    [Senate Hearing 105-529]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 105-529

                               IRS RESTRUCTURING

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

                                    HEARINGS

                                   before the

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                           ONE HUNDRED FIFTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 2676

                                   __________

                  JANUARY 28, 29; FEBRUARY 5, 11, and 25, 1998

                                   __________

                Printed for the use of the Committee on Finance

                         U.S. GOVERNMENT PRINTING OFFICE
                                 WASHINGTON : 1998

                              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

                                  ----------

                                JANUARY 28, 1998
                               Opening Statements

                                                                       Page
    Lott, Hon. Trent, a U.S. Senator from Mississippi................     1
    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......     5
    Kerrey, Hon. J., Robert, a U.S. Senator from Nebraska............     6
    Gramm, Hon. Phil, a U.S. Senator from Texas......................     7
    Grassley, Hon. Charles E., a U.S. Senator from Iowa..............     8
    Bryan, Hon. Robert H., a U.S. Senator from Nevada................     9
    Baucus, Hon. Max, a U.S. Senator from Montana....................    10
    Graham, Hon. Bob, a U.S. Senator from Florida....................    11
    Breaux, Hon. John, a U.S. Senator from Louisiana.................    12
    Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia.    13
    Conrad, Hon. Kent, a U.S. Senator from North Dakota..............    14
    Murkowski, Hon. Frank H., a U.S. Senator from Alaska.............    15

                            Administration Witnesses

    Rubin, Hon. Robert E., Secretary of the Treasury.................    16
    Rossotti, Hon. Charles O., Commissioner of Internal Revenue
      Service........................................................    20

                                JANUARY 29, 1998
                               Opening Statements

    Roth, Hon. William V., Jr., a U.S. Senator from Delaware,
      chairman, Committee on Finance.................................    51

                            Congressional Witnesses

    Portman, Hon. Rob, a U.S. Representative from Ohio...............    52

                                Public Witnesses

    Richardson, Margaret M., Esq., partner, Ernst & Young, LLP,
      Washington, DC; former Commissioner of Internal Revenue........    59
    Alexander, Donald C., partner, Akin, Gump, Strauss, Hauer & Feld,
      LLP, Washington, DC; former Commissioner of Internal Revenue...    61
    Cohen, Sheldon S., partner, Morgan, Lewis & Bochius, LLP,
      Washington, DC; former Commissioner of Internal Revenue........    63
    Goldberg, Fred T., Jr., partner, Skadden, Arps, Slate, Meagher &
      Flom, LLP, Washington, DC; former Commissioner of Internal
      Revenue and former Treasury Assistant Secretary for Tax Policy.    65
    Tucker, Stefan F., chair-elect, section of taxation, American Bar
      Association, and member, Tucker, Flyer & Lewis, Washington, DC.    90
    Burnette, Douglas C., president, National Society of Accountants,
      Alexandria, VA.................................................    92
    Cherecwich, Paul, Jr., international president, Tax Executives
      Institute and vice president, taxes and tax counsel, Thiokol
      Corporation, Ogden, UT.........................................    94
    Mares, Michael E., chair, tax executive committee, American
      Institute of Certified Public Accountants, Washington, DC......    97
    Gates, Bryan E., chair, Federal Regulatory Subcommittee, National
      Association of Enrolled Agents, Gaithersburg, MD...............    98

                                FEBRUARY 5, 1998
                               Opening Statements

    Roth, Hon. William V., Jr., a U.S. Senator from Delaware,
      chairman, Committee on Finance.................................   105

                            Administration Witnesses

    Calahan, Richard B., Deputy Inspector General, U.S. Treasury
      Department, Washington, DC.....................................   106

                            Congressional Witnesses

    Willis, Lynda D., Director, Tax Policy and Administration Issues,
      U.S. General Accounting Office, Washington, DC.................   108

                                Public Witnesses

    Olson, Nina E., executive director, Community Tax Law Project,
      Richmond, VA...................................................   124
    Saltzman, Michael, tax attorney, White & Case, New York, NY......   126
    Schriebman, Robert, tax attorney, Rolling Hills Estates, CA......   128
    Strauss, Bruce A., enrolled agent, Jacksonville, FL..............   130

                               FEBRUARY 11, 1998
                          (innocent spouse tax rules)
                               Opening Statements

    Roth, Hon. William V., Jr., a U.S. Senator from Delaware,
      chairman, Committee on Finance.................................   141
    Baucus, Hon. Max, a U.S. Senator from Montana....................   143

                                Public Witnesses

    Cockrell, Elizabeth, New York, NY................................   144
    Pejanovic, Svetlana, New York, NY................................   148
    Andreasen, Karen J., Tampa, FL...................................   150
    Berman, Josephine, South Orange, New Jersey......................   153
    Beck, Richard C., professor of law, New York Law School, New
      York, NY.......................................................   165
    O'Connell, Marjorie, O'Connell & Associates, Washington, DC......   168
    Keating, David, National Taxpayers Union, Washington, DC.........   170

                               FEBRUARY 25, 1998
                               Opening Statements

    Roth, Hon. William V., Jr., a U.S. Senator from Delaware,
      chairman, Committee on Finance.................................   185
    Kerrey, Hon. J. Robert, a U.S. Senator from Nebraska.............   197

                                Public Witnesses

    Light, Paul C., director, Public Policy Program, The Pew
      Charitable Trusts, Philadelphia, PA............................   187
    Sanders, Dr. Ronald P., associate professor of public
      administration, The George Washington University, Washington,
      DC.............................................................   189
    Stanton, Thomas, academy fellow and vice-chair of standing panel
      on executive organization and management, accompanied by
      Herbert Jasper, academy fellow, National Academy of Public
      Administration, Washington, DC.................................   191
    Tobias, Robert M., president, National Treasury Employees Union,
      Washington, DC.................................................   204
    Shaw, G. Jerry, general counsel, Senior Executives Association,
      Washington, DC.................................................   205
    Woolner, Ray, national president, Professional Managers
      Association, Washington, DC....................................   208

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    Alexander, Donald C.:
        Testimony....................................................    61
        Prepared statement...........................................   219
        Responses to additional questions submitted by Senator Roth..   223
    Andreasen, Karen J.:
        Testimony....................................................   150
        Prepared statement...........................................   227
    Baucus, Hon. Max:
        Opening statements...........................................
          10, 143....................................................
    Beck, Richard C.:
        Testimony....................................................   165
        Prepared statement...........................................   229
    Berman, Josephine:
        Testimony....................................................   153
        Prepared statement...........................................   231
    Breaux, Hon. John:
        Opening statement............................................    12
    Bryan, Hon. Robert H.:
        Opening statement............................................     9
    Burnette, Douglas C.:
        Testimony....................................................    92
        Prepared statement...........................................   233
        Responses to additional questions submitted by Senator Roth..   242
    Calahan, Richard B.:
        Testimony....................................................   106
        Prepared statement...........................................   245
    Cherecwich, Paul, Jr.:
        Testimony....................................................    94
        Prepared statement...........................................   250
        Responses to additional questions submitted by Senator Roth..   257
    Cockrell, Elizabeth:
        Testimony....................................................   144
        Prepared statement...........................................   262
    Cohen, Sheldon S.:
        Testimony....................................................    63
        Prepared statement...........................................   264
        Responses to additional questions submitted by Senator Roth..   273
    D'Amato, Hon. Alfonse:
        Prepared statements..........................................
          276, 277...................................................
    Conrad, Hon. Kent:
        Opening statement............................................    14
    Gates, Bryan E.:
        Testimony....................................................    98
        Prepared statement...........................................   278
    Goldberg, Fred T., Jr.:
        Testimony....................................................    65
        Prepared statement...........................................   282
    Graham, Hon. Bob:
        Opening statement............................................    11
    Gramm, Hon. Phil:
        Opening statement............................................     7
    Grassley, Hon. Charles E.:
        Opening statements...........................................     8
        Prepared statements..........................................
          287, 288, 289..............................................
    Hatch, Hon. Orrin G.:
        Prepared statements..........................................
          290, 291...................................................
    Kerrey, Hon. J. Robert:
        Opening statements...........................................     6
    Keating, David:
        Testimony....................................................   170
        Prepared statement...........................................   291
    Light, Paul C.:
        Testimony....................................................   187
        Prepared statement...........................................   296
    Lott, Hon. Trent:
        Opening statement............................................     1
        Prepared statement...........................................   306
    Mack, Hon. Connie:
        Prepared statement...........................................   306
    Mares, Michael E.:
        Testimony....................................................    97
        Prepared statement...........................................   307
        Additional comments requested by Senator Roth................   323
    Moynihan, Hon. Daniel Patrick:
        Opening statement............................................     5
    Murkowski, Hon. Frank H.:
        Opening statement............................................    15
    O'Connell, Marjorie:
        Testimony....................................................   168
        Prepared statement...........................................   327
    Olson, Nina E.:
        Testimony....................................................   124
        Prepared statement...........................................   329
        Responses to additional questions submitted by Senator Roth..   336
    Pejanovic, Svetlana:
        Testimony....................................................   148
        Prepared statement...........................................   340
    Portman, Hon. Rob:
        Testimony....................................................    52
        Prepared statement...........................................   341
    Richardson, Margaret M., Esq.:
        Testimony....................................................    59
        Prepared statement...........................................   342
        Responses to additional questions submitted by Senator Roth..   349
    Rockefeller, Hon. John D., IV:
        Opening statement............................................    13
    Rossotti, Hon. Charles O.:
        Testimony....................................................    20
        Prepared statement...........................................   354
    Roth, Hon. William V., Jr.:
        Opening statements...........................................
          2, 51, 105, 141, 185.......................................
    Rubin, Hon. Robert E.:
        Testimony....................................................    16
        Prepared statement...........................................   366
    Saltzman, Michael:
        Testimony....................................................   126
        Prepared statement...........................................   367
        Responses to additional questions submitted by Senator Roth..   375
    Sanders, Dr. Ronald P.:
        Testimony....................................................   189
        Prepared statement...........................................   379
    Schriebman, Robert:
        Testimony....................................................   128
        Prepared statement...........................................   385
    Shaw, G. Jerry:
        Testimony....................................................   205
        Prepared statement...........................................   387
        Letter to Senator Roth, dated January 21, 1998...............   392
    Stanton, Thomas:
        Testimony....................................................   191
        Prepared statement...........................................   394
        Supplemental remarks.........................................   404
    Strauss, Bruce A.:
        Testimony....................................................   130
        Prepared statement...........................................   406
        Responses to additional questions submitted by Senator Roth..   412
    Tobias, Robert M.:
        Testimony....................................................   204
        Prepared statement...........................................   413
    Tucker, Stefan F.:
        Testimony....................................................    90
        Prepared statement...........................................   417
        Additional views.............................................   425
    Willis, Lynda D.:
        Testimony....................................................   108
        Prepared statement...........................................   429
    Woolner, Ray:
        Testimony....................................................   208
        Prepared statement...........................................   435

                                 Communications

    Adams, Paula A...................................................   439
    American Bankers Association.....................................   441
    American Institute of Certified Public Accountants...............   442
    Anderson, Timothy................................................   447
    Association of American Railroads................................   451
    Federal Managers Association.....................................   452
    Illinois State Bar Association...................................   459
    Krent, Harold J..................................................   454
    Long, Robert D...................................................   460
    New York State Society of Certified Public Accountants...........   462
    Powers, Amy M....................................................   467
    Securities Industry Association..................................   470
    Shepard, James I.................................................   472
    Siegel, Jonathan R...............................................   473

                               IRS RESTRUCTURING

                                  ----------

                          WEDNESDAY, JANUARY 28, 1998

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 10:07
    a.m., in room SD-215, Dirksen Senate Office Building, Hon.
    William V. Roth, Jr. (chairman of the committee) presiding.
        Also present: Senators Grassley, D'Amato, Murkowski, Gramm,
    Lott, Moynihan, Baucus, Rockefeller, Breaux, Conrad, Graham,
    Bryan, and Kerrey.
        The Chairman. The committee will please be in order. I
    would ask Secretary Rubin and Charles Rossotti to come forward,
    as they have done. It is a pleasure to welcome both of you
    gentlemen. We appreciate your being here.
        I understand that the Leader has another meeting, so, with
    the indulgence of all the members, I would call upon him for
    any opening remarks he may have.

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

        Senator Lott. Thank you very much, Mr. Chairman,
    colleagues. I look forward to working with you, Mr. Chairman,
    Mr. Moynihan, and all of the members this year. I think we have
    got a lot of very important things we can do.
        I commend you for what we achieved last year in our tax cut
    bills and the progress that was made at the IRS oversight
    hearings that we all participated in. I thought that was a very
    illuminating and very important process to get to what we need
    to do in the IRS area.
        Now, since you are giving me this opportunity, I will be
    brief. Mr. Secretary, it is always a pleasure to have you back
    here. But especially, Mr. Rossotti, I want to welcome you. In
    the back room we were joking a little bit about the task you
    have before you. We do wish you very well and we hope you have
    great success in the position you have.
        You are undoubtedly a brave man for taking the job as IRS
    Commissioner. But I did have the pleasure to look at your
    resume and visit with you and I think that you are the right
    man for the job now.
        I must be honest with you, you run an agency I do not like
    and wish did not exist, quite frankly. Some call IRS a
    necessary evil. I know I agree with the second part of that
    description, but I have not made up my mind if I agree with the
    first part.
        Now, you are in the unenviable position of attempting to
    restructure an agency within an administration that sometimes
    does not seem to want to do all that needs to be done. We have
    a bill before us that came out of the House. Clearly, we think
    more needs to be done.
        As I said last night, we just cannot have a government
    agency in America that people are afraid of, that they feel
    threatened by and intimidated. As the audits have shown, there
    have been quotas and there have been improper seizures. There
    are major problems over there.
        But I look forward to studying your reorganization plan. I
    think you should have that opportunity. I hope you will lead.
    In the past, I think what we have had is a little lip service,
    while quietly the word is being sent down to the agents, just
    keep doing what you've been doing.
        I am not going to say absolutely how much of that was going
    on. But you must make it clear that this culture of threats,
    intimidation, quotas, and unfair treatment of American
    taxpayers is going to end.
        So we will look at your reorganization plan. We will have
    what I hope will be some helpful legislation for you to be able
    to do that. Until I have evaluated your proposal I will not
    deem it too little or say anything critical. I am going to be
    hoping for the very best.
        But you are there at a critical time. You must be
    aggressive and work with us. If you need tools, tell us what it
    is. You do not work, really, for the President and you do not
    work for us, you work for the American people. This agency is
    in a mess and it is important that we restore the trust of the
    American people in at least being treated fairly. So we will
    look forward to seeing your plan.
        Mr. Chairman, I would like to have my one-page statement
    put in the record at this point.
        The Chairman. Without objection.
        [The prepared statement of Senator Lott appears in the
    appendix.]
        Senator Lott. Thank you all.
        The Chairman. Thank you, Mr. Leader.
        We will call on everybody to make an opening statement. We
    would ask everyone but Senator Moynihan and myself to be
    limited to three minutes, because we do have a full day this
    morning.

