages should also be awarded to taxpayers whose rights have been 
violated.
    A taxpayer should be allowed a change of IRS auditor or collector 
for reasonable cause.
    What is needed is an external check and balance system; a forum 
where small business owners and the American taxpayer can afford to be 
heard without first having to pay what the IRS says is owed and where 
all collection activity must immediately stop until the issue is heard 
and ruled upon. What is needed is a forum where the burden of proof is 
shifted to the IRS instead of the way things are now where the taxpayer 
is presumed guilty until proven innocent. This forum must not be part 
of the IRS.
    May I respectfully suggest the institution of an independent 
administrative system of review of IRS collection activities before 
they are allowed to be implemented. A taxpayer should be allowed to 
appeal IRS action to an Administrative Law Judge and, if necessary, 
appeal that Judge's decision to an Administrative Appeals Board.
                               conclusion
    In conclusion, let me make it clear that not all taxpayers who owe 
the IRS deserve a kinder and gentler hand. Some of these people need a 
fist. Some do not take their tax obligations seriously, but most people 
do. Most Americans want to do the right thing by the IRS and get back 
on track. The IRS should not be abolished, but the machine definitely 
needs a tune-up. Taxpayers deserving respect must be treated with 
respect; they must be given a level playing field. Our laws, our courts 
and our Constitution must have the highest level of respect.
    On this date in 1779, a Scottish born American commanded an old 
French ship he renamed the Bon Homme Richard in honor of Ben Franklin. 
He got into quite a fight and was out-gunned by a larger British ship 
known as the Serapis. When the British captain asked him to surrender, 
he replied, ``Sir, I have not yet begun to fight.'' That man was John 
Paul Jones, the Father of the American Navy. Ladies and gentlemen of 
the Senate, you must show the American people that you, too, have not 
yet begun to fight!
    Thank you for this opportunity to appear before you.

                               __________

                 Prepared Statement of Bruce A. Strauss

    My name is Bruce A. Strauss and I'm currently an Enrolled Agent 
licensed to represent taxpayers before the IRS. I have been President 
of the Enrolled Agents in our five county area in Florida for the past 
three fiscal years. I retired from the Internal Revenue Service after 
31 years, the last 18 of which I held the position of Division Chief 
within the Collection Division. I also received nine consecutive 
performance awards from 1983 through 1991. At the time of my retirement 
(April, 1992), I was Senior Division Chief.
    I tell you this trusting you will accept the fact that I have 
considerable expertise regarding the operations of the IRS. This 
includes its history, its authorities, its personnel practices, and 
also its problems. Since beginning my practice representing the public 
as an Enrolled Agent, I have become increasingly concerned about the 
ability of the IRS to be fair and objective in dealing with the 
American public. I am also concerned with the public's fear of the IRS. 
THIS ENVIRONMENT OF FEAR MUST CHANGE. That is why I sit before you 
today.
    The IRS has been very successful in its primary mission of 
collecting taxes, bringing in over $1.3 trillion dollars in FY '95. It 
is a role model for other countries to follow, and has played no small 
role in the economic success of this nation.
    Obviously, I do not believe this system is broken. However, my 
experience and the feedback I receive in my work, tell me the public's 
confidence in the IRS is being eroded by the perception that it is 
losing its ability to apply the Internal Revenue Code and the resulting 
morass of regulations in a fair and objective manner. When a dispute 
with the IRS rises, the current systems in place to deal with the 
dispute are cumbersome, expensive, time consuming, and often times 
ineffective. The result is that the fear of the IRS continues to grow. 
THIS IS AN UNACCEPTABLE CONDITION.
    In a Democracy, the first condition that must he met is that the 
government must respect the citizens that it serves. I am not sure that 
condition exists today within the IRS. My purpose today is to assist in 
restoring, the confidence of the American public in the Internal 
Revenue Service.
    One of the problems which affects the way the IRS personnel 
interact with the taxpayers is the drive to achieve statistical 
operational objectives. One of the primary drives, if not THE primary 
drive, for the Examination Function is, ``dollars recommended for 
assessment''. This statistic does not measure how much money was 
actually collected nor does it measure how much additional tax was 
actually assessed via the examination process. It only measures what 
the Examination Function proposes to assess against the taxpayer (30 
day letter). The examination function made this measurement one of the 
operational objectives for Branch Managers and above, as I recall, in 
FY 90. About the same time the formal quality review of cases being 
issued 30 day letters was ceased. A fundamental principal of any 
organization is that employees will give their managers what their 
managers tell them is important. Or expressed a different way:
 an organization is driven by the objectives on which the managers are 
                               evaluated
    As a result, an environment or culture has emerged within the IRS 
that has made its employees often callous to the rights and concerns of 
the taxpayers. Statistical objectives for any agency with the power of 
the IRS are inappropriate, but when one considers the IRS has a 
measurement of what is ``recommended for assessment'', this strive to 
achieve specific objectives becomes intolerable.
    I have a significant compassion for the IRS employees in their most 
delicate responsibility of ensuring that each citizen files and pays 
their fair share of taxes. But based on my knowledge, the primary 
problem lies with the ineffectiveness of the top management of the IRS. 
Instead of assessing the current problems and taking appropriate steps 
to ensure correction of these problems, what I see taking place is a 
``circle the wagons'' mentality. This management approach has lead to 
significant problems which include:
          1. Denial of mistakes which lead to integrity issues;
          2. Using a sledge hammer to resolve compliance problems:
                  a. IRS files a return for the taxpayer, with the tax 
                significantly overstated;
                  b. Use of Bureau of Labor Statistics to assign 
                additional income; and
                  c. Not applying Internal Revenue Code sections which 
                benefit the taxpayer.
    There is a mentality within the IRS that mistakes are rare, and 
those that do gain notice are blown out of proportion. In fact, I would 
not be surprised if, as a result of this hearing, you hear that any 
complaints by taxpayers which you may raise, while unfortunate, are 
statistically irrelevant due to the 200 million returns that are 
successfully processed each year. Based on my knowledge, such a 
statement would not be factual. The truth is that of the Examination 
Function cases that I have seen as a representative of the taxpayer, 
the IRS often does not operate within its proper authorities. When 
called on these matters, the IRS response is often a denial, or a 
``spin'' is put on the issue in an attempt to protect their position. 
Such conduct shows a complete disregard for the taxpayer and their 
fundamental rights as citizens.
    I know of numerous cases where the IRS has specifically exceeded 
its authority. In one of most egregious examples, the IRS (Collections) 
predetermined that 637 taxpayers were liable for employment tax [they 
did not conduct legitimate investigations] used extortion tactics to 
have taxpayers sign returns which the IRS prepared; did not use any IRC 
sections which benefit the taxpayer; and disregarded established law, 
authorities and procedures; 630 of these taxpayers were also denied 
their ``Due Process Rights.'' When I brought this matter to their 
attention, instead of taking corrective action, they ``circled the 
wagons.'' After 3 years of my pursuing a resolution of this matter, the 
IRS has boxed itself into a position with significant integrity issues 
in question. The current status is that I have been unable to obtain a 
legitimate response form the Regional Commissioner.
    Another example is the tactic of assessing a tax twice for the same 
1040 tax form. The tactic involves accepting the Schedule C income, but 
disallowing all the related business expenses. When the taxpayer 
requested the case to be reopened, the deductions were allowed, but 
then the IRS reopens the income issue (in direct conflict with the IRC) 
and assesses additional taxes based on the Bureau of Labor Statistics 
income information to boost the income of the taxpayer. Then the 
taxpayer was informed that he has no appeal rights to contest the 
additional resulting tax.
    The advent of the concepts, as shown above, that the IRS now has 
the authority to assign additional income to a taxpayer at its 
discretion, without any basis in fact, is frightening and absolutely 
unacceptable.
    I admire the current efforts of Congress, such as the ``Commission 
on Restructuring the IRS'' to encourage the IRS to become more 
responsive to the public. I also appreciate the opportunity to 
contribute to the process by testifying at this important hearing, and 
I commend you Mr. Chairman for the courage to engage in this effort. 
But I do believe that Congress must share some of the blame for what 
has happened. Funding must be consistent with a long term philosophy, 
and the oversight of the IRS must be significantly improved. This 
hearing today is a great start, but long overdue.
    For each of you dealing with your constituents, I would offer that 
fact that the ability of any single Congressional staff to resolve a 
taxpayer issue with the IRS is extremely remote. I would suggest 
forming a single staff of highly trained and skilled individuals that 
could be a central clearinghouse for all taxpayer complaints received 
by the Congress. This would also provide a database of problems, that 
when noticed to be widespread, could be used to make systemwide 
corrective actions. It is only in this way that the management of the 
IRS can be held accountable to the Congress and to the American people.
    I am submitting a more comprehensive statement for the record, 
which includes some of my recommendations to remove the fear of the 
public when dealing with the IRS. I sincerely hope that my 31 years of 
experience with the IRS has helped in some small way to create a 
clearer picture of the agency. The many good people of the IRS, who 
perform a difficult task everyday, and the taxpaying public deserve 
your best efforts at cleaning up this important national asset.

                               __________

                 Prepared Statement of Lynda D. Willis

     Mr. Chairman and Members of the Committee:
     I appreciate being invited here today to discuss the availability 
of information on the Internal Revenue Service's (IRS) use of its 
enforcement authorities to collect delinquent taxes. In general, if 
taxes remain unpaid after IRS gives appropriate notice and demand for 
payment, IRS is authorized by the Internal Revenue Code to seize the 
delinquent taxpayer's property either through direct action or through 
demand (referred to as a notice of levy) made on third parties, such as 
banks or employers, to turn over the taxpayer's assets or earnings to 
IRS.[1] IRS is also authorized to file liens against the delinquent 
taxpayer's property.[2]
     According to data IRS pulled together from various internal 
management systems, in fiscal year 1996, IRS (1) filed about 750,000 
liens against taxpayer property, (2) issued about 3.2 million levies on 
taxpayer assets held by third parties, and (3) completed about 10,000 
seizures of taxpayer property. These enforcement actions can have 
severe financial consequences for taxpayers, and the potential exists 
for such actions to be taken in error or improperly. Accordingly, you 
asked us to determine if information existed that could be used to 
determine whether collection enforcement authorities were properly 
used.
     To determine whether information existed to evaluate IRS' use of 
collection enforcement authorities, we (1) asked IRS to provide us with 
available basic statistics on its use, and misuse, of lien, levy, and 
seizure authority from 1993 to 1996; (2) reviewed a small and 
subjectively selected sample of seizure, revenue officer, appeals, and 
problem resolution case files to identify the types of information that 
may be available from those files; and (3) interviewed IRS employees 
involved in these areas to determine how and when collection 
enforcement authorities were used, the controls for preventing misuse 
of those authorities, and the results of taxpayer complaints about the 
inappropriate use of the authorities.
     In summary, while IRS has some limited data about its use, and 
misuse, of collection enforcement authorities, these data are not 
sufficient to show (1) the extent of the improper use of lien, levy, or 
seizure authority; (2) the causes of the improper actions; or (3) the 
characteristics of taxpayers affected by improper actions. The lack of 
information exists because IRS' systems--both manual and automated--
have not been designed to capture and report comprehensive information 
on the use and possible misuse of collection authorities. Also, much of 
the data that are recorded on automated systems cannot be aggregated 
without a significant investment of scarce programming resources. Some 
information is available in manual records, but--because collection 
enforcement actions can be taken by a number of different IRS offices 
and records resulting from these actions are not always linked to IRS' 
automated information systems--this information cannot be readily 
assembled to assess the use of enforcement actions. Also, data are not 
readily available from other potential sources, such as taxpayer 
complaints, because, in many circumstances, IRS does not require that 
information on the resolution of the complaints be recorded. IRS 
officials told us that collecting complete data on the use of 
enforcement actions that would permit an assessment of the extent and 
possible causes of misuse of these authorities is unnecessary because 
they have adequate checks and balances in place to protect taxpayers. 
However, IRS does not have the data that would permit it or Congress to 
readily resolve reasonable questions about the extent to which IRS' 
collections enforcement authorities are misused, the causes of those 
occurrences, the characteristics of the affected taxpayers, or whether 
IRS' checks and balances over the use of collection enforcement 
authorities are working as intended.
         use of liens, levies, and seizures in collecting taxes
     The magnitude of IRS' collection workload is staggering. As of the 
beginning of fiscal year 1996, IRS reported that its inventory of 
unpaid tax assessments totaled about $200 billion. Of this amount, IRS 
estimated that about $46 billion had collection potential.[3] In 
addition, during the fiscal year, an additional $59 billion in unpaid 
tax assessments were added to the inventory.
     To collect these delinquent tax debts, IRS has established a 
graduated enforcement process. The process starts once IRS identifies 
taxpayers who have not paid the amount due as determined by the tax 
assessment.[4] In the first stage of the process, a series of notices 
are to be sent to the taxpayer from one of IRS' service centers. 
Collectively, these notices are to provide the taxpayer with statutory 
notification of the tax liability, IRS' intent to levy assets if 
necessary, and information on the taxpayer's rights. If the taxpayer 
fails to pay after being notified, the Internal Revenue Code authorizes 
a federal tax lien to be filed to protect the government's interest 
over other creditors and purchasers of taxpayer property.
     The second stage of IRS' collection process involves attempts to 
collect the taxes by making telephone contact with the taxpayer. IRS 
carries out this stage through its Automated Collection System (ACS) 
program. During this stage, IRS may levy taxpayer assets and file 
notices of federal tax liens.
     In the final stage of the collection process, information about 
the tax delinquency is referred to IRS' field offices for possible 
face-to-face contact with the taxpayer. During this stage, IRS may also 
levy taxpayer assets and file notices of federal tax liens. 
Additionally, as a final collection action, taxpayer property, such as 
cars or real estate, may be seized. Attachment I presents a flowchart 
that provides additional detail about the collection process.
     At any time in the collection process, IRS may find that a 
taxpayer cannot pay what is owed or does not owe the tax IRS assessed. 
In such situations, IRS may enter into an installment agreement with a 
taxpayer, compromise for an amount less than the original tax 
assessment, suspend or terminate the collection action, or abate an 
erroneous assessment. Also, if the taxpayer is having a problem 
resolving a collection action with the initiating IRS office, the 
taxpayer may go to IRS' Taxpayer Advocate or to IRS' appeals program 
for resolution. If an enforcement action is taken that involves a 
reckless or intentional disregard of taxpayer rights by an IRS 
employee, a taxpayer may sue for damages. In the case of an erroneous 
bank levy, a taxpayer may file a claim with IRS for reimbursement of 
bank charges incurred because of the levy in addition to a refund of 
the erroneously levied amount. If a taxpayer believes that enforced 
collection would be a hardship, the taxpayer may request assistance 
from the Taxpayer Advocate.
   irs has some limited data on the use and misuse of lien, levy, and 
                           seizure authority
     IRS produces management information reports that provide some 
basic information on tax collections and the use of collection 
enforcement authorities, including the number of liens, levies, and 
seizures filed and, in the case of seizures, the tax delinquency that 
resulted in the seizure and the tax proceeds achieved. Also, some 
offices within IRS collect information on the misuse of these 
collection enforcement authorities, but the information is not 
complete.
     Overall, IRS' management reports show that IRS' collection program 
collected about $29.8 billion during fiscal year 1996, mostly without 
taking enforced collection action. In attempting to collect on 
delinquent accounts, the reports show IRS filed about 750,000 liens 
against taxpayer property, issued about 3.2 million levies on taxpayer 
assets held by third parties, and completed about 10,000 seizures of 
taxpayer property. Attachment II presents this overall information on 
IRS' use of lien, levy, and seizure authority during fiscal years 1993-
96. Attachment III presents a summary of the distribution of seizure 
cases by type of asset seized in fiscal year 1996.
     For the seizure cases completed in fiscal year 1996, the average 
tax delinquency was about $233,700, and the average net proceeds from 
the seizures was about $16,700. Although complete data were not 
available on tax delinquencies and associated net proceeds for liens 
and levies, the best information available from IRS indicates that 
about $2.1 billion of the $29.8 billion was collected as a result of 
lien, levy, and seizure actions. The remainder was collected as a 
result of contacts with taxpayers about their tax delinquencies.
     The best data that IRS has on the potential misuse of collection 
authorities are from the Office of the Taxpayer Advocate.[5] However, 
those data alone are not sufficient to determine the extent of misuse. 
The data show that about 9,600 complaints involving allegations of 