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

        The Chairman. Let me begin by welcoming my colleagues and
    members of this committee to the first in a series of hearings
    that I anticipate will have a profound effect on the life of
    every family and taxpayer in America.
        Never before has Congress had the opportunity it now has to
    make necessary and lasting reform to the Internal Revenue
    Service. This, of course, is not the first time the issue of
    improving the agency that collects our tax revenue has come
    before Congress, and most likely it will not be the last, but
    never before has the agency been so ripe for reform.
        Never has there been such agreement on the need for
    restructuring--agreement that runs not only throughout both
    houses of Congress--but includes the administration and the
    hierarchy of the IRS itself.
        When conditions line up this way, I believe history is
    ready to be made. The potential for real reform that we have
    before us is certainly the result of efforts too numerous to
    mention. Both Houses of Congress have focused on this issue.
        The work of the Restructuring Commission was invaluable to
    our effort, as are the ongoing investigation and oversight
    efforts of this committee, not to mention the determined
    leadership of the IRS's new Commissioner Charles Rossotti.
        I appreciate the response and early efforts the agency made
    in the aftermath of our first series of oversight hearings last
    September. Commissioner Rossotti and I have met on several
    occasions, including attending a Taxpayer Service Day in
    Wilmington, Delaware. I find him sincere and very much resolved
    to press forward with reforms that will change the way the IRS
    does business.
        Already the agency has increased the safeguards that must
    be taken before it can seize a taxpayer's property. It has
    admitted to using quotas, statistics, and standards of
    measurement that pit IRS employees against taxpayers in
    adversarial and potentially destructive confrontations. And it
    has made a concerted effort to strengthen taxpayer services. In
    fact, Commissioner Rossotti has undertaken an ambitious effort
    to bring balance to the agency's dual mission of service and
    enforcement. I appreciate his efforts and laud his leadership.
        Now, these self-imposed reforms mark a noble beginning in
    our collective effort to bring real change to the agency, but
    they are just that, a beginning. The many shortcomings, abuses,
    and inefficiencies we are discovering within the IRS are not
    solely the fault of the agency itself. Congress and the
    administration must share in the blame.
        Consequently, necessary change will not be made by internal
    efforts alone. We need legislative remedies, we need real
    enforcement, disciplined congressional oversight, and a long-
    term change in culture and attitudes.
        If history has taught us anything about the IRS, it is
    that, despite past efforts to reform the agency, it has
    consistently succeeded in falling back into a pattern of
    mismanagement, abuse, and inefficiency.
        There is a well-established history of accusations,
    congressional hearings, minor reforms, and then nothing! No
    further oversight, no followthrough, no real effort to get to
    the core of the problems that plagues the agency.
        This--again, largely the fault of Congress--has led to
    cynicism in the taxpayer and a dismissive attitude within the
    agency that says, if we hold on long enough, this will pass and
    we can get back to our old way of doing things.
        Well, this time around I am determined to change business
    as usual. As I have said, thanks to the efforts of many, we
    have the conditions necessary for real reform, for
    restructuring that will change the way the agency interacts
    with the taxpayer and the way Americans feel about the IRS. In
    this effort, we must be thorough.
        Reform must go beyond simply creating an oversight board to
    establishing one that is independent of political and internal
    influences, one that has the ability to be an independent check
    on the way the IRS does business.
        Reform must go beyond making cosmetic changes that address
    personal concerns about abuse and ineffective management, to
    incorporate lasting change that gets at the very core of the
    agency's culture, constructively shaping it, and improving
    morale, efficiency, and service.
        Reform must go beyond simply beefing up current internal
    inspections in our effort to root out abuses, lawless behavior,
    and derelict employees; to build an inspection system that is
    independent, able to operate openly, honestly, thoroughly,
    beyond the influence of management and other agency
    interferences.
        Perhaps most importantly, reform must go beyond a few minor
    improvements of strengthening taxpayer protections to literally
    addressing the balance of power between the taxpayer and the
    agency.
        This includes not only looking at changing burden of proof
    rules, but addressing how interest and penalties are assessed,
    How liens and seizures are used; how the agency imposes labels
    like ``Illegal Tax Protesters'' and ``Potentially Dangerous
    Taxpayer,'' on Americans, and how those labels affect
    taxpayers, their futures, and their relationship with the
    agency. It also includes making certain that taxpayer cases are
    resolved expeditiously and conclusively.
        A vital part of increasing taxpayer protection includes
    increasing accountability among IRS employees, bringing
    simplicity and consistency to the process that governs a
    taxpayer's interaction with the agency, and includes bringing
    sunshine to the IRS, stripping away the cloak of secrecy and
    mystery and the use of intimidating tactics, and making the
    Office of Taxpayer Advocate truly that, the taxpayers'
    advocate, completely independent of management influence and
    bureaucratic interferences.
        Well, as you can see, what this committee, this Congress,
    has before it is a tall order. These areas I have listed, while
    they may appear to be a complete list, are only a sampling of
    what we need to look at in our restructuring efforts. In the
    interest of time, I will let them stand as an overview, a
    beginning.
        Our hearings today, tomorrow, and the weeks ahead will
    serve to fill in the gaps. We will hear from experts, both
    inside and outside of the agency. I am particularly looking
    forward to the insights that Secretary Rubin and Commissioner
    Rossotti will share with us.
        I remind my colleagues, as well as the media and all those
    who might be watching and listening, that while the current may
    serve our efforts today, we will only succeed through a sincere
    effort between Congress and the administration.
        Our success will only be as strong and lasting as our
    mutual resolve to make real reforms and build into the system a
    mechanism that provides constant oversight. The IRS must have
    the power and the authority necessary to collect tax revenue,
    but that power and authority must be used responsibly and under
    the direction of an ever-vigilant Congress.
        Senator Moynihan.

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

        Senator Moynihan. Thank you, Mr. Chairman. You are very
    generous to welcome us back to our first hearing of the second
    session.
        I know I have asked a number of colleagues how they passed
    the interval since we last recessed, and most said they spent
    most of their time watching advertisements on television for
    the new Roth IRA.
        The Chairman. Chuck says they call it the Roth IRA.
        Senator Moynihan. We welcome Secretary Rubin, of course. We
    would hope that he might want to refer in his remarks to the
    extraordinary proposals and outline he made in his lecture at
    Georgetown recently on the financial situation in Asia and the
    prospects for international regulation of financial matters
    beyond the Breton Woods proposals, which are a half century old
    now, which of course is the task before Mr. Rossotti, who
    honors us with his presence.
        Mr. Chairman, you said never before has there been such an
    opportunity to address the problems, the procedures of the
    Internal Revenue Service. I think you would perhaps agree that
    never before have we seen the advances in what could
    legitimately be called management science. It has quite
    transformed large American organizations in the last 20 years
    or so, with a theoretical basis. I mean, it is not just trying
    to see what works, but to figure out what ought to, and testing
    it.
        I have had the privilege of seeing Mr. Rossotti's
    testimony. It seems to me he has brought that management
    science from the private sector where he flourished so to this
    assignment. He is dealing, after all, with an organization
    established in 1862.
        This is a 19th century organization and it has all the
    regular features--stigmata, if you like--of the idea of a civil
    service organization of that time. Every century and a half you
    can take a new look at an organization, and you certainly have
    done, as did Senator Kerrey and Senator Grassley in their
    earlier efforts, which follow on from here.
        I hope you will have a chance just to mention the year 2000
    problem in your computers. The General Accounting Office has
    said that the potential here is catastrophic, far beyond any
    organizational changes in the near term. If we do not handle
    that, none of us will be back here, frankly, among other things
    because they will have turned the lights off.
        What you are dealing with in the IRS, many of these same
    patterns will be found in the Social Security Administration,
    the only other comparably sized and functioning organization of
    our time. It is an early 20th century organization, but it
    still shows the patterns of an earlier age in organizations.
        So I look forward to the hearing. I know that the Chairman
    will not mind if I express special gratification to see that
    Donald Lubick will be here before us for confirmation as
    Assistant Secretary of the Treasury, a job he has been doing
    for a year and a half and did so well three administrations
    ago.
        It says here he is from Maryland. If he wants to correct
    that before he gets up here, he has my vote, because, in fact,
    he is from Buffalo. But we will leave that to another matter.
        Mr. Chairman, thank you for welcoming us back.
        The Chairman. Thank you, Senator Moynihan.
        Senator Kerrey.

    OPENING STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR FROM
                                NEBRASKA

        Senator Kerrey. Thank you very much, Mr. Chairman.
        First of all, I want to thank Secretary Rubin. It is a
    pleasure, at this stage in the game, to be on the same side
    with you on this issue.
        I must note for the record that, during Congressman Portman
    and my deliberation, and Senator Grassley and I's deliberation,
    that the Treasury Department, though we had disagreements on a
    couple of issues, responded to me changes for the IRS, and the
    most notable change, of course, made me say to Mr. Rossotti
    yesterday when we were having a conversation, that it was a
    good day's work just to see that you've broken with tradition
    and brought a manager on as a head of the IRS.
        I must note what Senator Moynihan just said about
    management practices. There is no question that this has become
    a science, that this has become a new area of study. One of the
    areas of great controversy in our deliberation, I see you
    informed me yesterday that you were going to include, and
    showed me in your testimony, the need to reorganize the IRS
    along functions rather than the stovepipe organization that we
    had before.
        Both Congressman Portman and I looked at that and liked it.
    We were unable, because of the time of our commission, to get
    our arms around it, but we did include it as a part of our
    recommendations.
        I note that because I think it is terribly important,
    although I believe the law needs to be changed. I believe you
    need more authority. I believe we need incentives to go to
    electronic filing.
        There needs to be more oversight and accountability. There
    are lots of things that need to be changed. None of it works
    unless you get the right person in there to manage it with the
    expertise, with the talent, with the understanding of how to
    manage an agency.
        You told me yesterday that you had met a couple of times
    with the Treasury Employees Union. You know that if you propose
    any structural change, even if we give you the authority in
    statute, that it is going to be difficult and you have to get
    the employees' representatives on board to get that done.
        One of the complaints that we heard in our field hearings,
    Mr. Chairman, was that the previous reorganization effort was
    actually pulling people out of the field, moving them back into
    central locations.
        Your effort will reverse that. Your effort, as a
    consequence of organizing by function, will actually put more
    people out and give customers better service than they had
    before. It will not be politically easy; in some cases it is
    not without some controversy.
        But I must note at the outset, Secretary Rubin, although
    our disputes and disagreements became quite public, it was not
    quite as public that you made an awful lot of changes, and the
    most significant was bringing Mr. Rossotti on board.
        I hope, Mr. Rossotti, we can change the laws as quickly as
    possible. I appreciate and applaud the leadership that the
    Chairman of this committee has given us in this area. I know he
    has got some excellent ideas of how to make this legislation
    better and intends to get that done. I appreciate very much
    Senator Lott making it a high priority.
        I hope that we can, 10 years from now, say that both with
    your leadership and the change in the law that we make this
    year, that the people of the United States of America look at
    the tax collection agency and say that it is a better and more
    friendly operation.
        The Chairman. Thank you, Senator Kerrey.
        Senator Gramm.

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

        Senator Gramm. Thank you for holding this hearing. I want
    to thank our witnesses for being here. I was somewhat taken
    aback last night to hear the President chiding the Senate for
    not passing legislation reforming the IRS, and urging us to
    pass the House bill.
        I am not so feeble-minded as to not remember that the
    President originally opposed the House bill. I would simply
    like to say, Mr. Chairman, that we are here because we do not
    think the House did enough. I do not believe our problem is a
    management problem and I do not believe it is a problem of
    insensitivity. It is a problem because power corrupts.
        We need fundamental changes. I want to shift the burden of
    proof so that every taxpayer, in dealing with the IRS, has the
    same presumption of innocence that every criminal has in every
    courthouse in America.
        I want to try to find a way to separate powers. I think it
    is fundamentally wrong to have one agency that is the
    prosecutor, the judge, and the jury, that has the power
    unilaterally to take somebody's home or take somebody's
    business.
        I do not quite know how to do it, but I am hopeful that in
    these hearings we will find a way of guaranteeing that, before
    somebody's home or somebody's business can be taken by the IRS,
    that they get their day in court to make their case, where they
    are heard, and where an independent judgment is rendered.
        I also believe that if the IRS audits somebody, if the
    taxpayer spends thousands of dollars on attorneys and CPAs to
    defend themselves, if at the end of the day they have been
    found to have done nothing wrong, I believe that the Internal
    Revenue Service ought to be responsible for reimbursing them
    for those costs.
        Finally, I believe that it would be helpful, Mr. Chairman,
    if we could come up with a system that guaranteed the rotation
    of senior executives from the private sector into the IRS so
    that not everybody in the senior management positions have been
    in the service for 20 or 25 years. We might set up a system
    where a third of the senior management would rotate in from the
    private sector, serve for a period of time, maybe 4 or 5 years,
    and then rotate back in to the private sector.
        So I believe fundamental reforms are needed. I believe we
    will pass a very strong bill. I do not know whether in the end
    the President will like it, but I believe he will sign it.
        Thank you, Mr. Chairman.
        The Chairman. Thank you.
        Senator Grassley.

     OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR
                               FROM IOWA

        Senator Grassley. I am glad we are here on this issue,
    finally, because restructuring the Internal Revenue Service is
    badly needed. It has already been mentioned by several my
    service on the Commission on Restructuring the IRS and working
    with Senator Kerrey on the introduction on the first piece of
    comprehensive legislation, which was the product of that year-
    long commission work.
        I had hoped that we would pass this bill last fall, but
    this year certainly we must pass it and have it signed into law
    by April 15. In addition, we must pass solid, real reform. As
    the Chairman has noted publicly, we get one chance at this
    legislation so we had better do it right.
        There are real problems dealing with the IRS and there are
    real problems at the IRS. In this committee's hearings last
    fall, we heard horror stories about our government's treatment
    of taxpayers. Every time I go home I hear constituents tell
    about these firsthand experiences, and rarely are these
    experiences good.
        For this reason, it is not good enough just to try, we must
    try and we must succeed. I have a seven-point plan, and I doubt
    if very many people would disagree with whether it is seven,
    eight, or nine. But we need to get the job done.
        Increase taxpayers' rights and assure fairness for the
    taxpayers. For starters, we must increase the independence of
    the taxpayers' advocate at both the local and national levels
    and make sure that the taxpayers can find these advocates.
        We must also change the penalty system so that penalties
    are not accruing unfairly. We must seriously look at increasing
    innocent spouse protections and eliminating interest
    differentials between over-payment and under-payment.
        Point Number 2. Focus on customer service rather than
    customer abuse. Any legislation we must pass must restructure
    the IRS so that it views the IRS as a customer and aims to give
    this customer the best and most helpful service possible. Thus,
    reorganize the IRS with the taxpayer in mind.
        This means that there would be divisions to help small
    business with their concerns and problems, a separate one to
    help big business, and so on. This idea was considered by the
    Restructuring Commission and we came up with the idea that it
    needs serious exploration. Now I am glad to hear that
    Commissioner Rossotti has embraced the idea. This
    reorganization may be a good first step to reach our goal of
    focusing on customer service rather than customer abuse.
        Third, provide for real, effective, constant oversight of
    the IRS, particularly making sure that we are very vigilant on
    this, to help the public and the press help us assist in this
    oversight.
        Point Number 4. Make the IRS culture into that of a
    business rather than that of a government bureaucracy.
        Point Number 5. The IRS must meet the same expectations
    that it expects from the taxpayers.
        Point Number 6. Restore public confidence in the IRS.
        Point Number 7. Make the Tax Code more user friendly.
        If we stick to these seven principles, then we will have
    real IRS reform. Real IRS reform is a way that we can help
    American taxpayers. The IRS has unfairly ruined people's lives
    and we in the Congress should be here to help improve their
    lives.
        The Chairman. Senator Bryan.

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

        Senator Bryan. Mr. Chairman, thank you. Let me congratulate
    you on your decision to begin our legislative agenda hearings
    with the IRS reform. In my view, there is nothing more
    important we can do for the American people than to enact IRS
    reform this year, and to do so quickly.
        The need for reform is well documented, both by the
    hearings conducted by this committee and by many other sources.
    While there are many specific improvements we can and should
    make at the IRS, the biggest problem we face at the IRS does
    not easily lend itself to a legislative solution. It is a well-
    entrenched corporate culture which often views taxpayers as the
    enemy rather than the customer.
        The administration has taken an important first step in
    improving the IRS by selecting Mr. Rossotti. Unlike his
    predecessors who had distinguished backgrounds in law and
    accounting, Mr. Rossotti brings a management background and
    perspective and I think that that will be immensely helpful. I
    look forward to hearing the details of the IRS restructuring
    that he will share with us later this morning.
        Mr. Chairman, there is no reason we cannot get IRS reform
    legislation on the President's desk by April 15, the tax filing
    deadline, and give Mr. Rossotti the tools that he needs to
    accomplish the difficult job that we have entrusted to him.
        The Kerrey-Grassley bill contains many provisions, a host
    of refinements to improve the existing Taxpayer Bill of Rights,
    including such provisions as shifting the burden of proof in
    certain civil cases, and strengthening the taxpayer advocate by
    removing that position from the IRS career path.
        In addition, the bill provides new encouragements and
    requirements for the IRS to move into the 21st century with
    additional paperless and electronic filing. I must say that is
    one encouraging aspect I see, the number of individuals who are
    availing themselves of telefiling.
        Mr. Chairman, in Nevada we have had our share of negative
    encounters with the IRS over the years. For example, a few
    years ago the IRS established its own illegal book-making
    business in Nevada in an ill-fated sting operation that yielded
    little and led to all sorts of suspicious dealings.
        More recently, we have learned that, in spite of Congress
    barring the use of quotas for personnel evaluations in 1988,
    widespread use of quotas continued for years, including in Las
    Vegas, and information of that practice was sent to me by fax
    anonymously from IRS employees in Las Vegas during the hearings
    that we held last year.
        Finally, let me say these types of incidents abuse honest
    taxpayers and reduce the credibility of an agency that will
    never be our Nation's most popular.
        Mr. Chairman, I think that with your support and the
    bipartisan cooperation that characterized the activity of this
    committee early last year, we can and must enact IRS reforms
    prior to the 15th of April, and I look forward to working with
    you and the other members of the committee to accomplish that
    objective.
        The Chairman. Senator Baucus.

       OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM
                                MONTANA

        Senator Baucus. Than you, Mr. Chairman. I, along with other
    members of the committee, are very impressed that you are
    beginning this session of Congress with the hearing on this
    subject.
        American taxpayers have never liked the IRS; that is clear.
    But their disgust and anger with it has obviously grown over
    the years, and I think it is very important that we do our very
    best to solve the problems as best we can very early on in this
    session of this Congress.
        I suggest that we do our best to resolve a little bit of
    tension between, in some respect, your side of the aisle and
    this side. I sense, to some degree, your side wants to dig more
    deeply into all the IRS problems and improve upon the House-
    passed bill, and I understand that. There are a lot of things
    we can do to improve upon the IRS's, in many cases, inadequate
    performance.
        But, on the other hand, we also have to act expeditiously
    as well, you know. So I suggest that we get together on both
    sides and work very aggressively, maybe speed up the hearing
    schedule slightly with more in-depth hearings, so that, as has
    been suggested, we can pass a bill by April 15. We do not do
    our country any service by delaying, dallying.
        There has been a lot of work already on this subject, the
    Kerrey Commission, for example, and Senator Grassley has worked
    on it, and your very excellent work, Mr. Chairman, with the
    staff you hired last year and all the work you have done. The
    House has worked on it, has passed its bill.
        So I urge us very strongly to dig down, work hard, and do
    our job in a cooperative basis, knowing that nothing around
    here of consequence ever gets passed unless it's on a
    bipartisan basis or we work together to get it done.
        A second point. I was struck by Senator Gramm's statement
    that it is not a management problem, but an abuse of power
    problem.
        Senator Gramm. I did not say abuse of power, I basically
    paraphrased the ancient Greek who said power corrupts. The
    problem is, the agency has too much power.
        Senator Baucus. I understand. Lord Acton said that, ``Power
    corrupts, and absolute power corrupts absolutely.'' It is true.
        I worked at the SEC as a lawyer right out of law school and
    I was amazed at the power we had. As a young kid out of law
    school, we got these attorneys and senior partners in big law
    firms, Gravath, Swain, Sullivan & Cromwell, that would jump. I
    learned right away that you have to be very responsible in
    exercising power.
        So I think that this is also very much a management issue.
    It is very much a people issue. It is very much an attitude
    issue of the people at the top of IRS and down through the
    entire organization in just dealing with people.
        I frankly believe that with all the talk we have had about
    reforming the IRS, that this time we are finally going to
    basically get it done. It is not going to be perfect. We cannot
    let perfection be the enemy of the good. But we can at least
    pass a good reform bill that helps our new Commissioner do his
    job so the American public is basically satisfied that a
    necessary collection agency is basically doing its job.
        In one respect, it is a small part, I want to thank our new
    commission for the four categories. One for my State, Montana,
    is the category of small business. I think that is critical.
        We have large business, small business, individual
    taxpayers, as well as the nonprofits. I think that is a very
    good way to go after this. It is a good first step. I feel
    good, as long as we just keep the ball rolling here and get the
    job done. Thank you.
        The Chairman. Senator Graham.

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

        Senator Graham. Thank you, Mr. Chairman. I wish to express
    my appreciation to you for having started this process in this
    committee last year and giving us the base of information from
    individual taxpayers' experience upon which these solutions can
    now be predicated.
        I also want to thank Secretary Rubin and Mr. Rossotti for
    their very energetic work to see that we do not wait any longer
    than necessary in order to achieve effective reforms for the
    American people.
        I heard this in a very dramatic sense last Thursday at a
    hearing held in Orlando, in which Mr. Henley LaMar, the
    district director for the northern district of Florida, and
    Bruce Thomas, his counterpart for south Florida, both testified
    about the changes that they were already making to deal with
    many of the concerns that have been expressed.
        I wish to express my personal appreciation for their
    efforts and I know that it would not have happened had they not
    felt they had the support from the top of the department and
    the agency.
        I have spent a lot of time over the past several weeks
    exploring the issues of IRS reform with Floridians, including
    that hearing in Orlando last week.
        I would like to mention five of the concerns that have
    consistently been raised. These are examples of the types of
    concerns against which I think any reform ought to be judged.
    These are the issues that we need to take action to resolve.
        One, is that taxpayers feel as if there is an inability of
    the IRS to make a decision. We had one man from Jacksonville,
    Jim Stamps. It took him 6 years to get a simple letter saying
    that he had paid all that he owed in order to get his credit
    report cleared of a statement that he had an outstanding IRS
    dispute. I think we need to decentralize and focus decision-
    making so that these kinds of decisions can be made
    expeditiously.
        Two. Excessive interest and penalties keep low and middle
    income individuals from ever resolving their cases. A 73-year-
    old World War II veteran from Tampa, Carl Jungstrom, has paid
    $181 a month for 90 straight months against a $25,000
    indebtedness. Where is he now? Now his indebtedness, after
    having paid $26,000, is $28,000 because penalties and interest
    have continued to run during the time that he had this
    settlement agreement.
        Three. IRS collection agents are insensitive to law-abiding
    citizens. Betty Bryant, a social worker, was threatened with a
    garnishment of her wages. After she contacted the Governor and
    our Senate office, it was determined that, in fact, IRS owed
    her a refund. Yet, she felt as if she was a criminal during
    this period.
        I think we need to consider some system of rotation of
    collection agents out of high-stress, arrogant attitude-
    enhancing positions so that there will be greater sensitivity.
        Just the last two points. Leverage and negotiation strongly
    favors the IRS. I think we need to consider third party dispute
    resolution procedures in order to make the taxpayer feel as if
    they have a greater equality of treatment.
        Finally, the IRS is frequently unable to locate taxpayers'
    records. Application of modern, less paper-demanding
    information systems would facilitate a resolution of that
    issue.
        So, Mr. Chairman, I appreciate the opportunity to continue
    to delve into these important issues and I hope that we will
    expeditiously come to a Congressional resolution.
        The Chairman. Thank you, Senator Graham.
        John Breaux.

      OPENING STATEMENT OF HON. JOHN BREAUX, A U.S. SENATOR FROM
                               LOUISIANA

        Senator Breaux. Thank you, Mr. Chairman. Thank Mr. Rossotti
    and Secretary Rubin for being with us.
        One of my fears is that we are going to talk this issue to
    death and not get anything done. I think we are probably all
    ready to start marking up a bill this afternoon, if we were so
    inclined to do so. There is a lot involved here, but I think we
    all know the direction we have to go. I think we ought to move
    as expeditiously as we can and get the job done.
        I was really shocked yesterday, I think, to learn that we
    probably have less than 80 days left in this session,
    legislative days, to get all this work done. I think we ought
    to move forward, get it done, send it to the President and let
    him sign it.
        I think, Mr. Rossotti, that good things have already
    started to happen. I think things are changing administratively
    that are for the good. I have noticed a change in attitude in
    the feel in Louisiana with some of the people that I had talked
    to following our first round of hearings that the Chairman set
    up; people that had problems went back and got treated
    differently. I think that is very important.
        We all joke about, one of the greatest lies that was told
    was, I am from the IRS and I am here to help you. People are
    afraid of the IRS. Members of Congress are afraid to call the
    IRS because we feel intimidated--at least I did--because we get
    the attitude, how dare you call me on behalf of a constituent.
    That is wrong.
        So I think that things are changing for the positive
    because of your appointment and the work the Secretary has
    done, and that really is to the good.
        I was sort of shocked to learn, I did not know, that less
    than 2 percent of the individual returns in the whole country
    are ever audited. I mean, a lot of people think everybody is
    audited. Certainly anybody who has ever been audited thinks
    everybody is audited. But less than 2 percent of the people.
        That means, I guess, 98 percent file their returns and that
    is the end of it. But the 2 percent, or less than 2 percent,
    that are audited have created a real uprising and legitimate
    concerns have been brought to our attention. So I think things
    are starting to move, because of the changes, in a very
    positive sense.
        The second two points. I think a taxpayer advocate, as part
    of the legislation, is important. The taxpayer needs to know
    that there is someone there that is on their side, someone that
    helps represent their interests, someone that they can go to
    that is going to have their interests as their primary concern,
    not the interests of the government. We have enough people that
    have the government's interest as their primary concern. So the
    taxpayer advocate would establish that.
        A final point. I think the burden of proof issue is very
    serious. I really think that if we as a government, with all of
    our forces, challenge someone that is doing something improper,
    it should be our burden to prove it. We should not have to
    prove ourselves innocent. I think that is a matter that needs
    to be considered very seriously.
        I support changing the burden of proof and making sure that
    we have to show that wrong has been done in order to expose
    someone to criminal penalties. I think with that we could have
    a very good bill, and we should pass it as quickly as we can.
        Thank you.
        The Chairman. Senator Rockefeller.

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

        Senator Rockefeller. Thank you, Mr. Chairman. I want to
    thank you and Senator Moynihan, and many others, for having
    this discussion.
        Mr. Rossotti, I just want to give you a little bit of good
    news. There was a group of us sitting around the other night
    discussing Asia, but it got around to the IRS.
        One of the people we were talking with--some members of the
    Finance Committee--said that if they had to construct an IRS
    Commissioner from scratch to be the perfect IRS Commissioner,
    it would, in fact, be you.
        That puts a burden on you to live up to that, but I would
    rather have a feeling of knowing the confidence that people
    have in you going into this than starting out, as is so often
    the case, with two strikes against you, just people assuming
    somehow that it is just another appointment. You are not just
    another appointment, you have been carefully picked. You have a
    superb boss sitting next to you. I really feel very good.
        Now, the head of an agency does not make all the
    difference. We saw that yesterday in Japan when the head of the
    Ministry of Finance resigned, through absolutely no fault of
    his own, but simply because the bureaucracy which rules Japan
    and the Ministry of Finance in virtually absolute terms was
    unwilling to change.
        On the other hand, you can turn that back around and say,
    if the administrator over there, the finance minister, or in
    your case the Commissioner, really has the will of the American
    people and the will of the people who work for you in your
    agency, you are going to get change.
        It is not just the American people that know that something
    is wrong. IRS employees know that there is something wrong and
    they know that the system has to get better. We had a hearing
    when a number of them were shielded off from public view and
    they were talking honestly with their voices disguised.
        I really think that you have an agency which, in many
    respects, wants very much to help you do a good job. There is a
    lot of talk about it. The President is for it, the Majority
    Leader is for it, Senator Moynihan is for it, the American
    taxpayers are for it, we are all for it. So you have got a very
    good backing as you go into this job and I simply want to wish
    you well.
        I agree that the burden of proof is a very important
    principle. It has not been exercised in quite the same way as
    before. I like the idea of bringing in outside people on a
    timely basis just to kind of check your own checklist. But I
    think basically what I wanted to say is that we have an
    enormous amount of confidence in you going in. I suspect you
    are going to do a very good job, sir.
        Thank you, Mr. Chairman.
        The Chairman. Thank you.
        Senator Conrad.

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

        Senator Conrad. Thank you very much, Mr. Chairman. I want
    to thank the witnesses, Secretary of Treasury Rubin, who I
    think has provided real leadership on this issue, and our new
    head of the IRS, Mr. Charles Rossotti.
        I understand the Internal Revenue Service has had serious
    problems. It has had problems of attitude by some, it has had
    problems of abusing taxpayers by some, it has had critical
    problems of being out of step with the changes in technology,
    and the basic systems of the IRS are out of date in terms of
    what the private sector is doing to manage the various problems
    that the Internal Revenue Service faces.
        Mr. Rossotti, I have had a chance to study your plan and,
    as a former tax administrator myself, I think you are right on
    target. I think you are moving that agency towards modern
    business practices, modern organization, and the use of modern
    technology that will make a dramatic difference in the delivery
    of service to taxpayers, and I applaud you for this plan.
        Senator Rockefeller was referencing that what was
    appropriate in the past in terms of a head of the IRS, because
    typically we have chosen tax lawyers, tax accountants, and
    those were the right people for the time. But at some point,
    things changed.
        What we have needed is a manager, somebody that understood
    systems and technology, and you are that man. I think it is
    going to make a profound difference to the delivery of services
    to the American taxpayer.
        So I want to salute you and salute Secretary Rubin, who had
    the vision to find you, for what you have started to do. Now,
    all of us understand, you do not turn a ship around overnight.
    I do not think we should raise expectations in a way that is
    unreasonable.
        I must say though, I have detected an improvement in IRS
    operation since the hearings we had last year. I can tell you,
    we have had a number of cases come to us as a result of our
    hearings, Mr. Chairman.
        We have gone to the Internal Revenue Service on behalf of
    those taxpayers, and I am pleased to report we have been
    getting a very good response. Not a perfect response, but a
    very good response. So I want to applaud you for the new
    direction that you are taking.
        I want to add my voice to Senator Breaux's and the others
    who have spoken here today, Senator Moynihan. We ought to pass
    this legislation by April 15. We ought to set that as a goal
    for ourselves. Let us get this in place by the time the next
    tax returns are filed by the American people. There is no
    reason we cannot do it by then.
        So Mr. Chairman, thank you for holding this hearing.
        The Chairman. Well, thank you, Senator Conrad.
        Finally, Senator Murkowksi.

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

        Senator Murkowski. Thank you, Mr. Chairman. Good morning,
    Mr. Commissioner, Mr. Secretary.
        I could not help but notice, Mr. Chairman, a reference from
    our friend from Louisiana, and I wondered if he was having a
    look at his Louisiana calendar. I do not think there are
    Mondays and Fridays on that Louisiana calendar, so we may have
    more days than the Senator from Louisiana suggested. In our
    State we have a 5-day calendar, and then a Saturday and Sunday
    to go with it. Anyway, that is just an observation.
        Senator Breaux. We do not work during Mardi Gras.
        Senator Murkowski. And you do not work during Mardi Gras.
    [Laughter.]
        And we operate on Eskimo time. So I guess there is a push,
    regardless.
        It is interesting to listen to my colleagues relative to
    their suggestions as we have all observed the political nuances
    of the IRS. But it struck me that one thing that this
    particular agency has never had was accountability. It appears,
    to me at least, after viewing the structure, that it was never
    designed to have accountability.
        I am very pleased, Mr. Commissioner, to reflect on your
    effort to restructure the organization so there is
    accountability. With accountability can come responsibility
    and, really, responsibility is what I think many of the people
    in the IRS are looking for relative to people who can commit to
    a future in that agency.
        So I think, Mr. Chairman, the efforts of this committee to
    hold those hearings that were held last fall initiated not only
    public opinion, but a realization by the committee of just how
    far afield the IRS had gone in the manner in which it was being
    responsive to the American people. The reality was, it was not
    being responsible to the American people.
        I think, as I quote from one of the internal audits,
    ``There was an environment that had placed some taxpayers at
    risk of abridgement of their basic rights, and some taxpayers
    at the risk of an inappropriate evaluation atmosphere.''
        I am not going to go through my share of the horror stories
    that we have already recounted, other than to say that I
    certainly agree we should move with legislation now to change
    the relationship between the American people and the IRS, and I
    join with my colleagues in urging that this committee work with
    the members and the rest of the Senate to strengthen the bill.
        We have got the House bill that passed last year, so before
    this year is out we can look our constituents in the eye and
    tell them that we have fundamentally changed the culture, the
    attitudes, and the arrogance of some of the people in the IRS.
        So I wish you well, Mr. Commissioner, Secretary Rubin. I
    wish you well as you attempt to focus in on the crisis in Asia.
    Your experience in Asia may have application in that regard.
    Good luck.
        Thank you, Mr. Chairman.
        Secretary Rubin. There is no oil here, unfortunately,
    Senator, as you and I discussed.
        The Chairman. Well, thank you, Frank.
        Now we will turn to our witnesses. It is always a pleasure
    to welcome our distinguished Secretary of the Treasury. We are
    looking forward to his comments on the IRS. Immediately
    following that we will turn to our new Commissioner, Charles
    Rossotti.
        Mr. Secretary.