inappropriate, improper, or premature collection actions were closed by 
the Advocate in fiscal year 1996, as were 11,700 requests for relief 
from collection actions because of hardship. Although the Advocate does 
not routinely collect data on the resolution of taxpayer complaints, it 
does collect data on the resolution of requests for relief. According 
to the Advocate, during fiscal year 1996, the requests for relief 
resulted in the release--either full or partial--from about 4,000 levy 
and seizure actions and 156 liens.
     These Taxpayer Advocate data are not sufficient to determine the 
extent to which IRS' initial collection actions were appropriate or not 
for several reasons. First, the release of a lien could result from a 
taxpayer subsequently paying the tax liability or offering an 
alternative solution, or because IRS placed the lien in error. Although 
the Taxpayer Advocate maintains an information system that accommodates 
collecting the data to identify whether IRS was the cause of the 
taxpayer's problem, the Advocate does not require that such information 
be reported by the IRS employee working to resolve the case or be 
otherwise accumulated. Thus, about 82 percent of the taxpayer 
complaints closed in fiscal year 1996 did not specify this information. 
Of the remaining 18 percent, about 9 percent specified that IRS' 
collection action was in error either through taking an erroneous 
action, providing misleading information to the taxpayer, or taking 
premature enforcement action.
     In addition, the Advocate's data do not cover the potential 
universe of cases in which a collection action is alleged to have been 
made improperly. The Advocate requires each complaint that is covered 
by its information system to be categorized by only one major code to 
identify the issue or problem. If a complaint had more than one 
problem, it is possible that a collection-related code could be 
superseded by another code such as one covering lost or misapplied 
payments. Also, complaints that are handled routinely by the various 
IRS offices would not be included in the Advocate's data because that 
office was not involved in the matter. For example, appeals related to 
lien, levy, and seizure actions are to be handled by the Collection 
Appeals Program (effective April 1, 1996).
     For fiscal year 1996, the Appeals Program reported that of the 705 
completed appeals of IRS' enforced collection actions, it fully 
sustained IRS actions on 483 cases, partially sustained IRS in 55 
cases, did not sustain IRS actions in 68 cases, and returned 99 cases 
to the initiating office for further action because they were 
prematurely referred to the Collection Appeals Program. According to 
IRS Appeals officials, a determination that Appeals did not sustain an 
IRS enforcement action does not necessarily mean that the action was 
inappropriate. If a taxpayer offered an alternative payment method, the 
Appeals Officer may have approved that offer--and thus not sustained 
the enforcement action--even if the enforcement action was justified. 
In any event, the Collection Appeals Program keeps no additional 
automated or summary records on the resolution of appeals as they 
relate to the appropriateness of lien, levy, or seizure action.
 further assessment of extent or causes of misuse of liens, levies, and 
          seizures is limited by irs' record-keeping practices
     IRS' record-keeping practices limit both our and IRS' ability to 
generate data needed to determine the extent or causes of the misuse of 
lien, levy, and seizure authority. Neither IRS' major data systems--
masterfiles and supplementary systems--nor the summary records (manual 
or automated) maintained by the IRS offices responsible for the various 
stages of the collection process systematically record and track the 
issuance and complete resolution of all collection enforcement actions, 
i.e., liens, levies, and seizure actions. Moreover, the detailed 
records kept by these offices do not always include data that would 
permit a determination about whether an enforcement action was properly 
used. But, even if collection records contained information relevant to 
the use of collection enforcement actions, our experience has been that 
obstacles exist to retrieving records needed for a systematic review.
 Major Information Systems Do Not Contain Data Necessary to Assess 
        Enforcement Actions
     IRS maintains selected information on all taxpayers, such as 
taxpayer identification number; amount of tax liability by tax year; 
amount of taxes paid by tax year; codes showing the event triggering 
the tax payment, including liens, levies, and seizures; and taxpayer 
characteristics, including earnings and employment status, on its 
Individual and Business Masterfiles. Also, if certain changes occur to 
a taxpayer's account, such as correction of a processing error in a 
service center, IRS requires information to be captured on the source 
of the error, that is, whether the error originated with IRS or the 
taxpayer.
     Although some related data are recorded in the Masterfiles, those 
data are currently not readily accessible because IRS does not have 
retrieval programs and IRS officials told us that developing such 
programs would take considerable time because scarce programming 
resources are unavailable due to higher priority information management 
systems work. Moreover, the data that are recorded do not include some 
key aspects of enforcement actions. For example, the Masterfiles do not 
contain information on attempted levies--IRS' most frequently used 
enforcement authority. Also, IRS does not maintain automated 
information showing all tax payments received as a result of lien or 
levy actions taken. While IRS procedures provide for coding tax 
payments according to the event triggering the payment (which could 
include liens, levies, and seizures), IRS advised us that controls are 
not in place to ensure that the automated data are complete, and, in a 
recent limited review, IRS found wide discrepancies between the 
automated information and actual collections. As a result of the lack 
of such key data, IRS cannot readily produce data on the overall use or 
misuse of its collection enforcement authorities or on the 
characteristics of affected taxpayers. The lack of such data also 
precludes us from identifying a sample of affected taxpayers to serve 
as a basis for evaluating the use or misuse of collection actions.
 Offices With Authority to Initiate Liens, Levies, and Seizures Do Not 
        Keep Summary Records Related to Appropriateness of Actions
     As I noted earlier, the IRS tax collection process involves 
several steps, which are carried out by different IRS offices that are 
often organizationally dispersed. Since authorities exist to initiate 
some of the collection actions at different steps in the process, 
several different offices could initiate a lien, levy, or seizure to 
resolve a given tax assessment. In addition, our examination of 
procedures and records at several of these offices demonstrated that 
records may be incomplete or inaccurate. For example, the starting 
point for a collection action is the identification of an unpaid tax 
assessment. The assessment may originate from a number of sources 
within IRS, such as the service center functions responsible for the 
routine processing of tax returns; the district office, ACS, or service 
center functions responsible for examining tax returns and identifying 
nonfilers; or the service center functions responsible for computer-
matching of return information to identify underreporters. These 
assessments may not always be accurate, and as reported in our 
financial audits of IRS, cannot always be tracked back to supporting 
documentation.[6] Since collection actions may stem from disputed 
assessments, determining the appropriateness of IRS actions would be 
problematic without an accurate tax assessment supported by 
documentation.
     Further, offices responsible for resolving taxpayer complaints do 
not always maintain records on the resolution of those complaints that 
would permit identification of instances of inappropriate use of 
collections authorities. We found several examples of this lack of data 
during our review.
  --If a taxpayer complains about enforced collection actions (other 
        than allegations of criminal or serious administrative 
        misconduct by specific IRS employees), the complaint is to be 
        handled initially by the office responsible for the action. 
        These offices do not routinely keep automated or other summary 
        records on the complaints or on the appropriateness of lien, 
        levy, or seizure actions taken. If this information is 
        recorded, it would be included in the affected taxpayer's 
        collection case file and, as I will discuss later, 
        systematically obtaining these files is impractical. Also, in 
        cases involving ACS, where an automated system is used for 
        recording data, specific information about complaints may not 
        be maintained because the automated files have limited space 
        for comments and transactions.
  --If a taxpayer complaint is not resolved by the responsible office, 
        the taxpayer may seek assistance from the Taxpayer Advocate. As 
        noted earlier, the Advocate has some information on complaints 
        about the use of collection enforcement authorities, but those 
        data are incomplete. In addition, starting in the last quarter 
        of 1996, the Advocate was to receive notification of the 
        resolution of taxpayer complaints involving IRS employee 
        behavior (that is, complaints about IRS employees behaving 
        inappropriately in their treatment of taxpayers, such as 
        rudeness, overzealousness, discriminatory treatment, and the 
        like.) These notifications, however, do not indicate if the 
        problem involved the possible misuse of collection authority.
  --If a taxpayer's complaint involves IRS employee integrity issues, 
        the complaint should be referred to IRS' Inspection Office. 
        According to Inspection, that office is responsible for 
        investigating allegations of criminal and serious 
        administrative misconduct by specific IRS employees, but it 
        would not normally investigate whether the misconduct involved 
        inappropriate enforcement actions. In any event, Inspection 
        does not keep automated or summary records on the results of 
        its investigations as they relate to appropriateness of lien, 
        levy, or seizure actions.
  --Court cases are to be handled by the Chief Counsel's General 
        Litigation Office. Internal Revenue Code sections 7432 and 7433 
        provide for taxpayers to file a claim for damages when IRS (1) 
        knowingly or negligently fails to release a lien or (2) 
        recklessly or intentionally disregards any provision of law or 
        regulation related to the collection of federal tax, 
        respectively. According to the Litigation Office, a total of 21 
        cases were filed under these provisions during 1995 and 1996. 
        However, the Litigation Office does not maintain information on 
        case outcomes. The Office has recently completed a study that 
        covered court cases since 1995 involving damage claims in 
        bankruptcy cases. As a part of that study, the Office 
        identified 16 cases in which IRS misapplied its levy authority 
        during taxpayer bankruptcy proceedings. IRS officials told us 
        that the results of this study led IRS to establish a 
        Bankruptcy Working Group to make recommendations to prevent 
        such misapplication of levy authority.
 Existing Records Cannot Always Be Retrieved
     Even if collection files included information relevant to an 
assessment of the use of enforcement authorities, obstacles exist to 
the reconstruction of records that would permit an assessment of the 
use or possible misuse of collection enforcement authorities. As we 
have learned from our prior work, IRS cannot always locate files when 
needed. For example, locating district office closed collection files 
once they have been sent to a Federal Records Center is impractical 
because there is no list identifying file contents associated with the 
shipments to the Records Centers. On a number of past assignments, we 
used the strategy of requesting IRS district offices to hold closed 
cases for a period of time, and then we sampled files from those 
retained cases. However, the results of these reviews could not be 
statistically projected to the universe of all closed cases because we 
had no way to determine if the cases closed in the relatively short 
period of time were typical of the cases closed over a longer period of 
time.
 irs officials said that collecting data to assess enforcement actions 
is impractical and unnecessary because taxpayers are protected through 
                          checks and balances
     We discussed with IRS the feasibility of collecting additional 
information for monitoring the extent to which IRS may have 
inappropriately used its collection enforcement authorities, and the 
characteristics of taxpayers who might be affected by such 
inappropriate actions. IRS officials noted that, although IRS does not 
maintain specific case data on enforcement actions, they believed that 
sufficient checks and balances (e.g., supervisory review of collection 
enforcement actions, collection appeals, complaint handling, and 
taxpayer assistance) are in place to protect taxpayers from 
inappropriate collection action. The development and maintenance of 
additional case data are, according to IRS officials, not practical 
without major information system enhancements. The IRS officials 
further observed that, given the potential volume and complexity of the 
data involved and the resources needed for data gathering and analysis, 
they were unable to make a compelling case for compiling the 
information.
     We recognize that IRS faces resource constraints in developing its 
management information systems and that IRS has internal controls, such 
as supervisory review and appeals, that are intended to avoid or 
resolve inappropriate use of collection authorities. We also recognize 
that the lack of relevant information to assess IRS' use of its 
collection enforcement authorities is not, in itself, evidence that IRS 
lacks commitment to resolve taxpayer collection problems after they 
occur. However, the limited data available and our prior work indicate 
that, at least in some cases, these controls may not work as 
effectively as intended.[7]
     IRS is responsible for administering the nation's voluntary tax 
system in a fair and efficient manner. To do so, IRS oversees a staff 
of more than 100,000 employees who work at hundreds of locations in the 
United States and foreign countries and who are vested, by Congress, 
with a broad set of discretionary enforcement powers, including the 
ability to seize taxpayer property to resolve unpaid taxes. Given the 
substantial authorities granted to IRS to enforce tax collections, IRS 
and the other stakeholders in the voluntary tax system--such as 
Congress and the taxpayers--should have information to permit them to 
determine whether those authorities are being used appropriately; 
whether IRS' internal controls are working effectively; and whether, if 
inappropriate uses of the authorities are identified, the problems are 
isolated events or systemic problems. At this time, IRS does not have 
the data that would permit it or Congress to readily determine the 
extent to which IRS' collections enforcement authorities are misused, 
the causes of those occurrences, the characteristics of the affected 
taxpayers, or whether the checks and balances that IRS established over 
the use of collection enforcement authorities are working as intended.
    Mr. Chairman, this concludes my prepared statement. I would be 
pleased to answer any questions you may have.
                                endnotes
     [1]: Under the Internal Revenue Code, levy is defined as the 
seizure of a taxpayer's assets to satisfy a tax delinquency. IRS 
differentiates between the levy of assets in the possession of the 
taxpayer (referred to as a seizure) and the levy of assets such as bank 
accounts and wages that are in the possession of third parties such as 
banks and employers (referred to as a levy).
    [2]: A lien is a legal claim that attaches to property to secure 
the payment of a debt. The filing of a lien would prevent the taxpayer 
from selling an asset, with clear title, without payment of the tax 
debt.
     [3]: The $46 billion figure is based on IRS' analysis of a sample 
of unpaid tax assessments that, according to IRS' financial statements, 
consist of balances due where IRS has demonstrated the existence of a 
receivable through information provided directly from the taxpayer or 
through actions by IRS that support or validate IRS' claim, such as 
securing a taxpayer's agreement. Excluded from the receivables are 
financial write-offs, allowance for doubtful accounts, and compliance 
assessments where the taxpayer has not responded to validate the claim, 
i.e., there is not an established claim with the taxpayer.
     [4]: IRS tax assessments may result from a number of actions 
ranging from the self-assessment of taxes by a taxpayer on a tax return 
filed voluntarily to an IRS assessment of a tax deficiency identified 
in an audit.
     [5]: The Office of Taxpayer Advocate is responsible for helping 
taxpayers to resolve problems they may be having with any of IRS' 
various offices, including Collections.
     [6]: See Financial Audit: Examination of IRS' Fiscal Year 1995 
Financial Statements (GAO/AIMD-96-101, July 11, 1996) and Financial 
Audit: Examination of IRS' Fiscal Year 1994 Financial Statements (GAO/
AIMD-95-141, Aug. 4, 1995).
     [7]: See Tax Administration: IRS Is Improving Its Controls for 
Ensuring That Taxpayers Are Treated Properly (GAO/GGD-96-176, Aug. 30, 
1996) and Tax Administration: IRS Can Strengthen Its Efforts to See 
That Taxpayers Are Treated Properly (GAO/GGD-95-14, Oct. 26, 1994).