                   STATEMENT OF HON. ROBERT E. RUBIN,

                       SECRETARY OF THE TREASURY

        Secretary Rubin. Thank you very much, Mr. Chairman. I think
    in many ways, as I listen to your testimony, I could probably
    have satisfied my purposes by simply identifying with much of
    what you said. Having said that, I will reserve the right, if I
    may, to say a few words myself. But I do think you have stated
    the case, in many ways, very well.
        I became concerned about the IRS organization, about which
    I knew relatively little, very shortly after I became Secretary
    of the Treasury. It was obvious from my initial experience that
    there was much at the IRS that was not working properly,
    because the phones were not working, taxpayers were not being
    satisfied, and there were many other problems, technology and
    the like, that have been discussed in this committee and
    elsewhere.
        As a consequence, a little over 2 years ago, which was
    something less than a year after I became Secretary, we began a
    highly intensified process of reform and change.
        Though I believe that we really have begun to make progress
    in a number of areas, there clearly is an enormous challenge
    ahead, very much including internalizing at the IRS a
    commitment to change and the kind of cultural change that
    several of you have spoken to, and I think is absolutely
    fundamental if we are going to have the kind of IRS that we all
    want to build.
        Many have contributed, as the Chairman said, to what I
    believe the irreversible process of change that is under way at
    the IRS. Clearly, Congress, very much including this committee,
    has played an absolutely indispensable and powerful role.
        We at Treasury have worked very closely with the IRS,
    particularly, as I said, in a highly intensified fashion over
    these last couple of years. The Vice President's National
    Performance Review, in conjunction with Treasury and the IRS,
    has produced an important set of recommendations on customer
    service.
        The Commission on IRS Restructuring, on which Senators
    Grassley and Kerrey served, has clearly been a very important
    forum for analysis and for discussion.
        As I said a moment ago, the Finance Committee hearings last
    fall brought to light serious, and I think without question
    intolerable abuses, abuses that have now been vigorously
    explored in two reports that the IRS mandated be done right
    after your hearings, and has been submitted to you, and there
    is a third report yet to come which I think is coming sometime
    in March or April.
        I think, as you said, Mr. Chairman, there is a strong and
    effective--and as I said a moment ago, I believe irreversible--
    dynamic for change at the IRS involving Congress, the
    administration, the IRS itself, its new Commissioner, the
    Treasury Employees Union. I think, as you said, this is the
    time to act and to take advantage of this environment to
    accomplish what needs to be done for the American taxpayers.
        I think as we look at all of these issues, it seems to me
    the only question ought to be, what do we do now that best
    serves the purposes of creating an IRS that meets the needs of
    the American taxpayer, provides taxpayer service, protects
    taxpayer rights, while at the same time collecting the revenues
    due?
        As I said at the time, I was deeply troubled by the
    conclusions and the reports I just mentioned, that
    inappropriate use had been made of enforcement statistics. This
    is obviously unacceptable, and our new Commissioner has taken
    strong steps in respect to that.
        We at the Treasury and our new Commissioner of the IRS are
    committed to fundamentally changing this agency, transforming
    this agency to serve the American taxpayers, to protect the
    taxpayer rights, while at the same time, as the Chairman
    mentioned, performing its critical task of collecting the taxes
    due.
        I believe that in recent months significant steps have been
    taken toward the end of improving taxpayer service, including
    the stopping of the use of revenue goals in field offices,
    beginning the development of a new set of performance measures,
    taxpayer problem resolution days, and a whole host of other
    measures.
        It was gratifying to hear some of you say today, and also
    some of you said at the dinner that a number of us had the
    other night, that you are beginning to see some effect of this,
    some impact of this, at your local field offices.
        Despite the enormity of the problems, and I think we can
    all agree on those, and the immensity of the challenge, I do
    believe that there is good reason, given the dynamic that is in
    place, to expect substantial progress in the years ahead.
        The IRS is now guided by the firm hand of its new
    Commissioner, Chairman Rossotti. I have now had the opportunity
    to work with our new Commissioner for some time. He brings 28
    years of experience in the private sector in the area of
    information technology which, as you know, is core to the
    future of the IRS. I have found in Charles Rossotti everything
    we had hoped, which is a very good, sound, practical business
    mind, plus a deep knowledge of the issues of information
    technology.
        I believe that our new Commissioner will not only provide
    transforming leadership, but is a symbol of the commitment of
    the administration to that transforming leadership.
        Over the last couple of years we have taken, I believe,
    very important steps to begin this process--and I emphasize the
    word begin, to begin this process--of transformation.
        The crisis that most, it seemed to us, needed addressing at
    the beginning of this intensified process was technology,
    because effective technology underlines everything that you all
    and we want to accomplish at the IRS.
        I think there is now universal agreement that the
    technology program has been put on a new track. We have
    canceled very large numbers of contracts. There is a new
    technology blueprint out, as you know.
        As the new Commissioner will be the first to say, this is a
    very difficult undertaking and there is a long way to go, but I
    believe we have made a very good start.
        We have substantially increased the use of electronic
    filing, telefiling. Quite a number of taxpayer service
    initiatives have been put in place, Taxpayer Advocate has been
    strengthened. I think we have made a good start in a goodly
    number of areas.
        The bipartisan legislation that passed in the House last
    year and that is before you right now, it seems to me, is the
    next step, and the critical step, to bring the IRS into the new
    era.
        Congress has been vital and integral to the reform process,
    and Congress will be vital and integral as it goes forward by
    providing adequate funding, by providing effective oversight,
    and most immediately, by passing the bill passed by the House
    as soon as possible.
        This bill contains important measures that will help build
    the IRS we all want to see. In reference to Senator Gramm's
    comments with respect to the President's comments last night,
    let me say that the bill went through several iterations in the
    House process, as you may remember.
        At the end of that process we wound up with a bill that we
    very strongly supported and we felt was a very good and
    workable path forward for the IRS, reflecting the changes that
    have been developed as a consequence of the process that
    Senator Kerrey addressed when he was here, if we all work
    together to produce an effective bill.
        The bill before you provides for increased continuity in
    leadership by providing a Commissioner with a 5-year term. It
    provides a very important set of personnel management reforms.
    Nobody mentioned that in the course of your comments. But if
    our Commissioner is going to have the opportunity that he needs
    to do what he needs to do, we also have to create greater
    flexibility with respect to personnel practices within the IRS.
        It contains additional steps strengthening taxpayer rights,
    many of which reflect taxpayer rights proposals the President
    made last year. I know the Chairman is very much focused on
    additional measures in that area. We very much look forward to
    working with you on that. There are important measures to
    expand electronic filing which, again, is key to having an
    effective IRS in the future.
        Finally, the bill contained new government arrangements
    providing for valuable input from the private sector and
    effective outside oversight, while at the same time maintaining
    the authority and accountability with respect to the IRS within
    the existing structure of the Federal Government, with the
    ongoing oversight and synergies that that can provide and the
    Treasury is committed to providing, and I believe has been
    providing over the last couple of years.
        In short, Mr. Chairman, I believe that the bill that is
    before you will help continue the process of change at the IRS
    in the years ahead, including intense focus on eliminating the
    kinds of abuses that were discussed at your hearing.
        It is absolutely clear, and we are all committed to the IRS
    focusing more on taxpayer rights, on quality, and customer
    service, while at the same time, as you observed, collecting
    the revenue due.
        I think it is important to observe in that regard that
    those who deliberately evade paying their taxes increase the
    burden on all of the rest of us.
        Mr. Chairman, Internal Revenue Service reform and having an
    IRS that meets the needs of the American taxpayer and does so
    in an appropriate fashion, provides good taxpayer service, is
    an issue of immense national importance and one that we take
    with the utmost seriousness.
        We can debate, as one Senator suggested in his remarks,
    whether to continue with the current progressive income tax
    system or change to some other system, but I do not believe we
    should let that debate affect our support for reforming the IRS
    to provide taxpayers with the service that they need and
    deserve.
        Our society depends on effective tax collection for 95
    percent of the revenues of the Federal Government, which
    support everything from defense to Social Security, and we have
    got to get this right.
        The new IRS will be the work of many hands. As we go
    forward, we must all work together in a constructive spirit to
    help the IRS meet the many challenges it faces, including each
    year's tax collections, but also including the new challenges
    that are now before us, the fundamental transformation now
    under way and dealing with the year 2000 conversion, a subject
    that I know is of great interest to some members of this
    committee and was absolutely critical to our Nation.
        Again, Mr. Chairman, I would like to conclude on this note.
    I believe, as you said in your remarks, that we have a
    powerful, and I believe irreversible, dynamic in place
    involving Congress, the administration, and all others
    concerned for change at the IRS. We should take advantage of
    what you referred to as an historic opportunity to get the job
    done and to produce an IRS that provides taxpayers with the
    service they deserve, that protects taxpayers' rights, while at
    the same time collecting the taxes that are due.
        I think the only question as we face this issue is, what do
    we do going forward to best serve this purpose? I think in that
    respect there are two things that we can now do that are most
    important, pass this legislation as quickly as possible, and to
    support our new Commissioner, Charles Rossotti, so that he can
    fulfill his commitment to change.
        Let me also say, if I may, Mr. Chairman, that we have with
    us today Congressman Hoyer, who has been an ardent proponent of
    IRS reform through this whole process and has been integrally
    involved in our efforts at Treasury and at the IRS to do what
    needs to be done to accomplish the purpose that you and all of
    us have.
        Thank you very much.
        The Chairman. Thank you, Mr. Secretary.
        [The prepared statement of Secretary Rubin appears in the
    appendix.]
        The Chairman. Now, Mr. Commissioner.

    STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER OF INTERNAL
                            REVENUE SERVICE