Attachments.
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                  Prepared Statement of Witness No. 1

    Mr. Chairman, I thank you for the opportunity to appear before you 
and this Committee today. I have spent the last 25 years either working 
for the Internal Revenue Service Collection Division or representing 
taxpayers before the IRS Collection Division. I have collected taxes 
from thousands of taxpayers and I have also represented hundreds of 
taxpayers with tax problems. It is my sincere hope that my testimony 
today will serve to improve the operation of the IRS for the benefit of 
the taxpaying public.
    The Internal Revenue Code does not abuse taxpayers. A complicated 
tax code may result in some unfair taxation, but rarely is it the cause 
of abuse. Long multi-page tax forms also do not in themselves cause 
abuse. Frustration maybe, but not abuse. Even an audit, while certainly 
stressful should not result in taxpayer abuse.
    What then has caused the outcry of American citizens about abuse 
from the IRS, and the plethora of media reports of the heavy hand used 
by the IRS?
    Abuse of the taxpaying public occurs when the IRS improperly, and 
sometimes illegally, uses its vast power in the process of implementing 
some type of enforcement of the tax laws. Enforcement is the levy of a 
paycheck or bank account, the seizure of a car, or home, or business. 
It can also result in the forced liquidation of a taxpayer's life 
savings, IRA, or retirement account.
    There is only one small part of the IRS that implements all of 
these types of enforcement--the IRS Collection Division. The Collection 
Division is charged with the collection of unpaid taxes and securing 
unfiled delinquent tax returns. The Collection
    Division serves wage and bank levies, files tax liens, seizes cars, 
homes and businesses to enforce the collection of unpaid taxes. The 
Collection Division takes literally hundreds of enforcement actions 
every day! Yes, hundreds of these actions against taxpayers every day. 
It is the Collection Division of the IRS that is responsible for the 
overwhelming majority of IRS enforcement actions.
    Enforced collection of unpaid taxes is a necessity. As a result, 
the danger of taxpayer abuse is both inherent and inevitable. Many 
taxpayers will feel they have been abused simply because they do not 
like the fact that they are being compelled to pay their fair share. We 
understand that ``comes with the territory'' when enforced collection 
of taxes is part of one's every day job. So how does one ferret out the 
true cases of taxpayer abuse? The answer to that question is the 
important issue to be addressed.
     First of all, does the IRS correct abuses when they become aware 
of them? Often times, they do. However, the more important question is, 
does the IRS cover up occurrences of abuse? The answer is, yes! If the 
true number of incidences of taxpayer abuse were ever known, the public 
would be appalled. If the public also ever knew the number of abuses 
``covered up'' by the IRS, there could be a tax revolt.
    Why do we not know of these ``covered up'' abuses? The answer is 
simple. The IRS protects itself by management support of employee 
actions whether those actions are right or wrong. This acceptance of 
abusive actions by management is the root cause of taxpayer abuse.
    As I mentioned earlier, the initial cause of taxpayer abuse is IRS 
employees who actually implement enforcement actions, many of which are 
approved by management in advance. The enforcement may be necessary, 
however, it is the improper, or sometimes illegal, enforcement that 
causes unnecessary abuse. Sadly, some employees repeatedly do not 
follow proper collection policies and procedures and thereby repeatedly 
abuse taxpayers. There are several reasons why this occurs:
           1. IRS tax collectors, Revenue Officers, but more 
        importantly managers, are not properly trained in IRS policies 
        and Internal Revenue Manual (IRM) procedures.
           2. Revenue Officers, but more importantly managers, often 
        respond that IRM policies and procedures are ``guidelines'' 
        only and do not carry the force of law.
           3. When management condones the abuse, the Revenue Officer 
        believes the mistake is acceptable and is free to repeat the 
        error again.
           4. Revenue Officers learn the general perception from 
        management that most tax debtors are trying to cheat the 
        government, are crooks or flakes, and generally not willing to 
        pay their fair share of taxes.
           5. Revenue Officers capitalize on the taxpayer's inherent 
        fear of the IRS and the intimidation that they can inflict on 
        taxpayers without any consequences for their improper 
        enforcement.
           6. Revenue Officers, often with management approval, use 
        enforcement to ``punish'' taxpayers instead of trying to 
        collect the most money for the government.
     There is an IRS policy statement on Collecting Principles P-5-2 
#7,which is the most often ignored. In part, it states:
         ``We should help taxpayers who try to comply with the law, and 
        take appropriate enforcement actions when taxpayers resist 
        complying. Good judgment is needed in selecting the appropriate 
        collecting tool.''
    If this one policy statement were properly applied, it would 
eliminate most all taxpayer abuse. But it is IRS management that must 
lead the way.
    The most important factor in all of the foregoing information is 
that occasional frontline employee errors in judgment, violations of 
the Internal Revenue Manual and lack of understanding of policy 
statements are to be expected. However, what is not acceptable is 
frontline management support of these mistakes. What is unconscionable 
is upper management's support or tolerance of frontline management 
errors. The bottom line is that the abuse of taxpayers by the IRS is 
most often caused by the Collection Division--and the problem with the 
Collection Division is mismanagement.
    The following are some general scenarios of Internal Revenue Manual 
violations and taxpayer abuse that I have personally encountered:
           1. On far too many occasions, when a taxpayer fails or 
        forgets to supply one or two items on a long list requested by 
        the Revenue Officer, the Officer's response is the heavy hammer 
        of a paycheck or bank levy.
           2. Even when a taxpayer is represented by a Power of 
        Attorney, the Power of Attorney is quite often treated more 
        aggressively than the taxpayer. Revenue Officers generally 
        learn from management the perception that most Powers of 
        Attorney intentionally try to delay the resolution of a case. 
        This attitude is what causes the greatest animosity between the 
        tax representation community and the IRS. Disregarding the 
        policy statement that I read to you earlier results in damaging 
        the credibility of the IRS and the integrity of the Revenue 
        Officer.
           3. Quite often, the Revenue Officer finds a specious reason 
        to serve levies on the very source of income or assets that the 
        taxpayer disclosed to the IRS. Again, this only serves to 
        undermine the credibility and integrity of the IRS. It is no 
        wonder that the taxpaying public has an aversion to providing 
        any information to the IRS. It is an aversion created by the 
        IRS' repeated misuse of information provided to them by the 
        cooperative taxpayer.
           4. When a levy is served prematurely, even when the IRS 
        admits that the levy was improperly served, the routine IRS 
        response is that when the taxpayer provides additional 
        information, the IRS will ``consider'' releasing the levy. When 
        the information is provided, the IRS adds insult to injury by 
        not releasing the levy. The IRS cannot seem to grasp the 
        concept that when it makes a mistake, it should reverse the 
        error immediately, no matter what the consequence to the IRS.
           5. Revenue Officers routinely violate the relationship with 
        the Power of Attorney by contacting the taxpayer directly. It 
        is also a common practice of Revenue Officers and frontline 
        managers to try to intimidate a Power of Attorney into thinking 
        that the IRS has a right, false though it may be, to interview 
        the taxpayer personally.
           6. I have heard of Revenue Officers trying to discourage 
        taxpayers from hiring representatives and making disparaging, 
        and slanderous statements about representatives. Many taxpayer 
        representatives know IRS collection procedures better than the 
        Revenue Officers. In many instances I have heard and 
        experienced more harsh treatment of representatives simply 
        because the taxpayer's representative was former IRS.
           7. The Internal Revenue Manual states that, ``. . . 
        reasonable necessary living expenses are always allowed.'' 
        However, on more than one occasion I have seen the IRS punish a 
        taxpayer by not allowing reasonable necessary living expenses, 
        even current tax payments. Why? Because the Revenue Officer and 
        the manager did not think the taxpayer obeyed their commands 
        appropriately and simply felt that the taxpayer could somehow 
        survive without reasonable necessary living expenses.
           8. A Revenue Officer, with IRS District Counsel concurrence, 
        can serve what are termed, ``nominee'' liens and levies, 
        against third parties whom the IRS ``believes'' are in 
        possession of assets belonging to the taxpayer. The IRS is not 
        required to provide documentation to the taxpayer. The IRS is 
        not required to provide documentation to the taxpayer or the 
        third party supporting the basis of their ``beliefs.'' The IRS 
        basically has the attitude ``Sue us to prove that we are 
        wrong.''
           9. I have witnessed Collection Division Branch Chiefs, 
        Assistant Division Chiefs, Division Chiefs, Problem Resolution 
        (PRO) employees, and even an Assistant District Director, 
        violate or ignore Internal Revenue Manual procedures and 
        Treasury regulations simply because they wanted to punish a 
        taxpayer.

     I have seen more violations of IRS procedures and policies than I 
can count. The most appalling aspect of the foregoing examples is that 
in most every instance, IRS management supported the erroneous actions 
of the Revenue Officer.
    The Problem Resolution Office (PRO) is responsible for protecting 
the taxpayer from IRS abuse. But having appealed many taxpayer abuses 
to the PRO, I have found them to be utterly useless. PRO employees are 
typically Revenue Officers who came from Collection Division and who 
may very well return to the Collection Division after spending some 
time in the PRO. The PRO employees must depend on their evaluations and 
promotions from the same Collection Division management which they are 
required to police while assigned to the PRO. If the public thinks that 
the PRO is being objective in assisting with abuse cases, the public is 
being hoodwinked!
    What are the solutions to end this suffering of repeated abuses 
that I have just outlined? I have two basic answers.
    First, require the IRS to follow its Internal Revenue Manual as 
though it were law. The IRS should be required to follow the manual to 
the letter. Taxpayers are required to follow complicated tax return 
instructions, so why shouldn't the IRS be required to follow their own 
procedures?
     Second, make the IRS and management responsible for violations of 
Manual procedures. By that I do not mean holding frontline employees 
responsible for accidental or unintentional mistakes. However, when 
upper management condones the violations which bring great detriment to 
taxpayers, then management should be held personally responsible.
    As only one taxpayer representative out of thousands across the 
country, I have seen dozens of taxpayers severely damaged, even made 
homeless, by the IRS Collections Division. The true bottom line 
solution to resolving taxpayer abuses is IRS frontline management. 
Restitution by an administrative claim as opposed to court action for 
erroneous or improper actions would be a giant step in the right 
direction, but who will decide when an action is improper?
    If left in the hands of the IRS, you will have an IRS proud of the 
fact that they paid out a minimal amount of restitution funds over the 
course of the year.
    The culture of the IRS must change and it will not change on its 
own!
    Thank you.

                               __________

                  Prepared Statement of Witness No. 2

    Mr. Chairman and respective members of the Senate Finance 
Committee, it is a pleasure to be able to address you here today. I 
have been a law enforcement officer for approximately twenty years. 
Currently, I am a criminal investigator for the Internal Revenue 
Service's Internal Security Division.
    IRS' Internal Security Division has a multi-functional purpose. In 
the broad sense, we have a mission similar to that of a Federal 
Inspector General or internal affairs in a police department, along 
with some additional duties. Among our main responsibilities are 
conducting investigations into allegations of IRS employee misconduct, 
outside attempts to corrupt the administration of internal revenue 
laws, and employee safety.
    I am here to speak about some of the problems I have observed in 
performing my work for the Internal Security Division. By the nature of 
our mission, it is imperative that we be unencumbered in opening and 
investigating violations of law within the scope of our office.
    However, the culture and climate of the Internal Revenue Service 
often prevents Internal Security from fulfilling our responsibilities. 
In addition, the distrustful and secretive nature often hinders an 
investigation.
    A lack of independence from District and regional forces intent on 
not tarnishing the IRS' image has reduced administrative sanctions 
against employees to a point where they have no effect in controlling 
employee misconduct. IRS does not want bad press on employee misconduct 
at a time when the Agency's public image is at a low point. This has 
affected who we investigate and what happens after an investigation has 
been completed.
    Allegations against Internal Revenue Service managers and National 
Treasury Employee Union (NTEU) officials have not been investigated. 
The IRS is aware of the administration's favorable view of unions. NTEU 
greatly benefits from this. High level Internal Security officials do 
not want to take on a case involving the union or union officials.
    Allegations against IRS managers, including Criminal Investigation 
Division managers, are only worked when an allegation is serious and 
Internal Security management can not find a way out of assigning the 
case (i.e.: too many people are aware of an allegation). Some Internal 
Security managers believe that there is a bond between all IRS managers 
that should be maintained in the name of working relations.
    There have been violations concerning the taxpayer's Attorney/
Client privilege. IRS management often knows of these violations for 
months before reporting them to Internal Security. These types of cases 
can involve compromises in privileged communications.
    Investigations into serious allegations are shortened by nature of 
a 180 day baseline. Six months is insufficient time to conduct a 
complex investigation, especially when new allegations are developed 
during the investigation. After 180 days the investigator and the 
immediate manager start to feel pressure on closing the case. This is 
where the IRS ``bean counter'' mentality hurts us. An employee case is 
considered an ``actionable'' case. This means proven or not, opening 
the case earns the agent credit for what we call a ``stat.'' A case not 
involving an employee only gets a ``stat'' if there is judicial action. 
In other words, hypothetically, a case involving an armed militia is of 
less credit for the Inspection Division than a case involving the 
misuse of a government car by an IRS employee. Management feels that 
since a ``stat'' is obtained just by opening any employee case, there 
is no justification to have any case older than 180 days.
    Proven violations of criminal misconduct against an employee have 
been ``whitewashed'' by Internal Revenue Service managers and labor 
relations. Serious violations such as browsing, unauthorized access to 
taxpayer's records, and unauthorized release of taxpayer's information 
have received nothing more than counseling letters. These letters are 
then removed from the employee's personnel file after one year. This 
kind of action does not serve as a deterrent for misconduct.
    The IRS can, and does, investigate its own employees when it is 
suspected that an employee has acted improperly or illegally. However, 
Internal Security management has inappropriately notified and kept IRS 
District management officials abreast of these investigations. Such 
investigations are supposed to be kept confidential. However, more 
often than not, if these investigations target employees who are 
friends of management, they will be informed of the probe in time to 
quit the agency before adverse personnel action can be initiated 
against them. Once an IRS employee resigns, it is rare that the U.S. 
Attorney will accept that case for prosecution.
    At the same time there is outside interference on Internal 
Security's mission, there are internal pressures that corrupt our 
ethical standards and place morale at low levels.
    Internal Security managers exhibit arrogance while they themselves 
violate laws and commit prohibited personnel practices. Investigators 
have been told by Internal Security managers to record the 
conversations of other IRS employees without the Attorney General's 
approval. In other words, we have been directed to make non-consensual 
recordings of other IRS employees without fulfilling Justice Department 
requirements.
    Investigators are often not able to share taxpayer information on 
multi-agency investigations, yet Internal Security managers have 
``unofficially'' provided taxpayer information to managers at other 
agencies.
    IRS Internal Security managers are notorious for committing 
prohibited personnel practices. After an employee litigates, settles 
out of court or obtains a favorable Merit Systems Protection Board 
ruling (MSPB), the Agency takes the corrective action without 
consequence to the offending manager. In other words, a manager 
violates an employee's rights. The employee seeks and obtains redress 
from the Agency, but the manager is never sanctioned for violating the 
employee's rights in the first place.
     Internal Security managers are aware of how difficult it is for an 
employee to litigate against the Agency. After all, the Agency does not 
have to pay for legal representation. If a manager does not like an 
employee for personal reasons, there is nothing to stop the manger from 
violating the employee's rights. This is a ``us'' vs. ``them'' 
mentality that is more flagrant at this Agency than I've ever seen 
anywhere else.
    The ``corporate culture'' at 1111 Constitution Avenue is not 
conducive towards independent, well worked criminal investigations. In 
general, IRS pushes employees to open and close a tax or collection 
matter as quickly as they can. Often getting the proper tax is 
secondary to reducing overall case load as quickly as possible.
    For Internal Security this ``bean counter'' mentality means 
numbers, numbers, numbers! ``Cases open, cases closed--let's count them 
up so we can report at the end of the year what a good job we've 
done!'' Quality, where is that found in an accountant's book?
     In a way, this has created an atmosphere that has given us many of 
our employee misconduct cases. However, criminal law does not afford us 
the opportunity to work an investigation in the same manner. As long as 
Internal Security is part of the IRS, there can be no real oversight or 
independence; we are just part of a greater problem.
     Over my 20 years of service, I have become painfully aware of the 
ability of the IRS to retaliate against employees who dare to speak 
out. Many of the witnesses you will have before you in this hearing 
could be retaliated against for their testimony before this Committee. 
At times, I have been assigned an employee case and been told that 
management does not like that employee, and I have been told that I 
need to find something that they can use to terminate their employment. 
In the IRS, retaliation is swift and severe. I hope you will respect 
the risk that these witnesses took to appear before you, and protect 
them from any act of revenge by IRS management.
     I came here, today, not to harm this Agency, but to help it heal. 
You must decide the best method to accomplish that goal. The IRS cannot 
heal itself, so others and I have taken the chance that you are serious 
about changing and improving my Agency. I thank you for the opportunity 
to participate in that healing process.

                               __________

                  Prepared Statement of Witness No. 3

    Good morning Mr. Chairman and Members of the Finance Committee.
    I am presently a GS-12 Revenue Officer, which is also identified as 
a Field Collection Officer, with the Internal Revenue Service. I have 
worked as a Revenue Officer for over 35 years, having begun my career 
with the IRS when John Kennedy was President.
    I am here this morning to cite numerous incidents that I have 
observed in the course of my career as a Collection Officer with the 
IRS. I hope to use these examples to assist you and the Committee in 
making our Agency a better place, and ensure greater fairness for the 
American people.
    Over the last few months, you have heard a great deal about 
``browsing'' of taxpayers' files. Allow me to focus on this problem for 
a moment and describe to you specific situations that I have personally 
witnessed in the IRS workplace which I once considered commonplace:
   Tax data being accessed by IRS employees to check on 
        prospective boyfriends;
   Tax data being accessed by IRS employees to check ex-
        husbands for increasing income in order to receive increased 
        child support payments;
   Tax data being accessed on people with whom IRS employees 
        were having some kind of personal disagreement;
   Tax data being accessed on locally prominent or newsworthy 
        individuals, public figures--even team coaches;
   Tax data being accessed out of simple curiosity about a 
        friend, a relative or an employee's neighbor;
   Tax data being accessed on individuals who are perceived as 
        critical of the IRS, such as tax protestors or, as in one case, 
        a person who had simply written a Letter to the Editor.

     The following inquiries, which I consider to be ``institutional'' 
misuse of taxpayer information, are cases in which the IRS has tacitly 
sanctioned looking up data on citizens but who are not the subject of 
any investigation being conducted:
   Tax data being accessed on relatives and acquaintances of 
        the subject taxpayer, such as cases where the taxpayer is 
        suspected of using friends and relatives to hide income or 
        assets;
   Tax data being accessed on potential witnesses in government 
        tax cases;
   Tax data being accessed on jurors sitting on government tax 
        cases. Senators, there is no excuse for this type of action!