        Commissioner Rossotti. Thank you very much, Mr. Chairman
    and distinguished members of the committee.
        First, just let me say that I very much appreciate the very
    generous comments that Senator Rockefeller and others made
    about me. Every time I hear something like that, though, it
    makes me lose even more sleep because I wonder how anyone could
    live up to those standards.
        Mr. Chairman, I noted at my confirmation hearing last
    October that your hearings were a call to action to the IRS. As
    you begin to consider the restructuring legislation here in the
    Senate, I want to begin this by laying out a concept of how we
    can take advantage of this legislation to modernize the IRS so
    it does what we all want, which is to provide a far better
    level of service to taxpayers.
        Let me just stress at the beginning that the enactment of
    the restructuring legislation is crucial to the whole concept
    that I am about to outline. It is really a necessary enabler of
    the changes that the IRS must undertake.
        In my written statement, to save time, I have provided some
    specific comments on the legislation.
        The Chairman. Your full statement will be included as if
    read.
        Commissioner Rossotti.  Thank you very much, Mr. Chairman.
        [The prepared statement of Commissioner Rossotti appears in
    the appendix.]
        Commissioner Rossotti.  Let me just say, in preparation for
    what I am going to talk to you about today, that I have
    carefully reviewed the transcripts of your hearings, the work
    of the National Commission on Restructuring which Senator
    Grassley and Senator Kerrey served on, and I have spoken to
    both of them in person. There are many thousands of pages of
    GAO studies and internal IRS studies on business practices,
    technology, and organization which I have tried to review.
        I have had the opportunity in the last 3 months to meet in
    small groups with several hundred IRS employees, as well as
    from many other people that are interested in our tax system.
        Of course, I have consulted carefully with the Secretary of
    the Treasury, and I have benefitted from the work of the
    National Performance Review that did considerable work on
    customer service, as well as from the hearings of the Ways and
    Means Committee.
        I believe that from all of this work, as many of you have
    observed, a clear sense of direction has emerged. That is, the
    IRS must shift its focus from simply its own internal
    operations to thinking about how it can do its job from the
    taxpayers' point of view.
        Now, right now, today, the IRS does do a rather remarkable
    job of processing annually 200 million tax returns, collecting
    with great integrity $1.5 trillion, and providing service to
    millions of taxpayers. These capabilities represent a great
    strength for our country and we can build on these to make a
    better agency.
        But to meet the public's legitimate expectations in the
    future, we in the IRS know that we must fundamentally change
    the way we think about our agency. We must become fundamentally
    committed to customer service. We must shift our focus, as many
    large companies have done in the last 10 years, from expecting
    our customers to figure us out, from figuring out how to
    navigate our system and our process, to thinking about
    everything we do from the taxpayers' point of view. That means
    we must find ways to gain a better understanding of the
    taxpayers' problems and how we can help them meet their
    obligations under the tax laws.
        A simple way to say it is, we have to become problem
    solvers, not problem creators, for taxpayers. That is exactly
    what I meant when I said at my confirmation hearing that
    everyone in the IRS should begin to think of themselves as a
    taxpayer advocate, not simply the people in the Taxpayer
    Advocate's Office.
        Now, if we begin to think about the IRS from the taxpayers'
    point of view, we can note that we actually serve taxpayers in
    two different ways. One way, is that we serve each taxpayer one
    at a time when we deal with them directly.
        These kinds of interactions with taxpayers range from
    routine interactions such as providing information or forms to
    much more complex and difficult interactions such as when a
    taxpayer may be thought to owe more money as a result of an
    examination.
        Mr. Chairman, we have to be committed in the IRS to the
    fact that in each and every one of these interactions, from the
    most simple to the complex, we should provide first-quality
    service and treatment that is prompt, professional, and helpful
    to that taxpayer based on what we know to be their particular
    circumstances.
        Now, the second way we serve taxpayers, is that we serve
    all taxpayers as a group, as a whole, because our tax system
    depends on every person who is voluntarily paying their taxes,
    which the vast majority of them, knowing and having confidence
    that his or her neighbor or competitor is also complying.
        Now, I believe that the IRS, over time, can improve both
    kinds of service to the public. Furthermore, I believe we can
    accomplish this while also processing the increased work load
    that comes every year with the growth of the economy, largely
    with the work force we have.
        Our work force I have found to be competent and dedicated,
    but very much handicapped by outdated structures, practices,
    and technology. That is what I am going to talk about in a
    moment.
        But I do want to note, as many Senators have kindly
    observed, that we have taken action already to move towards
    these goals right now. We are not going to simply wait until
    everything has changed in the organization until we start to
    make progress on these goals.
        The Problem Solving Days that I was glad to attend with
    you, Senator Roth and Senator Grassley, are good examples, I
    think, of the way we should be serving taxpayers. We are also
    extending our telephone service this season to be 12 hours a
    day, 6 days a week.
        We have set up a special process to resolve the
    particularly difficult taxpayer cases that we are identifying
    through both our internal programs and through this committee.
        We have taken steps, as people have noted, to raise the
    level of management review on enforcement actions, such as
    seizures, and to see that inappropriate use of statistics is
    ended. These are only a few of actually hundreds of actions
    that we are taking this year to improve service and provide
    proper treatment to taxpayers.
        We are also closely managing our enormous and very
    challenging program to update our computer systems for the
    century date change, and also, I might add, for the tax law
    changes that are required by last year's tax bill. Most of this
    work has to be completed in the next 12 months, so this must
    be, and is, a very short-term priority.
        As important as these steps are, and we are not going to
    take our eye off the short-term ball, they will not enable us
    to meet our goals unless we take more fundamental changes in
    the way we do business.
        These changes will take a lot more time, but I believe they
    are essential for the IRS to meet the legitimate expectations
    of the public in how it receives service from such an important
    agency.
        Let me just outline to you at a high level, a very high
    level, the concept that I would like to propose. This concept,
    which is outlined in this chart, includes a renewed mission of
    the service with emphasis on service to taxpayers and fairness.
        It includes practical goals and some guiding principles,
    which I think will define the path forward. We can start to
    take action, as I have noted, on these principles and these
    goals right now.
        But we will only reach our goal of providing service to
    each taxpayer, as well as to all taxpayers, through more major
    changes in five areas. Each one of these five areas complements
    the others, and these five areas, of course, are summarized
    here. I want to stress that all five will be required in order
    for this concept to be successful.
        First, let me turn my attention to the box on the far left
    there, which is that we must re-think and revamp all of the IRS
    business practices so that we will think about how these can
    work when we focus on understanding, solving, and preventing
    taxpayer problems. Remember, we want to become a problem
    solver, not a problem creator.
        I have found that each of the IRS business practices, from
    customer education, to filing assistance, to collection, every
    one of them holds a great deal of promise for improvement
    simply by our gaining a greater understanding of the particular
    problems that taxpayers have in working with us and focusing
    continuously on solving them. Fortunately, in many cases there
    are close parallels in the private sector that we can draw on.
        For example, our business practices should make filing
    easier for all taxpayers by providing easily accessible, high-
    quality assistance to all taxpayers who need help in filing and
    by making more returns filed electronically.
        Now, how do we do this? Well, just as companies develop
    very specific marketing programs to reach customers with
    different needs, we can help taxpayers far more effectively by
    tailoring our publications, communications, and assistance
    programs for taxpayers with particular needs.
        For example, college students, who often can file with a
    simple 1040EZ form and a 10-minute phone call, have very
    different needs from senior citizens with Social Security,
    dividends, and interest who may be best served through a
    network of volunteers who can specialize in the needs of
    seniors. Similarly, small businesses need a different kind of
    assistance.
        So this principle of tailoring our services to the needs of
    particular groups of taxpayers is really a cornerstone of how
    we can dramatically improve our service to taxpayers, as well
    as our internal productivity.
        As another example, Mr. Chairman, some of our most
    difficult interactions with taxpayers, as you well know from
    your hearings, occur when additional money may be due and
    collection activity is required.
        One of the most important statistics I have come across in
    my 3 months at the IRS, is if you look at where the collection
    activity of the IRS is spent, both phone collection and field
    collection, 90 percent of it is spent on accounts that are more
    than 6 months old, and much of it is much older than that, 1 or
    2 years.
        Now, I can tell you from my personal experience in the
    private sector, that is exactly the reverse of what the private
    sector does when it collects money. Every business collects
    money from people.
        The proven keys to collection are to identify, as promptly
    as possible, customers who may present a risk of non-payment
    and to work out very quickly a payment program that addresses
    the particular payment problems of that customer.
        This helps the customer as well as the collecting agency,
    and it minimizes the need for enforcement action, which should
    always be a last resort. This is just one example, but
    collections is a very important example.
        So now, let me turn to the second of the five elements of
    this concept. It is one of the most important factors that will
    enable us to make the kind of changes we need, and that is the
    organization structure itself.
        The current IRS organization structure which is depicted on
    this chart that is about to be put up in simplified form,
    frankly, Mr. Chairman, no longer enables its managers to be
    knowledgeable about and take action on major problems affecting
    taxpayers. It is simplified, Senators. It is.
        Senator Gramm. You would never know it.
        Commissioner Rossotti.  Well, let me just describe a few
    things about it to you. It is not only a matter of it not being
    simplified, it really is not capable, in my view, of
    modernizing the business practices and technology that we need
    in order to meet our goals.
        Let me just point out a few highlights here, as shown on
    the chart. The heart, really, of the IRS organization structure
    is built around 33 districts and 10 service centers.
        Each of these 43 units spread around the country is charged
    with the mission of administering the entire Tax Code for every
    type of taxpayer, large and small, simple or complex.
        If a taxpayer moves, the responsibility moves to another
    geographical area, to another service center, toanother
    district. Furthermore, every taxpayer is serviced by both a service
    center and a district, and sometimes more than one, and each of these
    units performs customer service, collection, and examination activities
    all for the same taxpayer.
        For example, take my collection example. In the collection
    area there are three separate kinds of organizations spread
    over 43 organizational units that use 3 separate computer
    systems to support collection. Each of these three types of
    units collects from every kind of taxpayer, from small
    businesses to wealthy individuals. It is understandable why it
    takes so long.
        Now, another element that is built up in this structure is
    that there are eight intermediate levels of staff and line
    management between a front-line employee and the Deputy
    Commissioner. The Deputy Commissioner, actually, if you analyze
    it, is the only manager besides the Commissioner who has full
    responsibility for service to any particular taxpayer.
        Now, there have been some important improvements--some very
    important improvements--made in the structure over the last few
    years, notably the reduction in the number of district
    headquarters.
        But a fundamental problem remains, which is that this
    structure is just too complex and, I think as Senator Murkowksi
    observed, really makes accountability quite weak and very
    difficult to achieve, despite the best efforts of people to
    achieve it.
        Fortunately, there are solutions to this organizational
    problem which are widely used and proven in the private sector
    and which I believe can enable us to better serve the taxpayer.
        This basic approach is simply to organize not around our
    own activities as much, but to organize around the needs of our
    customers, who are the taxpayers.
        Just as many large financial institutions, such as large
    banks, have a different division that serves the retail
    consumer, small- to medium-sized business customer, and the
    large, multinational customers, the taxpayer base of the United
    States falls naturally into four groups. This is not because of
    anything to do with the IRS, but simply because it reflects the
    structure of the American economy.
        Therefore, as shown in this chart that has just been put
    up, a logical way to organize the IRS is into four units, each
    of which would be charged with complete, end-to-end
    responsibility for serving a particular group of taxpayers with
    a particular set of needs.
        These units then could replace the existing four regional
    offices and a substantial part of the large national office,
    which would then allow our National office to better fulfill
    its responsibilities of oversight and broad policy rather than
    operations, which would be the function of the units.
        Now, a great deal of study is going to be required of this
    concept, and that is the effort that we intend to launch very
    soon. But I believe we need to refocus and realign the efforts
    of IRS on our customers, the American taxpayers, and that is
    the underlying idea of this concept.
        By organizing in this way, the management team for each one
    of these units could learn a great deal more than the managers
    in the current structure about the specific needs and
    particular problems that affect each taxpayer.
        Now, the Tax Code is extremely complex, but most of it does
    not apply to each of these groups of taxpayers. So, a team can
    learn about the specific, narrower set of problems.
        Let me just briefly begin to give you a little discussion
    about some of the particular problems that each of these groups
    of taxpayers has from the taxpayers' point of view.
        On the left, there are a group of 100 million tax filers
    comprising, with joint filers, 140 million people. That is
    about 80 percent of the total number of people filing.
        Now, for this large group of taxpayers the primary needs
    are improved assistance in filing or in getting information
    about an account or refund. Collection problems in this large
    group of taxpayers are relatively limited because almost all of
    the money that they pay in taxes actually comes in through
    withholding from their employers, and is not directly received
    from them. In fact, most of them get refunds.
        The compliance problems are much more limited in this group
    because of the obvious fact that most of the income is withheld
    and reported. Most of the compliance problems are in areas such
    as dependent exemptions, credits, filing status, and
    deductions, and many of these particular kinds of compliance
    problems can be addressed by better education of taxpayers,
    with the assistance of volunteer groups and preparers.
        Also, improved phone service and, yes, more walk-in retail
    sites throughout the country where taxpayers can get in-person,
    face-to-face assistance is also important for this group.
        Now, another extremely important group for our country are
    taxpayers who are small businesses, which include sole
    proprietors as well as small business corporations and
    partnerships. There are about 25 million filers in this
    category.
        Compared to other individual taxpayers, this group has much
    more frequent and complex filing requirements and pays much
    more money directly to the IRS because they are filing tax
    deposits, quarterly employment returns, and many other types of
    income tax returns and schedules.
        As a matter of fact, those 25 million filers file about 90
    million returns a year with the IRS, not counting tax deposits,
    so we are much more closely involved with this group of
    taxpayers than with the other group. Therefore, providing good
    service to these group of taxpayers is more difficult than with
    the wage and investment taxpayers.
        The compliance and collection problems are also much
    greater because they are sending us more cash and that is just
    closely related. Small start-up businesses, in particular, need
    special help so they do not get behind.
        So by dedicating a unit that would be totally and
    completely responsible to provide all IRS services for self-
    employed and small businesses, I think such a unit would be
    able to work closely with industry associations, small business
    groups, and preparers to solve the special kinds of problems
    that these kinds of small businesses have.
        Moving on to the larger businesses, which are far fewer in
    number, they will pay a very substantial share of the tax in
    the form of not only the income tax on their own income, but
    withholding, employment, and excise taxes.
        In this group, the principal issues are complex tax law,
    regulatory, and accounting questions, and of course many issues
    that arise from international activities in which these
    taxpayers engage.
        So a management team and a unit dedicated to serving these
    taxpayers will be better able to understand and solve these
    problems more effectively than at present.
        Finally, there is the tax-exempt sector, which includes
    employee plans, exempt organizations, and State and local
    governments, and actually represents a very large economic
    sector also with unique needs.
        Although taxpayers in this group really do not pay very
    much income tax, because they are tax-exempt, they actually
    send the IRS over $190 billion a year in cash in the form of
    employment taxes and withholding for employees. They also
    manage $5 trillion in tax-exempt assets. So this huge sector
    would also benefit, I think, from a group that understands its
    special needs.
        Now, let me turn from the organization structure to some of
    the other key elements here of this concept.Since each of the
    units would be fully responsible for serving a set of taxpayers which
    have similar needs, the management teams that would be responsible for
    each of these units will be able to become knowledgeable about the
    needs and problems of their customers and will be able to be held fully
    accountable to solve those problems and to achieve specific goals set
    up to serve those taxpayers.
        Furthermore, having learned about problems, managers can
    cut dramatically the time required to communicate with the work
    force and implement solutions. Because the organization would
    be flatter, there would be fewer layers of management. In fact,
    we could cut the number of layers in half, Senator Moynihan.
        Front-line employees and first-line managers would have a
    much closer identification and communication channel to people
    who actually have general management responsibility and can
    actually act to solve problems.
        I think for each unit we could establish a cohesive
    management team which will be able to organize itself
    internally in ways that are appropriate to the particular needs
    of the taxpayers they serve rather than the one-size-fits-all
    that we have today.
        I also believe that we would be much more successful in
    attracting highly-qualified managers from internal or external
    sources with these kinds of management jobs because they are
    more comparable to the management jobs that exist in the
    private sector.
        I think, Senator Gramm, this is one of the things that
    would enable us to do what you suggest, which I think is a very
    wise suggestion, which is to rotate people in from the private
    sector, which is exactly one of the ideas that I have in mind
    with this.
        I will say that we will need some of the personnel
    flexibilities that are in the legislation that we need to talk
    to the staff about in order to make that possible, because it
    is difficult to do right now. But, with the aid of your
    legislation, I think we can do that.
        Let me say, we are not waiting. We are doing that right
    now. We have, as I think I indicated in an earlier meeting, a
    search effort underway with an international search firm to
    find someone from the private sector to take over the job of
    the National Taxpayer Advocate. We can do that right now.
        Longer term, with the structure that I proposed, we can
    have a special dedicated Taxpayer Advocate from the outside,
    one for individual taxpayers, one for small business taxpayers,
    and one for exempt organizations, so we can really enhance the
    role of the Taxpayer Advocates in a very, very concrete way.
        The fourth element here which is important is to have
    performance measures which reflect what we really want to
    achieve with this organization. It is important, as we have
    already noted, to have organizational performance measures that
    balance customer satisfaction, business results, employee
    satisfaction, and productivity.
        It is particularly important that the performance measures
    do not directly or indirectly cause inappropriate behavior
    towards taxpayers and, in fact, that they provide incentives
    for service-oriented behavior.
        I think the establishment of management teams with clear
    accountability and responsibility for serving large groups of
    taxpayers, which internally have reasonably common
    characteristics and needs, will make it possible for the first
    time to develop realistic and meaningful measures of
    organizational performance in all of these areas, including
    customer satisfaction, and compliance on a continuing basis.
        Senator Bryan, I think this will be the thing that will
    allow us, finally, to do what you suggested once before, which
    is to drive a silver stake through the idea of the use of
    enforcement statistics as a key measure of performance.
        Now, finally, I would like to talk about technology, which
    is the other critical enabler. One of the limiting factors in
    our ability to modernize our business practices at the IRS
    today is our computer systems, which are extremely deficient in
    their ability to support our organizational mission.
        But computers systems in a business setting essentially
    represent a detailed codification of the business practices and
    organization structure that exists. That is all a computer
    system is, really.
        Building new computer systems to support the old business
    practices and complex organization structure will not work. It
    is like paving cow paths.
        The recently issued modernization blueprint and the new CIO
    organization that has already been established by Secretary
    Rubin and Deputy Secretary Summers will provide, I think, an
    outstanding and professional basis for managing the evolution
    of our technology. That has already begun to be put in place.
        But the revamped business practices and the rationalized
    organization structure I discussed will provide the other
    missing component, which is a sound basis for completing and
    implementing the modern systems that are envisioned in the
    blueprint.
        I think one of the important elements here is that the
    management teams that are actually going to be responsible for
    managing will be able to act as knowledgeable and responsible
    business owners to work with the centralized and professional
    Information Systems (IS) organization, as well as outside
    contractors, in order to complete the blueprint.
        I really believe that if we can do this, for the very first
    time this will establish all of the critical elements that are
    going to be necessary to manage a large-scale and very
    difficult technology modernization program.
        So, to summarize the entire concept--and I stress it is a
    concept--it includes a renewed mission with an emphasis on
    service and fairness to taxpayers, some practical goals and
    guiding principles which define the path forward and which we
    can start to act on right now; revamped business practices that
    focus on solving and preventing taxpayer problems rather than
    creating problems; a new organization structure built around
    serving groups of taxpayers with similar needs; more
    accountable, and I think more attractive, management roles;
    balanced measures of performance tied to achievement of goals;
    a workable way, over the long term, of modernizing our
    technology.
        I want to stress, Mr. Chairman, that this is a concept. A
    great deal of study is going to be required to validate this
    concept to decide on hundreds of details. We will need the
    assistance of an outside firm to assist us in this effort. Much
    consultation will be required, both internally and externally,
    during this process. We hope to complete an initial study of
    this by early summer.
        So we have an enormous job ahead of us which we have to do
    while we are still keeping our eye on the short-term problems.
    I am confident that, given time and support from Congress and
    the public, this path will lead us to the goal we seek, which
    is an IRS which provides consistently first-quality service to
    all taxpayers.
        Let me, finally, say that this concept is fully consistent
    with, and in fact complements, the oversight board that is
    created in the restructuring bill. Under the structure we
    propose, the Commissioner and the national office, I believe,
    will be better able to fulfill their appropriate top management
    roles and will be able to be accountable to the board for
    achievement of overall organizational goals, as approved by the
    board, which is one of their main jobs under the legislation.
        In conclusion, I want to assure the Committee that this is
    a new day at the IRS. The agency is fully committed to moving
    forward in ways that keep up with the changing world and the
    increased expectations of the American taxpaying public.
        The restructuring legislation that is before you is
    essential to get there, and the work of your committee, Mr.
    Chairman, has served as one of the catalysts for change.
        Thank you. I will be happy to answer questions.
        The Chairman. Well, thank you, Mr. Commissioner. Let me
    start out by saying that I think your proposal for reform is,
    indeed, very promising.
        I understand it is only a concept now, but in many ways it
    is embedded in what has happened in the private sector where
    large organizations similarly had a hierarchy, but they have
    restructured and reorganized around their customers. That is,
    as I understand, what you are trying to do here, is
    restructure, reform the agency to take care of the requirements
    of the various classifications of taxpayers. Is that a fair
    statement?
        Commissioner Rossotti.  That is a fair statement, Mr.
    Chairman. I think you would find, when you get your other
    witnesses, this has been a strong trend throughout American
    business in the last 10 years.
        It is to basically shift from inside looking out to outside
    looking in and saying, instead of worrying about our problems,
    let us think of what the customers' problems are and figure out
    how we can solve those problems. The best way to do that is to
    concentrate everything you do and think about it from the
    customer's point of view.
        So I do not think there is anything novel about this at
    all. It may be different as far as the IRS is concerned, but I
    do not think it is novel at all as far as American business is
    concerned.
        The Chairman. But it is true that it is this type of
    restructuring that has enabled our private sector to become
    very competitive.
        Commissioner Rossotti.  Yes, indeed. I think Secretary
    Rubin has experienced, in his former life, how much it has
    helped some major companies to become more competitive.
        The Chairman. Let me say to the members of the panel, there
    will be 10 minutes for Senator Moynihan and myself, and then
    the first round we will restrict to 5 minutes.
        Commissioner Rossotti, you talked about the oversight
    board. As I understand the problem, we need independent
    oversight of the agency, both internally and by the Congress.
    Now, the purpose of the board is to give that independent
    oversight of operations to ensure that it is being operated in
    a manner consistent with the policies of both the
    administration, as well as the Congress.
        Now, if you are going to have oversight responsibility, it
    is important that you have the information, the facts that are
    necessary to provide that oversight. As we all know, under 6103
    authority it is very limited as to who can have taxpayers'
    information because we want to protect the privacy of the
    taxpayer.
        But I am concerned here. The House bill does not give 6103
    authority to the board. Now, I think we all agree that the
    board should not be involved in trying to resolve specific
    cases, but in discharging its obligation of oversight it should
    look at it systematically. How can that be done if it cannot
    have the basic information about how the agency is handling, in
    a systematic way, the various taxpayers?
        Let me just give an illustration. I think this is a copy of
    the Review of the Use of Statistics and the Protection of
    Taxpayer Rights in the Arkansas-Oklahoma District Collection
    Field Function. If you do not have 6103 authority, the problem
    is, you are going to have a lot of pages like this where it is
    deleted. It is not made available.
        So my question is, if the purpose of the board is to
    correct significant problems in the IRS, does not the board
    need to have the facts? In that case, will the facts not
    include taxpayer information?
        Commissioner Rossotti.  Well, I think this is obviously a
    question we could talk about at length if we get into the
    specific functions of the board. But as I understand the
    function of the board as it was worked out in the House
    legislation, it is the function of the oversight board, the new
    oversight board, essentially, to bring in outside, private
    sector expertise to work with the Commissioner and the staff to
    work out goals and long-range plans, and then to determine the
    degree to which those are being achieved and to hold the
    management accountable for those things.
        I believe that in most boards that I have been involved in,
    that is also the function of the board as opposed to getting
    too deeply into specific issues. For example, in our previous
    life it would have been contracts or projects. I did not really
    see much need for our board to get involved in that.
        The Chairman. No argument that they do not need detailed
    facts to look at it on a case by case basis.
        Commissioner Rossotti.  Yes. Yes.
        The Chairman. That is not the purpose. But if they are to
    be in a position to give effective oversight, it does seem to
    me that they have to have basic data, including that covered by
    6103, to review the operations.
        Commissioner Rossotti.  Well, with the case of audit
    reports, which is an important source of information, as it is
    now, the IRS is required to send all internal audit reports
    over to the Appropriations Committees for example, and
    certainly they could be sent to the Congress.
        I think there are sometimes, as you noted there, some
    deletions that relate to specific cases. But in the case of the
    recent audit reports, I think the ones that dealt with the use
    of statistics really did not require that many deletions. The
    ones on specific seizures did require deletions because of the
    fact that they did get into specific seizure cases.
        So I think that the board would certainly be able to look
    at most of the audit reports that we get, and the only thing
    that would have to be deleted would be the specific taxpayer
    cases.
        The Chairman. I have to say, I am concerned about their
    having access to the basic information, for limited purposes.
        Let me just point out that the original purpose of 6103 was
    to protect the taxpayer. I fear that the practice has become
    one to use it to isolate and protect the secrecy of the agency.
    I see the Secretary wants to comment.
        Secretary Rubin. I do not have a practical solution, but I
    think you have stated the dilemma very well, Mr. Chairman.
        Let me may a suggestion, if I may. It seems to me that I,
    as a taxpayer, even if I did have a terrible problem with the
    IRS--which hopefully in my present job I would not, but if I
    did today, at least I would know how to address it--I do not
    think I would want my personal information in the hands of a
    board that has a group of private sector member and non-full-
    time government employees.
        On the other hand, I think your point is also valid. Maybe
    the idea would be for the Commissioner to work with the
    committee to find some way of getting you what you need, but in
    a fashion that disguises the individual characteristics enough
    so it protects the identities and particular personal
    characteristics of the taxpayers.
        The Chairman. Well, we would be happy to work with you. I
    think there is a need here.
        Let me turn to the question of the independent inspector.
    Back in 1986, I was chairman of the Governmental Affairs
    Committee. I asked GAO to report on the need for a statutory
    independent IG at the Department of Treasury. The GAO made a
    study and recommended the creation of an independent IG, but
    the Treasury, at that time, opposed it.
        Anyway, in 1988 Congress partially acted on the
    GAOrecommendation and we enacted the current arrangement of the
    umbrella IG. However, the 1988 conference report noted, Mr. Secretary,
    that, The Secretary of Treasury has the authority, under Section
    9(a)(2) of the IG Act, to complete the task and transfer the Inspection
    Division of the IRS to the Treasury IG. Is it not time, Mr. Secretary,
    to exercise that authority?
        Secretary Rubin. Well, let me give you a partial answer if
    I may, then ask the Commissioner if he would comment. The
    Commissioner and I have talked about this. We have talked about
    a lot of matters. I think what you have got right now is an
    extremely good working relationship between the Commissioner
    and our Assistant Secretary Nancy Killefer, myself, Larry
    Summers, and others. It has been, I think, a very good and
    synergistic kind of relationship.
        I think the question you have got is, on the one hand, if
    you did that you would have more of a pure IG kind of function,
    which is what you are driving at. On the other hand, the
    Inspection Service, as it is now organized, gives the
    Commissioner an arm, if you will, that he can use for
    accomplishing all sorts of purposes in terms of finding out
    what is going on at the IRS. I think the Commissioner can speak
    for himself, but my guess is that that is a very valuable arm
    for the Commissioner to have.
        As I understand it, under the current system if you have
    problems with senior people--and this is, admittedly, limited
    to senior people--at the IRS, then the Treasury IG does get
    involved. But I, at least, think we may well have the
    appropriate balance, but let me ask the Commissioner to comment
    on that.
        Commissioner Rossotti.  First of all, Mr. Chairman, let me
    just say that having a really strong internal audit inspection
    IG kind of a function for an organization like the IRS is
    critical. I think that anyone that would take the job such as I
    have as a Commissioner would want to have that.
        I think if you look at almost all the cabinet agencies and
    all the major agencies of government, the IG does report to the
    head of the agency and that is viewed as an arm of management.
        I think one of the problems that we may have had with the
    Inspection Service at the IRS has to do more, not so much with
    the Inspection Service, but with the IRS itself. If you look at
    that complex structure that I showed up there, the national
    office is not really like a corporate office in a corporation,
    it is really sort of combined with an operations office, so it
    does not have that vertical separation that you would normally
    have in a large corporation.
        I think there is a possibility here that we could rectify
    that--in fact, I think we would rectify it--by having more of a
    vertical separation, where the Inspection Service would be one
    level above the operating units, which is not the case today.
        Having said that, let me just say that I think there
    probably are some ways that it would make sense to strengthen
    what is now the Inspection Service in terms of its independence
    and make it more like an IG without completely taking it out
    from under the Commissioner, and I think we would be happy to
    sit down and talk to you about some of those ideas.
        The Chairman. Just let me say that I have no argument about
    the Commissioner needing an independent source of inspection,
    but I do think that in government and other agencies we need an
    external check to ensure that this agency is not isolated.
        What I am concerned about is not today with you there and
    Secretary Rubin where he is. But what we are trying to put in
    place is the kind of organization that will ensure the kind of
    operation you are trying to bring about will continue. So we
    have to look at the possibility that you may have individuals,
    as in the past, who have misused these for their own purpose or
    they have been ineffective.
        Commissioner Rossotti.  I am very sensitive to that. I
    think that maybe there are some things that we could do to
    strengthen the Inspection Service's independence and make sure
    that it does not, even in the long term or with another set of
    people, fulfill its role without undermining what I think is
    very important. That is, as you have acknowledged, the need for
    a Commissioner of the IRS to have, as all other cabinet
    officials or senior officials that run large agencies have, an
    Inspection Service. As you know, I have been actively using the
    Inspection Service.
        Could I just comment on your other point about the
    information and follow up on the Secretary's comment about
    that. We would be happy to work with you to figure out how we
    could do that. As you know, one of my goals that I said at my
    confirmation hearing is to bring sunshine in and to have an
    open, honest communication. It is one of the five guiding
    principles that I have established here.
        So certainly, from my point of view, I want to do
    everything we can to not use 6103 or anything else to slow down
    the appropriate flow of information, even internally within the
    IRS to me, let alone the outside board.
        The Chairman. My time is up. I have a number of additional
    questions.
        Senator Moynihan. Sure. Go ahead.
        The Chairman. Thank you, Senator Moynihan.
        As you know, we have been concerned about the fact that the
    use of collection quotas and statistics to inspire IRS
    employees to shake down taxpayers was a major and disturbing
    finding of our September hearings.
        On January 12, 1998, the IRS Chief Inspector issued a
    report which confirmed this practice in the 12 districts that
    were reviewed. The report concluded that the IRS has violated
    the law and has created an environment driven by statistics
    that place taxpayers' rights at risk.
        The Chief Inspector reported, ``In recent years, the
    Service focused on increasing productivity in the Collection
    Field function. Dollars collected was the most important factor
    in setting program goals and evaluating program
    accomplishments.''
        It goes on, ``The former Assistant Commissioner
    (Collection) issued guidance on the use of enforcement
    statistics, which violated the provisions of the Taxpayer Bill
    of Rights.''
        My question to you, Mr. Commissioner, is what steps are
    being taken to remedy this situation?
        Commissioner Rossotti.  Well, Mr. Chairman, we have taken
    quite a number of steps as we have learned more about this
    situation. Of course, one of the steps that was already taken
    before I got there was to suspend the use of all these
    statistics down to the district level and to issue restrictions
    on the use of enforcement statistics, which are going to be
    enforced, meaning the non-use of them will be enforced. We will
    make sure that that happens.
        We have also, of course, instituted additional
    investigations to see if there are individual managers within
    the IRS who need to be held accountable for these violations.
        As a matter of fact, I have set up a special process to
    receive the results of the facts that are gathered through
    these investigations so that they can be given to some
    objective people who are not part of the IRS to determine what
    kind of disciplinary action would be required. That process is
    instituted and will be playing out over the next couple of
    months.
        In addition to that, we have done a number of steps, as you
    know, to change the process and to provide more management
    oversight for enforcement actions such as seizures, and we have
    taken those steps already and put those in place.
        We are now studying additional steps that we might want to
    take in other kinds of enforcement actions, such as liens and
    levies, and to see if we need to change some of the process
    there. So, we have taken significant steps.
        Of course, we have withdrawn the document that was issued
    that was incorrect. We have set up a process to ensure that any
    such policy documents are more closely coordinated, more
    appropriately coordinated with counsel. There are more that I
    believe we have given to you in a letter that we sent to the
    committee, Mr. Chairman.
        Let me just say, as important as these are, and there may
    be more that we will take because we are still continuing these
    audits, that fundamentally we have got to change the whole
    thinking process here and how we do compliance, and that is
    what I was trying to get to in my opening concept. We really
    need to turn this around and focus not on measuring our success
    by enforcement, but by basically how well we serve the
    taxpayer.
        The Chairman. Let me turn to one additional question, if I
    may. Our hearings indicated a need for the Committee to
    consider protection for the taxpayer in a number of very
    specific areas. Taxpayers are angry because they feel that the
    IRS can arbitrarily assign income to taxpayers, who then have
    to prove that they do not have such income.
        Should we change the system so that the basic rule would be
    that the IRS carries the burden of proof on income and the
    taxpayer, perhaps, the burden of proof on deductions? How does
    the burden of proof on the IRS square with the legal duties of
    taxpayers to file a correct return?
        Commissioner Rossotti.  Yes. I think there is a provision,
    of course, in the House bill that deals with this issue and we
    support the idea of improving the way this proof is done.
        The only concern we have with the House bill is that it
    could inadvertently lead taxpayers, as it is currently drafted,
    we think, in some cases to think that they would be better off,
    for example, not to keep any records at all, which would then
    lead to further disputes.
        This is a very technical issue. We support the idea of
    shifting, as the House bill has done, to improve the rights of
    the taxpayers. But I think we need to really, as I would
    suggest, get our staffs together to make sure that we have got
    the drafting right so that we do not inadvertently create more
    disputes rather than resolving them.
        The Chairman. One of the problems I see with the House
    approach is that it only applies when it is in court.
        Commissioner Rossotti.  Yes.
        The Chairman. I think what the American people are
    concerned about is that the IRS itself can impose or assign
    income, then the burden is on the taxpayer. So I do not see the
    House proposal really addressing that problem.
        Commissioner Rossotti.  I am afraid, Senator, that gets
    into a highly technical area on which I need to get some staff
    support on to work with you.
        The Chairman. This is one of the areas in which I think
    members of both sides have expressed real concern.
        Commissioner Rossotti.  Yes.
        The Chairman. Let me give you another example. The area of
    interest and penalties seems to be out of control and is a
    source of a great deal of unhappiness with taxpayers. I think
    it is a serious problem. It takes too long for the IRS to
    notify taxpayers of mistakes and resolve issues. This is not
    fair to the taxpayers who are trying to make a good faith
    attempt to comply with the tax laws.
        We have an example, where a 10 cent error ballooned into a
    $500 cascading penalty. This is absurd. It should not happen.
    Do you agree that there is a problem in this area of interest
    and penalties?
        Commissioner Rossotti.  Mr. Chairman, I definitely agree
    there is a problem, and I think it comes from a number of
    different sources. One of them is just the structure or the way
    the interest and penalties are set up in some cases.
        Many former Commissioners before I ever took office advised
    me that this is an area that we ought to look at. I think there
    is a provision in the bill, as I recall, that specifically
    calls for study of interest and penalties by the Joint
    Committee, with which we would like to participate. But let me
    just say that the way that they are set up in the legislation
    and the regulations are not the only source of the problem.
        A very big source of the problem is the statistic I cited
    to you, that 90 percent of the collection activity that we do
    at the IRS is after 6 months, which is, by that time, no matter
    what structure you have, a time in which you have got interest
    and penalties accumulated.
        So I think we need to address it from both angles. One, is
    to perhaps reform the calculation of the interest and
    penalties. I think the study that is called for in the
    legislation would be helpful. We also need to reform our
    practices so we do what the private sector does and get in and
    help people not get in trouble in the first place.
        The Chairman. Well, I think there is a serious problem. I
    am not sure that I am satisfied with just another study being
    made.
        But my time is now up, and I do have some more questions.
        Secretary Rubin. Mr. Chairman, could I make just one
    comment, if I may?
        The Chairman. Sure.
        Secretary Rubin. To go back to one of the earlier
    questions. On the burden of proof, as the Commissioner said, we
    have all been very sympathetic to the concerns that underlay
    the House provision. On the other hand, sometimes unintended
    consequences can overwhelm the purpose that they are trying to
    achieve.
        As the Commissioner said, there is the potential for an
    unintended consequence in here in terms of an incentive for
    people to either not keep, or even destroy, records. That has a
    whole set of other consequences that would be very undesirable.
    So I think this is something that we would have to respectfully
    suggest be worked through very carefully.
        The Chairman. I agree with that.
        Senator Moynihan.
        Senator Moynihan. As do I, sir.
        Mr. Chairman, at the risk of offering moral support to
    Senator Gramm, or perhaps immoral support. [Laughter.] I would
    like to comment just a moment and hear anything you have to say
    about the degree to which the problems of the IRS are a
    function of the complexity of the Tax Code, as created by this
    Congress and authorized by successive administrations.
        On the last day of last year, Wednesday, December 31, the
    Wall Street Journal had an article on its editorial page called
    ``The Market Value of the Tax Code,'' and told of the enormous
    increase in the value of the stock of H&R Block Company in the
    aftermath of what the Wall Street Journal described as the
    unsurpassedly complex Taxpayer Relief Act of 1997.
    Unsurpassedly complex. They said there were 800 new amendments,
    290 new sections, and 36 new retroactive provisions. They are
    opening up 250 new offices around the country.
        They note that in the 1960's when the H&R Block Income Tax
    Guide was first published, it had 196 pages. By 1988, it was up
    to 317 pages. This year, its pages will number 574.
        Now, putting that kind of complexity onto an organization
    where people do not make a lot of money, let us face that
    limitation of what we can expect of a system like this, the
    salary structure, which is a civil service salary structure. We
    ask what I think we ought not to do.
        I note that with respect to the year 2000 problem, I do not
    want to seem to be preoccupied by this, but if our tax system
    collapses because we do not get to this problem, we will have
    been to blame. Larry Summers not long ago said we are badly off
    track.
        May I say, it sounds like it is a problem that happens in
    the year 2000. No, no. It happens about three months from now
    when you are at a point of no return. In Sydney, Australia, the
    hotels taking reservations for the year 2000 Olympics find
    their computers cannot do it and they are doing it on paper.
        We understand from your very able spokesman, Mr. Art Gross,
    that this last tax bill will put a three-month delay in getting
    on with the year 2000 conversion problem, as the Secretary put
    it.
        Now, could I ask you, with obvious political purpose but
    some residual public purpose as well, do you think we ought to
    pass another tax bill this year like the last one?
        Commissioner Rossotti.  I think I ought to let the
    Secretary answer that one. [Laughter.]
        Secretary Rubin. Can I respond, Senator, with total public
    purpose and no political purpose. I, myself, think the last tax
    bill, though it certainly was not simplifying, I agree with you
    in that respect, had in other respects very important purposes
    we supported, and I think rightly so. There is a complexity
    problem. We believe in simplification.
        I think the problem that you get, and you know far better
    than I having been involved in this longer, is that while
    simplicity is an objective we all have, once you start looking
    at particular tax reform proposals against the questions of
    what effect they have on the economy, on the deficit, and on
    fairness and things of that sort, you get into much more
    difficult issues and the kinds of proposals have been made,
    flat taxes, VATs, and things of that sort, in our judgment at
    least, are replete with very difficult problems, and in our
    view, at least, on present evidence, would seem to be not as
    good as the progressive tax system that we have.
        Senator Moynihan. Sure.
        Secretary Rubin. But I think we all do need to try to
    improve simplification, because I think clearly that is an
    objective that we share.
        Senator Moynihan. I wonder if I could just suggest that we
    might think, as we work through this bill, some metric about
    complexity. Maybe the Joint Tax Committee should do it, maybe
    the IRS should do it. Something saying, enough is enough, and
    that is too much. That is all I mean. But I do not see how,
    given the Tax Code we have presented you, you would have
    anything but the difficulties you now encounter.
        Secretary Rubin. Could I suggest the Commissioner, in
    addition to addressing what I just responded to, might also
    like to address your year 2000 comment.
        Senator Moynihan. Yes, sir.
        Secretary Rubin. It is obviously an extremely important
    question.
        Senator Moynihan. That was my last question.
        Secretary Rubin. I am sorry. I did not mean to. You had
    raised it and I just wanted to have it addressed.
        Commissioner Rossotti.  I was just going to say that you
    are certainly right, that if it were not handled correctly it
    would have catastrophic consequences. That is why we are paying
    so much attention to it. I think that as a result of work that
    had already been done before I got there, there was a great
    deal of activity under way which is in the right direction to
    make sure this was done.
        Since I have gotten to the IRS, that was one of the first
    things I did. We did establish some additional tasks and jobs
    to be done. We have a management process that I have set up
    that is reporting directly to me to make sure that we do the
    thing that we most need to do, which is to identify any risks
    that might prevent us from being successful as quickly as
    possible.
        As you remember, we have got them very simply coded, green,
    red, and yellow. There are a lot of yellows on the chart right
    now. There is only one red one. That is the one that we are
    paying the most attention to.
        So I think we have a lot of risk still ahead of us. This is
    an extraordinarily complex program. But I do think we have a
    process in place that has identified the risks and we are going
    to work as hard as we can to make sure that we address those
    right away.
        Senator Moynihan. I know you will, Commissioner. I think it
    simply is, for our part, to be restrained to give you the
    opportunity. By the year 2001, we can go wild with amendments
    again.
        Thank you, Mr. Chairman.
        The Chairman. Senator Gramm.
        Senator Gramm. Thank you, Mr. Chairman, and let me thank
    our witnesses.
        I just want to touch, very briefly, on the burden of proof.
    I think probably from the very beginning of the tax collection
    process in this country there has always been a slight shifting
    of the burden.
        But I am in strong agreement with the Chairman. I do not
    think the House goes far enough in establishing the principle
    that the taxpayer is innocent until proven guilty. Only in rare
    cases, including an assertion of fraud, is that the case under
    the current statutes. I do not want to make it easier for
    crooks to not pay taxes.
        On the other hand, I am willing to put a heavier burden on
    crooks with penalties, fines, in order to be able to expand the
    legitimate rights of honest taxpayers. I want to explain very
    briefly why I disagree with the prevailing sentiment on this
    issue.
        I do not believe that the American public is ever going to
    come to view the tax collector as a consumer-friendly agency.
    Thinking back, the last tax collector that I remember who was
    generally loved was St. Matthew. That has been a long time.
        I do not buy the idea that any consumer is ever going to
    get a telephone call from the IRS and say, wow, I am about to
    get helped. [Laughter.] Also, quite frankly, at the risk of
    sounding cynical, if the duty of the IRS is to collect taxes, I
    am not sure how you ever totally get away from the position
    that ultimately you have to judge an agent on their ability to
    collect legitimate taxes.
        So I again say that what we really need to be doing here is
    fundamentally change the structure of the system and restrain
    the government in its role as the tax collector using the
    police power of the State.
        That is why I dwell on this burden of proof issue and I am
    totally in agreement with the Chairman. I do want to work with
    you on it, because I know there is a problem. I am not sure how
    we ought to solve it.
        I would like to touch on an issue that I raised that I feel
    strongly about. I noticed in looking at the seal of the
    Internal Revenue Service--if you would put back up one of those
    charts--I noticed it has scales above a key. I assume the
    scales stand for justice, and I assume that is the key to the
    Treasury. But in the seal, justice is above the Treasury.
        Now, I want to get your views of the proposal that I intend
    to put before the committee when we vote on this bill. If I am
    a taxpayer and I am paying my taxes, and I get audited and I
    have to go out and hire attorneys, and hire lawyers and go
    through a process that may embarrass me, my children, my
    family, hurt my business, and at the end of the day it is found
    that I have done nothing wrong, I have paid all my taxes, why
    should the Internal Revenue Service not have to pay the costs
    that I have incurred because they have imposed a burden on me
    by auditing my account and in the process forcing me to spend
    money? Why should that not be part of my legitimate taxpayer
    rights?
        Now, if I did something wrong, it is a different ball game.
    But I am talking about a case where we go through the whole
    process and, at the end of the day, it was proven that I did
    nothing wrong, why should the IRS not be liable to pay the
    expenses that I incurred in defending myself?
        Commissioner Rossotti.  Well, let me just say that there
    are certain circumstances, and I think they are enhanced in
    this bill, under which the taxpayer can recover costs. I think
    one problem that may exist, is the idea that an audit implies
    somebody has done something wrong.
        I mean, there is not any way in the world that a tax system
    could be administered and know in advance, when you initiate an
    audit, whether it is going to produce revenues or not. I mean,
    right now audits are done, most of them, based on a statistical
    formula that looks at a return and attempts to predict whether
    there would be additional tax due.
        Senator Gramm. But does it bother you that in doing this we
    are imposing thousands, tens of thousands of cost on ordinary
    citizens who may not have done anything wrong?
        I view this as a takings, that you have got a small,
    independent business person, he is audited, and he had to spend
    $15,000 defending himself. It turns out he did not do anything
    wrong.
        Our response is, well, you know, we have to audit people.
    Well, what about his $15,000? I am saying, if there is a public
    good in auditing, then if this taxpayer did nothing wrong the
    public ought to have to reimburse him.
        Commissioner Rossotti.  Of course, there are a lot of
    burdens that are imposed by the tax system, including just
    filing the forms in the first place, which is just a part of
    the way the tax system works. So I think that is more of a
    policy issue.
        I think the committee, the Congress and the Treasury would
    have to determine whether this particular form of burden is one
    that should be reimbursed, even though other forms of burdens
    in complying with the law are not reimbursed.
        I mean, it is certainly an issue that is worthy of
    discussion, but I think it needs to be put in the broader
    context of all the burdens that are placed on taxpayers as a
    result of the fact that we have a tax system.
        Senator Gramm. Well, Mr. Chairman, my time is up. But I
    thought the committee would enjoy knowing that these are not
    new problems. I was reading from the 1924 hearings, which I
    guess were the first major hearings held on this problem. I
    just want to read one paragraph.
        ''Finally, rumors abound that a successful career in the
    Treasury Department would be aided by the collection of a large
    amount of taxes. These rumors were officially denied, but they
    may have been believed by some. If the board was left in the
    Treasury,'' and this was the debate about basically whether the
    IRS should be independent of the Treasury, ``it would always be
    subject to the charge that ambitious members would seek to gain