     Until recent years, the agency had an almost casual attitude about 
privacy and misuse of taxpayer records. It has tightened up now to the 
point that good employees, who never think of browsing or gaining 
illicit accesses, are fearful that they may be subjected to 
investigation for an innocent error.
    I have witnessed other serious abuses by the IRS. While these are 
separate incidents, they are indicative of a pervasive disregard of law 
and regulations designed to achieve production goals for either 
management or the individual agent.
    One particular incident that occurred in 1994 shows how at least 
some managers figure they can get away with almost anything. A 
listening device was discovered to exist in our IRS Office. Its 
ostensible purpose was a public address system, the users--managers and 
secretaries--had installed a receiving capability as well. With the 
receiving capability in place, they could press a button and overhear 
conversations taking place in the employee break room. While I have no 
personal knowledge of the existence of similar devices, I understand 
from others that some indeed existed in conference rooms used by 
taxpayers and their representatives. A co-worker and I found the device 
in the break room and learned how it worked. Learning of our discovery, 
higher level officials immediately had the devices removed and have 
attempted a reprisal by initiating an investigation of those who 
brought the matter to light.
    Another incident involved what would be called fraud if perpetrated 
by any other institution, and I still cannot believe it was done in the 
face of my objections. This was the Case of a Fake Tax Lien. While I 
made the matter known to superiors, they did not even seem to want to 
hear about it.
     When a taxpayer gets a notice of tax due from the IRS, a lien on 
the taxpayer's property may arise under the Internal Revenue Code. To 
be effective against third party purchasers and lenders, a Notice of 
Lien must be filed in the local courthouse. The public accepts that the 
IRS files only legitimate notices, but in this case a Notice of Lien 
was filed by the IRS when there was no assessment and therefore no 
legitimate lien. Mr. Chairman, there must be an assessment of tax due 
in order to file a lien--that is the law!
     And if that wasn't bad enough, the IRS asserted its seemingly 
correct lien against a third party--and that third party, a bank, had 
no way of knowing that the lien was not legitimate. The amount involved 
was not large, only a few thousand dollars, but the Collection 
employees were motivated to close the case rather than take the correct 
and legal action and lift the false lien. In this case the Service 
acted illegally by collecting money from the taxpayer and quietly 
closing the case.
     I believe this incident is indicative of a systemic problem 
plaguing the Agency--its original mission of collecting tax revenues 
has now become incidental to the production of statistics. A case that 
is written off as uncollectible, a Form 53, is counted as a closed case 
just the same as if it were fully collected. When I started with the 
IRS in the early 1960's, warning flags went up if uncollectible 
accounts amounted to more than 15%. I have now seen months in which 
over 60% of case closures were ``53'd''--closed as uncollectible.
     Senators, I have voluntarily come before you today to relay to you 
some of the deep concerns I have regarding the current mind-set of the 
IRS. I have been in a position to watch the gradual changes taking 
place among the IRS management and Agency attitudes. These are not 
positive changes and I am very concerned about the Service's future 
road. Although my comments today may appear negative and anti-Agency, 
it is my sincerest hope that they will help bring about just the 
opposite result. I hope you will come to the aid of the IRS with the 
positive and forthright oversight it so badly needs. The IRS needs 
help, it needs careful attention it cannot possibly provide itself. The 
help must come from the outside--through effective and forthright 
oversight of an ailing system.
     It is my deepest hope that this hearing will initiate these badly 
needed steps.

                               __________

                  Prepared Statement of Witness No. 4

    Mr. Chairman, Senators, thank you for allowing me to appear before 
you today and share with you some personal observations I have made 
during the more than 25 years I have been employed by the Internal 
Revenue Service. For the majority of these years, I have served as a 
Revenue Officer in the IRS' Collection Division.
    Until very recently, I felt a great sense of pride in my job. I 
actually looked forward to going to work. Over this past year, however, 
I have seen dramatic changes take place in this organization and, in my 
opinion, most were not for the good of the Service, or the public that 
we are supposed to serve.
    In the past, with few exceptions, I felt that management truly 
cared for its employees. I find this no longer to be the case. I have 
never seen overall morale in the IRS as low as it is right now. Many of 
my fellow colleagues have expressed to me recently that they no longer 
feel motivated, and many are feeling the physical and emotional effects 
of constant stress.
     Management fails to acknowledge employee concerns as evidenced by 
the fact that they refuse to hear grievances or address workplace 
concerns. Managers fail to realize that if employees are under stress 
or disillusioned with the Service, their attitude will surely flow to 
the taxpayers, the people we are paid to serve.
    I have recently seen many abuses by IRS managers as well as first 
line employees. These abuses range from the deception of taxpayers to 
gross misuse of travel funds. I could write a book on the subject of 
IRS abuse of both its employees and of the American taxpayer. Allow me 
to provide some brief examples.
    But before doing so, allow me to point out that I have never had a 
performance problem during my employment with the IRS. To the contrary, 
I have received numerous annual performance awards, so I am not here 
today because I have any axe to grind. I truly hope that by appearing 
before you that I can contribute--positively--to restore pride in our 
organization and re-establish the confidence of taxpayers.
    The area that causes me significant concern is the widely varied 
treatment that taxpayers can, and do receive. The IRS' approach toward 
a taxpayer can vary dramatically depending upon the IRS Group Manager 
whose group is assigned the case; depending on the employee working the 
case; and/or depending on the Collection Division policy in effect at 
the time the case is received. For example, you may have one business 
owner who is allowed to make monthly payments on delinquent employment 
taxes, while another business owner, given the same set of 
circumstances, is put out of business or forced into bankruptcy. In 
other words, one taxpayer may have their taxes simply ``written off'' 
as uncollectible, while another taxpayer under the identical 
conditions, may be forced to pay their taxes in full, or risk losing a 
home or business. Taxpayers deserve a consistent and fair policy when 
it involves the survival of their businesses.
    Another concern I have is based on the fact that collection 
initiatives change regularly. It appears that management is more 
concerned about maintaining high statistics than with the quality of 
work being performed, or even whether the taxes were collected, or were 
just written off. Whenever there is pressure to maintain high 
statistics, and the performance levels of the different departments 
within the organization are a source of constant comparison, you can be 
certain that someone is going to suffer the consequences of such an 
explosive situation--and it is usually the taxpayer.
    Recently a local Revenue Officer planned an elaborate sale to 
dispose of certain assets seized from a taxpayer. Many of the IRS 
employees were invited to help in the effort. The Group Manager was 
also present. Even though the Revenue Officer failed to achieve the 
minimum bid, as required by law, before selling the assets, he went 
ahead and sold the property at a significant loss to the taxpayer. 
Property which had a minimum bid of at least $40,000 was sold for 
roughly $7,000. Although this wrongdoing was found out and the Revenue 
Officer and his manager now face possible disciplinary actions, the 
real victim is the uncompensated taxpayer.
     In terms of travel abuse, I know of situations where managers 
arrange travel to outlying IRS offices simply to accommodate their own 
personal travel. They charge the government mileage and occasionally, 
even a night's lodging, in their effort to get to their final vacation 
destination. A previous District Director, who had a condo at the 
beach, would frequently make brief appearances at the outlying IRS 
offices while his family waited for him in the car. When his visit was 
over, he and his family would simply continue their drive to the beach. 
All this was done at taxpayer's expense while management was telling 
employees that they had to conserve on official travel, and that 
overnight lodging was not permitted. While this may seem minor compared 
to many other things you will hear in this hearing, trust me when I say 
these activities by management have a devastating effect on morale.
     In another abuse of travel funds, a Collection Division Chief 
assigned a Revenue Officer in her office to travel out of state in an 
effort to check-up on the work habits of other IRS employees. Extensive 
travel was involved and the secret investigation of our own agents 
caused significant confusion among taxpayers and IRS employees alike. 
When contacted by this IRS employee, who was following up behind the 
work of the real case agent, some taxpayers called their local IRS 
offices. Some of the local officials initially thought that an IRS 
impersonator was at work. In fact, a taxpayer with whom I had been 
working was contacted by this ``spy'' employee, and contacted me 
afterward, wanting to know what I thought was going on. Fortunately, in 
this case, nothing detrimental occurred to affect my taxpayer's case, 
but the manner in which this secret study was conducted was underhanded 
and humiliating to the rest of the IRS employees involved. In addition, 
if this information was determined to be of such importance to the out-
of-state Collection Division Chief, why not inquire about such 
information in a professional, above board manner, not deceptively 
behind employees' backs. The effort undoubtedly would have been more 
effective, less disruptive and certainly far less costly to everyone 
involved--taxpayers and IRS employees alike.
    Mr. Chairman, I greatly appreciate being afforded this opportunity 
to inform this Committee of what I have observed while working with the 
IRS, and the great disservice the actions of some of my colleagues have 
brought upon unsuspecting and undeserving taxpayers, not to mention 
each other. When the American taxpayer is defrauded of their due 
rights, we all stand to suffer.
    It is not a pleasure for me to share such stories with you. These 
stories are about my colleagues, those with whom I work. But my 
intention to do so is simple. I, too, am an American taxpayer, and I am 
asking this Committee to return the Service's management and 
operational standards to the level that will again earn my own trust, 
as well as that of all tax paying Americans.
     Thank you.