    favor for future promotions by deciding cases against
    taxpayers.''
        The point being, this is not a new problem that came about
    yesterday, this is an old issue and one that we have never
    fully come to grips with, at least in the era when government
    has been a huge gatherer of resources from the general public.
        Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator Gramm.
        Senator Grassley.
        Senator Grassley. I want to say to both of you that it is a
    real welcome atmosphere that we are in here. There is a real
    rational exuberance for reform. Twelve months ago, particularly
    I would say this to Secretary Rubin, I thought if we were going
    to get anything done we were just going to be fighting and
    pulling teeth and just have a terrible time.
        To have the sort of attitude that you expressed today is
    very satisfying and very welcome. I think not only does it help
    get the job done between Congress and the administration, but
    also I think it is very good for the sort of culture that we
    want to change, from the highest to the lowest levels, of the
    IRS. It was kind of unpredictable 12 months ago and I am glad
    it is here and am glad we have this sort of cooperation.
        I guess maybe along that line then we have already had some
    evidence of changes going on. From your standpoint, Secretary
    Rubin, not only the extent to which you probably are endorsing
    this direction already, maybe you have not made a final
    decision on every detail, but obviously somewhere up the chain
    I suppose OMB guides and directs every position that goes on.
        Are we going to have this sort of enthusiastic support
    outside of your department as well to get the job done, do you
    believe? Second, within your department will there be the
    resources there to get the job done?
        Secretary Rubin. Senator, first of all, I appreciate your
    comment. Except for the budget aspects of it, this is an issue
    that lies in the province of Treasury. I can assure you that
    our commitment will continue unabated. We are exceedingly
    fortunate we have a new Assistant Secretary of Management,
    Nancy Killefer, who was a very senior person at McKenzie &
    Company and is dedicated to this with equal fervor. So I think
    you can be assured that this atmosphere will continue. And the
    President expressed his views on that last night.
        Senator Grassley. The reason I asked about OMB is, and
    maybe I would be wrong on this in this instance, but it seems
    to me like everything has got to clear OMB. They can become a
    hurdle, a terrible hurdle, to get over regardless of how
    sincere you might be. You do not see problems like that?
        Secretary Rubin. I really do not, Senator, other than
    budget issues which very properly belong in OMB. All of the
    other decisions and issues that we have to deal with lie within
    Treasury. Also, I might add, OMB has been very supportive of
    this reform perspective with respect to the IRS.
        Senator Grassley. All right.
        Along that line then, for either one of you, do you see
    that the reforms that you are going to bring about are an
    excuse for the expenditure of a lot more money?
        Secretary Rubin. An excuse for, a reason for?
        Senator Grassley. Yes. I mean, getting more money for IRS,
    to have a bigger budget for IRS.
        Secretary Rubin. Let me give a generalized response, but I
    think the Commissioner can better respond than I can. I think
    that to have the purposes that you all want to accomplish and
    we all want to accomplish, we have to have an appropriately
    financed IRS. I do not believe, and I will let the Commissioner
    comment on this, there is a cheap way to do this.
        I think this is an enormous undertaking and I think it is
    going to, very importantly, need adequate funding. I think this
    committee, while it is not obviously in your jurisdiction, the
    appropriations, I think your lending your voice to that could
    be very helpful.
        Senator Grassley. All right.
        Commissioner Rossotti.  Let me just say this, Senator
    Grassley. I think one of the goals that was up there was
    productivity. I did not mention that as much because I talked
    about service, but the third one is productivity.
        Here is what I believe about that. I believe that we can,
    as actually has happened over the last three or four years, if
    we do this, we can shrink continuously for at least the next
    four or five years. I do not know about longer than that. We
    can shrink the size of the IRS in relation to the economy. In
    other words, we can keep the work force we have and the economy
    can grow and we will become a smaller fraction year after year.
        However, I do want to say one thing on the money side. The
    work force is the principal cost, but the one exception I have
    to make, is we are going to need money for technology because
    the technology base that we have is just utterly deficient and
    is not comparable to anything in the world.
        I know that there was great concern in the Congress about
    the fact that Congress did provide a lot of money over a long
    period of time and it did not succeed in solving the problem.
    All I can say is, there is nothing I can do about that. That
    happened.
        But in the future we are going to try, at least on my
    watch, to spend every dollar we have on technology as carefully
    as we can, recognizing there are risks. I mean, technology is a
    very risky business. But we are going to try very hard to make
    sure we put it where it needs to be. So that is the one
    exception. We do need some incremental money for technology.
        Senator Grassley. All right.
        My last question then would deal with something that has
    already been discussed pretty thoroughly by several people,
    including the Chairman, and that is your internal audit. You
    have already expressed strong actions you are going to take and
    how wrong this is, the policy to give people promotions based
    upon money collected, forfeitures, liens, et cetera.
        Obviously, we legislated against that 10 years ago. Whether
    we legislated against it or not, it is bad policy. But it was
    part of the Taxpayer Bill of Rights I. Do you see what is wrong
    not only being bad policy, but do you clearly see it as a
    violation of the Taxpayer Bill of Rights as well?
        Commissioner Rossotti.  Yes. I think that the audit report
    says that in some cases there was a violation of the Taxpayer
    Bill of Rights. I mean, they were dispersed. They were not all
    violations specifically. But regardless, I mean, the whole
    message we are sending is that we are just not going to do
    business this way.
        We are sending that message in a lot of different ways. I
    think part of my longer term concept here is to reverse
    completely the whole emphasis and put it on compliance and
    service, not enforcement.
        Senator Grassley. So it seems to me that you would see this
    as just bad policy that maybe Congress should not have ever to
    legislate against.
        Commissioner Rossotti.  Well, actually, I think there was
    policy beforehand. Even before there was legislation, the
    Congress reinforced it.
        Senator Grassley. All right.
        Commissioner Rossotti.  What we have to do, is we have to
    figure out how to manage the agency that is consistent with
    those set of values, which is what I am trying to do.
        Senator Grassley. Thank you very much.
        The Chairman. Thank you, Senator Grassley.
        Senator Graham.
        Senator Graham. Thank you, Mr. Chairman. Again, I expressed
    earlier my admiration for the Secretary and for the
    Commissioner, and their comments today have added to that
    admiration.
        I believe the blueprint that the Commissioner has laid out
    is a very prudent and effective road map for how we can reverse
    this agency from being one that looked inward to one that looks
    outward. That is a fundamental and extremely significant
    reversion of position.
        I would like to go back to some of the concerns that were
    raised by Floridians at the hearing that we held in Orlando,
    starting with this issue of penalties and interest. I came out
    of that hearing with the impression that this was a very
    fundamental barrier to middle and lower income taxpayers being
    willing to settle a case.
        Frankly, the gentleman who paid $181 a month for 90 months
    would have been better off declaring bankruptcy and discharging
    his responsibility in that manner, because he has ended up
    having made these substantial payments but still owes more than
    he did when he started the process.
        A statement was made at the hearing by representatives of
    the IRS that they did not have the discretion to waive
    penalties and interest, that the law required them to continue
    the clock to run during the period of settlement. I wonder if
    you could comment on that.
        Commissioner Rossotti.  Yes. Let me just say, again, this
    is where my not being a tax lawyer is not too helpful. But, as
    I understand it, we can in most cases waive penalties but not
    interest. I think that really does not get at the heart of your
    question. I think your point is right. I mean, one of the
    pieces of advice I got from former Commissioners before I came
    here was, get on to this interest and penalties thing because
    this is a problem area, and that it is.
        It is a complicated area. I do think it is a good idea to
    do the study that is required in the legislation to look at the
    specific provisions that dealwith interest and penalties, and
    perhaps some of the issues about what discretion the IRS has. I think
    that is one of the parts of tackling this problem, because it is a very
    big problem.
        The other part of it, though, I get back to the business
    practices. I mean, one of the reasons these small business
    people and other people get into so much trouble, is, it is so
    late. It gets so far down the line. The compounding effect
    becomes very, very serious.
        So that is a really fundamental problem in the way that the
    whole IRS does business, and it is completely the reverse of
    the public sector. Basically, our approach is, let things build
    up and then come in with a lot of interest and penalties and
    enforcement action.
        It is not because the people at the IRS want to do that, it
    is just this whole process is really broken, I would say, in
    terms of the way it works. It is really a big job to fix it
    because it is an enormous operation.
        So we really have to approach it from sort of a number of
    angles. One, is the reform, perhaps, of the legislation, which
    we have to study very carefully particularly the technical side
    of it.
        The other is the business practices and the way we actually
    administer these things. I am not saying, by the way, there are
    not short-term things we are going to do. That is one of the
    things that we are looking at short-term as part of our near-
    term actions, within the next year. There may be more things we
    can do even within our own discretionary authority. If we can,
    we will.
        But I would say, without a doubt, I really agree with your
    taxpayer and I agree with your observation. I think it is not
    going to be a simple one to fix. We need to approach it from a
    number of different points of view.
        Senator Graham. Another issue raised from the perspective
    that the taxpayer is feeling that the process is unfair in that
    the person who yesterday was the prosecutor relative to
    developing the case of the IRS against the taxpayer, tomorrow
    is the judge to determine whether the taxpayer is, in fact,
    liable.
        The suggestion was made that some of the developments of
    third party dispute resolution procedures, which have been
    effective in a number of judicial and commercial settings,
    might be applied to render a greater sense of fairness within
    the IRS system. I wonder if you could comment about that.
        Commissioner Rossotti.  Well, again, I think there are--and
    this is an area I am not yet entirely familiar with, so I have
    to be honest, I do not have a complete answer to your
    question--some experiments going on with third party
    resolution. That could be a very promising approach for certain
    kinds of disputes.
        But I think another element of this is to really, as we go
    through this rethinking of our whole concept, is to be sure
    that there are the right kinds of channels that are truly
    independent. We actually have them on paper now, in many cases,
    Senator. We have different channels. We have an appeals
    process, we have a Taxpayer Advocate process, and of course,
    you have a court process.
        So there are an awful lot of processes in place. Adding
    more of them is not always the answer. I think what we need to
    do is to think of how we can make those actually work better
    for the taxpayer, and I think there are some things we can do
    along those lines.
        Senator Graham. As you have analyzed taxpayers into the
    four discrete categories, I think the current procedures
    probably work reasonably well for the larger taxpayer who can
    afford the representation that those administrative and
    judicial procedures entail. They do not work well with the
    small taxpayer, particularly the small business taxpayer.
        Commissioner Rossotti.  Actually, if you look at it, I
    think that is a very good observation because all of these
    issues we are talking about, I mean, the attempt to try to
    develop one process and one way of doing it that fits everybody
    from the largest corporation to a small, two-person business is
    just an impossible job to do. I think one of the concepts here,
    not just the organization structure, is let us not try to look
    at one size fits all.
        As you say, if we want to have something that is an appeals
    process or a dispute resolution process, let us devise one that
    really works for a five-person business, where the owner has to
    wear six hats rather than try to devise the same exact thing
    for that person and somebody who has a much larger business. I
    hope, over time, that that principle will be one of the driving
    principles that we can work on through this whole agency.
        Senator Graham. Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator Graham.
        I have three questions. I will try to make them as short as
    possible. We have the same problem with liens, levies and
    seizures. The oversight hearing showed people are very
    concerned that they do not receive real notice. They can wake
    up in the morning and find that their bank account has been
    frozen, or other assets, including their house, may have been
    taken. It goes back again to the question of the IRS being a
    prosecutor, judge, and jury.
        In the private sector, if a creditor has problems, he has
    to go to court. Why would that not be appropriate here?
        Commissioner Rossotti.  Well, first of all, I want to say
    that everything we are doing is being studied. The fact is,
    everything we are doing is being studied because we are trying
    to review everything we are doing. We have a study that we have
    just initiated recently. We started with seizures, but now we
    are trying to look more carefully at liens and levies. I hope
    that within a few months, and I do not remember the exact date
    for when that study is, we will be able to come up with some
    things that we can implement ourselves.
        Beyond that, I think that another big point, the collection
    process. Frankly, Senator, of all the processes that we have in
    the IRS, and I talked about different business practices like
    filing and compliance, I think the one that has the most
    opportunity to improve is the entire collection process. I
    think some of your hearings observed that.
        We really need to do a better job of getting in and
    figuring out solutions for taxpayers earlier and minimizing the
    use of some of these kinds of techniques. That does not mean we
    will ever get away from it. I think that the IRS does have to
    have these powers in order to be able to execute its role and
    to be fair to all taxpayers, making sure the ones that are
    voluntarily paying are not penalized by somebody else who is
    not paying.
        But I think, over time, through a number of different
    techniques we can minimize or reduce dramatically the need to
    use some of these stronger techniques. So I hope that we will
    be implementing over time a continuous series of things to
    improve. Of course, through your oversight process you can
    observe and work with us to see how well that is going.
        The Chairman. I appreciate your answer. I think this may be
    an area where we might want to legislate as well.
        Let me go on to a couple of other questions. I know the
    Secretary remembers when he was here before and we talked about
    the Commissioner having his own management team. You assured me
    that the new Commissioner would be able to appoint his own team
    as a reasonable means of getting action taken in a meaningful
    way.
        So I would like to ask the Commissioner, now that you have
    been on the job, what are your plans in regard to the senior
    executive service positions? Do traditional senior executive
    positions fit in with your plans to hire management for a
    specific time to accomplish specific results? If not, would you
    describe the tools you wouldlike the Congress to provide.
        Commissioner Rossotti.  Thank you very much. That is a very
    important point in being able to make this plan work. First,
    let me say that the Secretary has delivered everything that I
    have asked for, including letting me take one of his most
    important aides, which was probably the hardest decision he has
    made so far.
        So we have already started to use some of the authority
    that has been granted to us. I mentioned that we have a
    national search firm searching outside for national taxpayer
    advocates. That is already under way. So, it is not that we are
    stymied, it is not that we cannot do anything, we are moving
    ahead.
        Nevertheless, for this new concept, and I have talked about
    these management roles, I think we will have for the first time
    management roles that are comparable to the outside so that we
    will be able to bring in people.
        And, yes, I think we do need some additional legislative
    authority as part of this, which we need to work with your
    staff to define. But the essence of it is to be able, for a
    limited number of positions, to bring people in, much as
    Senator Gramm has suggested, on limited term appointments that
    we could renew for a limited period of time. I think we do not
    need a large number of these, but these would be critical for
    filling some of these key roles.
        We would also like to have for those positions some
    compensation authority that would allow us to have part of
    their compensation be variable so that it would only be paid if
    they achieved the goals that were set by management. Those are
    the two key things we need.
        A third one has to do with some technical positions. The
    technical world has become very competitive, and salaries are
    going up. We would like to have some authority to hire a
    selected number of technical experts for certain positions in
    an expedited way. I think, in addition to what is already in
    the bill, those are the things that we need the most in order
    to be able to succeed with this concept.
        The Chairman. Let me ask you this. If your reorganization
    causes positions to be eliminated, will you need new buy-out
    authority or any additional flexibility in the application of
    reduction in force rules?
        Commissioner Rossotti.  Yes, we would like to have that. I
    think in my written statement, Mr. Chairman, we indicated some
    authority we would like in that area.
        The Chairman. Yes. We will certainly want to work with you
    on that.
        Now, let me go back a moment to the oversight board
    questions. The House bill establishes a board to oversee the
    IRS in its administration, management, conduct, direction,
    supervision of the administration of the tax law. What does
    oversee mean to you? What should be the relationship between
    the Commissioner and the board?
        Commissioner Rossotti.  Is that to me, Mr. Chairman?
        The Chairman. Yes. Sure.
        Commissioner Rossotti.  All right. Well, the only thing I
    can go by is my experience in the private sector where I was in
    various roles over many years, both as the person being
    overseen and also as a person who was on boards overseeing
    other people.
        I think that what it really means to me is that the board
    lends its expertise. It lends its judgment to the formulation
    of goals and plans which are the responsibility of the
    management, but it also lends its expertise and it gains an
    understanding of what those things are, usually on an annual
    basis. Then it monitors whether it believes that the management
    is actually living up to the expectations that it has agreed
    to.
        So it is almost like a contract to me between the board and
    the management. The board negotiates the contract. I mean, it
    is not literally a contract, of course, but it has sort of that
    character, where you say, here is what we are going to do, here
    are the resources we need.
        The board provides its broad expertise in helping the
    management come to those conclusions and then it is up to the
    management to execute and make it happen. If it does not, the
    board then decides whether it needs new management or whether
    it needs to help the management do something different or take
    some other action. I really think that that is the way that
    this board can work.
        I think it is going to be critically important to get the
    best people on this board that can really lend real judgment
    and expertise. I think no matter what kind of structure you set
    up, it is going to be critical. Of course, that will be up to
    the Secretary and the President to do that. But that is the way
    I see it. I think it can be very constructive. In the right
    way, it is a very, very constructive relationship.
        I think if the board attempts to become part of management,
    it then eliminates its own role, first of all, and becomes,
    really, an impediment to management. So it is important that
    you have these two roles clearly defined.
        The Chairman. Finally, I am troubled that the House bill
    prohibits the board from exercising any authority over law
    enforcement activities, an area, frankly, that our hearings
    showed to be rife with abuse. Would you care to comment on
    that?
        Secretary Rubin. Mr. Chairman, yes. I think the House bill
    and the bill I believe Senators Kerrey and Grassley submitted
    to this committee, on the governance issues, at least, track
    pretty well--in fact, probably very well--except for that one
    issue. That is my recollection, at least.
        I think the thinking in the House, as I understood it, and
    I was part of the discussions, was that the notion of law
    enforcement reporting to a private sector group of citizens
    raises a lot of questions that were troubling. On the other
    hand, there are all these collection and other, what you might
    want to call, law enforcement issues, which you very correctly
    say need to be properly looked at.
        My suggestion would be that, once again, it is one of these
    difficult kinds of issues we need to try to work our way
    through, since you have got conflicting considerations, if you
    will.
        That is something we should try to work with your committee
    on and see if we can find some reasonable resolution because,
    on the one hand, I think the points that you have raised are
    right and valid, and on the other hand, I suspect the notion of
    having law enforcement authorities report to private sector
    citizenshas a lot of troubling issues to it. I think we need to
    work on that and see if we can find something that reasonably meets
    both purposes.
        The Chairman. Very good. We will work with you on this, as
    well as a number of other issues.
        I do have additional questions. I will submit those in
    writing rather than propound them now.
        I would be happy to give you, Mr. Secretary, the
    opportunity to comment on Asia at this time, if you so choose.
    We are having a hearing next week, and I understand you cannot
    be here.
        Secretary Rubin. Mr. Chairman, I gave a 37-minute speech
    the other day at Georgetown. If you would like, I could repeat
    that as best I remember it. [Laughter.]
        The Chairman. I heard most of it.
        Secretary Rubin. Let me try to be a touch briefer. I know
    that both of you have been in Asia over the recess and are both
    enormously focused on this set of issues.
        I think that the issues that we are seeing in Asia are
    obviously extremely important in and of themselves, but I think
    they are the issues of the new global economy.
        I do not think it is an overstatement to say that these
    issues in their broader sense are perhaps as important as
    anything that the country has had to face in a long time
    because this is the new global economy we are living in, with
    all of its opportunities, but also all of its risks.
        At the present time, Mr. Chairman, with respect to Asia
    itself, I think it would be fair to say that I do believe--in
    fact, very strongly--that we have good, effective, and strong
    IMF-centered programs that deal with the structural issues that
    have given rise to the financial instability.
        These are not austerity programs, they are not
    predominantly fiscal or monetary policy programs, they are
    structural programs. Having said that, it is an extremely
    complex situation. The key is for each country to adhere to
    these programs on a sustained basis.
        Korea is a very good example of a country in which both the
    existing government and the government-elect have really been
    doing and saying the kinds of things they need to. With the
    banks now coalescing around a program, I think one can have a
    very constructive view of that, although we all know there are
    no guarantees in such complex matters.
        Our interests are vitally at stake because of the enormous
    exports that we have in the developing world, and also because
    depreciating currencies elsewhere hurt our competitiveness and
    our goods. The way to correct all that is to try to restore
    economic well-being to these countries.
        I would say one other thing. I think these are enormously
    complex issues and I think there are no sure answers. I think
    my own view is that the IMF, with us, have made the best
    judgment that one of the right ways to go forward with these
    programs is they have to be adapted as we go along.
        You saw that the other day in Indonesia. In Indonesia there
    obviously have been very considerable questions, or I would say
    concerns expressed, about the government's commitment to the
    program, and that is absolutely the key. Hopefully, that
    commitment will be manifest in many ways going forward.
        We also need more broadly, Mr. Chairman, to figure out what
    kinds of changes need to be made in the architecture of the
    global economy for the years and decades ahead. We are in a new
    world.
        The mechanisms we have now, although they are the best ones
    we have and I think we have to fully support them to deal with
    the crisis at hand lest it get out of hand and have all kinds
    of terrible adverse effects on us--and it is not out of hand at
    the present moment, though it is very serious. But the
    mechanisms we have today are not as modern as the marketplace
    we live in. We expect to spend enormous intellectual energy
    with the Federal Reserve Board and others trying to work
    through those issues over the months ahead. But they are very,
    very complex issues.
        Senator Moynihan. And we can expect some proposals. We
    might reasonably expect some.
        Secretary Rubin. Senator, I think we all need to work
    toward trying to find--this is very tough. Deputy Secretary
    Larry Summers and I were talking about that this morning. We
    all need to try to work toward improvements.
        On the other hand, I have noticed in the last couple of
    weeks op-ed pieces and articles and all sorts of things,
    comments about all sorts of ideas, many of which are very
    attractive on their face, but when you subject them to the kind
    of rigorous analysis that is going to be required if we are
    really going to do something that makes sense, you see all
    kinds of other consequences.
        Senator Moynihan. But it is a half century since Breton
    Woods.
        Secretary Rubin. It is a half century since Breton Woods.
    We certainly should hope to have proposals that are real and
    effective, serious and substantial. I guess the only reason I
    hesitate a touch at your comment was, there is an enormous
    amount of work to do between now and the day we get to those
    proposals.
        Senator Moynihan. Thank you, sir.
        The Chairman. I certainly agree with Senator Moynihan as to
    the importance of receiving whatever recommendations you have
    as you develop them.
        Let me just make a very basic observation. I do not think
    the public, yet, is aware of the significance that area has on
    our economy, the fact that we are in a global economy. I think
    it is critically important that the Administration make clear
    why this is important to the individual here.
        Secretary Rubin. Could I make a comment on that, Senator?
        The Chairman. Sure.
        Secretary Rubin. Mr. Chairman, I think you are right. The
    President has said on a number of occasions, and I think what
    you have said is 100 percent right and it is a critically
    important issue, until the public understands what is at stake
    you will never have the public support for the programs and
    things that we need to do.
        Senator Moynihan. Yes or no, Mr. Secretary. Do you believe
    we should provide our regular replenishment of the IMF?
        Secretary Rubin. Yes, absolutely and unequivocally. The IMF
    is not perfect and the mechanism is not perfect, but lest there
    be a crisis, which none of us hope happens, in a relatively
    short period of time we need to have a capability to deal with
    it.
        Senator Moynihan. Right you are.
        The Chairman. Well, gentlemen, you both have been very
    patient and very helpful in answering the questions raised by
    members of the committee. This is an important, I think,
    undertaking. We are going to move expeditiously, but we are not
    going to move until we have what we consider to be reasonable
    answers.
        We look forward to working with you.
        Senator Moynihan. Thank you.
        Secretary Rubin. Thank you all.
        Commissioner Rossotti.  Thank you.
        [Whereupon, at 12:43 p.m., the hearing was recessed.]