                               __________

                  Prepared Statement of Witness No. 5

    I am a long term employee of the Internal Revenue Service employed 
as a Revenue Officer. I am appearing before you today to bring to your 
attention concerns share by many of the employees in my District 
office.
     In the past two years all of the standards of ethics by which we 
have been lead to believe were an integral part of our job, and 
responsibility in dealing fairly with both taxpayers and employees, 
have been replaced with practices that were widely viewed as not only 
unethical, but often illegal.
    To elaborate on this statement let me refer you to IRS policy 
statement, P-1-20, which essentially states that employees will not be 
evaluated on statistics. This mandate was made in an effort to insure 
that taxpayers would be treated fairly by the IRS so as to curtail the 
IRS from being overly zealous in their collection activities. However, 
our office has taken to disregarding this policy and has unfairly 
targeted long-term, good employees in an effort to ``motivate'' others 
into making more seizures. We are told that if we are to ``justify'' 
our jobs, we must ``prove'' that we are willing to take strong 
enforcement action.
     I would like to point out to you that my evaluations over the 
years have always been very high. I am considered to be one of the most 
effective collection officers in this district. However, I find it 
disturbing to learn that even though I collect more money with a 
substantially high number of my cases paying in full, that I am now 
evaluated on my number of seizures rather than my over all 
effectiveness. The message we are receiving from upper management is 
let's take the action that will get us noticed. Don't worry about 
whether it's the right thing to do or not.
    Many other issues have come to my attention over the course of time 
that have created a threatening environment for myself and many other 
employees. Examples of these issues are:
   managers are targeted for termination on the basis of who 
        their ``friends'' are
   statistics are manipulated to make it appear that our office 
        is producing much higher statistics than what is factual
   selected employees are encouraged to file EEO complaints on 
        the basis of trumped up charges with the promise that their 
        claim will be settled so they can then be promoted--unfairly--
        without having to compete for the job against more qualified 
        employees
   Revenue Officers have been directed to release seized assets 
        because management personally feels indebted to the taxpayer's 
        representative--a former IRS employee and a friend of 
        management.

    The list of code and ethics violations is too long and cumbersome 
for me to further elaborate in on at this time. [I will be happy to 
provide the Committee with further documentation and information under 
proper disclosure guidelines] However, I am willing to answer any 
questions you may have.
     I am not revealing my identity hear today for fear I would run the 
risk of retaliation, not only for myself but for colleagues with whom I 
work. However, I am thankful that you permitted me this opportunity to 
come before you and make my concerns for the Agency known to you. If I 
did not believe in this Agency, I would not have dedicated eight years 
of my life working for it. However, motivation to execute one's 
responsibility should not be based on statistics at the expense of 
quality, nor should motivation be based on unfair competition among 
colleagues for promotion, nor for any other reason I sadly offered to 
you today. I hope you can bring integrity back to the IRS and allow the 
good and ethical employees to do their jobs well while serving the 
American taxpayers with the fairness and integrity they deserve.
    Thank you.

                               __________

                  Prepared Statement of Witness No. 6

     Mr. Chairman, Honorable Members of this Committee, I work in the 
Inspection Division of the IRS which investigates employee misconduct 
and responds to and investigates threats and assaults perpetrated 
against IRS employees. I am appearing here in front of you at great 
personal risk to my career with the IRS. I have seen too many times how 
swift and severe the IRS can be in retaliating against those who do not 
conform and agree with its own corporate mentality and attitude. I have 
seen how the IRS management attempts to kill the messenger, but ignores 
the message. I do not appear here today to try and hurt this Agency or 
the majority of dedicated career government workers who staff the 
offices, but I have seen the efforts by the IRS to try and heal itself. 
The result is but dismal window dressing to appease you in Congress 
while they continue with business as usual. The IRS and the public need 
and deserve a strong, independent, fully staffed and fully funded 
Inspection Division, able to carry out its investigations without 
interference, subtle or otherwise, from within. I do not see how this 
is possible given the IRS' current climate.
     In the IRS' nationwide all-manager training in the late 80's, one 
of the messages delivered was that it is permissible to lie or mislead 
the public and/or IRS employees as long as it accomplishes the goals 
and mission of the Agency. This information was relayed to me by a 
former IRS manager who attended this training session and could not 
believe that the IRS was instructing its managers to do so. He 
questioned this policy. Coincidently, his position was later 
eliminated.
    A 1992 Inspection Division re-organization memo addressed Regional 
management structure and other issues regarding the Inspection Division 
having at least 1 to 2 excessive levels of management. The Inspection 
Executive Committee voted to retain that same management structure. 
Coincidently, the Inspection Executive Committee is composed of the 
same people occupying the very positions that were identified as 
excessive.
    Criminal investigations cannot be worked with the same auditor 
mentality and goals as audits are conducted. In criminal 
investigations, leads generally dictate where and how long the 
investigation and case go on. Applying an artificial time limit to 
cases severely stifles the creativity and progress of an investigation, 
and sends the wrong message to the investigator to get the cases closed 
ASAP. The attitude is ``big cases, big problems; little cases, little 
problems!'' Quantity not quality is the message. According to Special 
Agents in the Criminal Investigation Division, (CID) emphasizes opening 
the traditional tax cases, the ``Mom and Pop'' cases, which are easy 
``hits'' and can be opened and closed quickly to bolster CID's average 
and numbers, rather than investing time in the large cases which take 
longer and require more resources. Big cases are often put off or 
overlooked in deference to the small, quick ones.
    Mr. Chairman, it has been my observation and experience that 
taxpayers are treated as being ``guilty until proven innocent.'' Based 
on my experience, this attitude coupled with an arrogant and 
indifferent manner in which citizens are sometimes treated, directly 
contributes to, and in some instances instigates many of the threats, 
assaults, resistance to and lack of cooperation experienced by IRS 
employees when dealing with the public. If police officers displayed 
this same attitude when interacting with the public, they would be 
fired! Why is this attitude tolerated and encouraged by the IRS?
     The Inspection Division's budget is directly controlled by the 
IRS. Therefore, by depleting or denying budget dollars, subtle limits 
and boundaries are placed on who and what is investigated, as well as 
what resources we get. We are dependent upon the very people and Agency 
we investigate for our budget resources, and every year have to go hat 
in hand to get money. Field Agents feel that there is too close a 
relationship and that we are too cozy with IRS Management to 
impartially and effectively investigate internal IRS matters without 
interference or pressure. Investigations into allegations of misconduct 
by IRS Management are generally not opened. Only by detaching the 
Inspection Division's Criminal Investigative Function from the Internal 
Audit Division and then moving our function under the Department of the 
Treasury's Office of Inspector General, or under the office of the 
Under Secretary of the Treasury for Enforcement, or permanently fencing 
our budget, will this pattern be broken. Every other federal law 
enforcement agency is hiring and expanding, why is Inspection the only 
federal law enforcement agency that is closing field offices and 
downsizing and proposing RIF's? A recent Chief Inspector memorandum 
reports that FY98 budget funds 1214 Full Time Equivalents, (FTE) yet we 
are still planning to close offices and do a RIF to get down to 1150 
full time employees. The IRS is also in contempt of Congress for only 
reducing field positions and closing field IRS offices and not reducing 
its Management structure. The current restructuring eliminates field 
investigator positions only. Only one Inspection Management position 
has been slated for elimination. There was a jockeying and 
gerrymandering of the span of control in order to retain every 
Inspection Management position, at the sacrifice and expense of field 
investigator positions.
    I have observed little or no accountability for misconduct, 
mistakes and/or errors, whether innocent or intentional, and seldom--if 
ever--does the IRS or the responsible employee ever apologize to the 
taxpayer for the errors committed by the IRS. Again, this displays an 
attitude of indifference or arrogance to the public it serves.
    During my experience with the IRS I have observed a real lack of 
``meet and greet'' qualities and people skills among IRS employees, as 
well as an arrogant attitude which originated with, and is perpetuated 
by, IRS Management down to the field level employees.
    Most of the complaints from taxpayers regarding abuse or misconduct 
on the part of the IRS employees do not rise to the level of 
criminality or egregiousness, the level at which my section would get 
involved. Such cases do not usually reach us and are thus handled by 
the Management of the involved employee. Union agreements and 
concessions by the IRS, create difficulty in disciplining employees 
beyond much more than a reprimand and slap on the wrist. This, too, 
must be strengthened to have any deterrent effect.
    Mr. Chairman, allow me to thank you for inviting me to testify 
before you today. As employees we are the ``IRS,'' and unless you get 
views and input from the field and do not rely entirely on the views 
from 1111 Constitution Avenue, you will not get a true picture of what 
needs to be changed. I am grateful that you sought out the feelings and 
experience of the street level agents for the Committee. As I stated 
earlier, it is not my intent to hurt the IRS in any way. It is my 
sincere hope that by informing you of some of the problems I have had 
the opportunity to personally observe from within the IRS, you and your 
Committee will provide the Agency with necessary help and motivation to 
correct them.