                               IRS RESTRUCTURING

                                  ----------

                           THURSDAY, JANUARY 29, 1998

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 10:05
    a.m., in room SD-215, Dirksen Senate Office building, Hon.
    William V. Roth, Jr. (chairman of the committee) presiding.
        Also present: Senators Chafee, Grassley, D'Amato, Nickles,
    Gramm, Jeffords, Moynihan, Baucus, Rockefeller, Conrad,
    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. Today
    we are beginning our second day of hearings on reforming the
    Internal Revenue Service, and the goal of our series of
    hearings is to lay the groundwork for legislation that will
    improve oversight of the agency, better protect taxpayers from
    unfair treatment and change the IRS internal culture.
        Some of the major concerns I have that I would like to
    address in our series of hearings include: How can a board
    truly be an oversight board if it cannot get behind the IRS
    veil of secrecy? Is the IRS internal inspections doing an
    adequate job as an internal division?
        Should the IRS be allowed to arbitrarily assign income to
    taxpayers, forcing the taxpayer to prove a negative? Shouldn't
    the IRS carry the burden of proof when it says that a taxpayer
    has a certain income?
        How can we insure that taxpayers who are making a good
    faith effort to comply with the law are not hit with
    unreasonable penalties and interest? Should additional taxpayer
    protections be accorded when the IRS is about to freeze a
    taxpayer's bank account or seize their property, even a home?
        For example, should the taxpayer have the right to court
    review before the IRS takes these types of actions? Are there
    additional personnel rule changes that should be made so that
    the IRS can be managed more efficiently?
        For example, are the IRS personnel rules so burdensome that
    employees who abuse taxpayers are not disciplined? And what
    needs to be done to insure that employees are treated fairly by
    management and work in an atmosphere that is free of fear and
    intimidation?
        Our September hearings provided evidence that too often IRS
    employees find themselves in a hostile work environment.
        Well, these are a sampling of the concerns that our
    September hearings raised, concerns that we will address in our
    hearings as we build our reform legislation.
        Now, today we will hear from representative Rob Portman,
    who co-chaired the IRS Restructuring Commission with Senator
    Bob Kerrey. We will also hear from a panel of former IRS
    commissioners. Their experience at the helm of the IRS gives
    them a unique and important perspective.
        Finally, we will hear from a panel of tax practitioners.
        Senator Moynihan will be here in a while, but I think we
    will just go ahead and proceed, as we do have a pretty full
    agenda.
        Congressman Portman, it is indeed a pleasure to welcome you
    here today. Just let me say how much I admire the work you have
    done in this area. You have been an early leader on the need
    for reform, and I congratulate you for what you have done. And
    are doing.
        Please proceed.

     STATEMENT OF HON. ROB PORTMAN, A U.S. REPRESENTATIVE FROM OHIO

        Congressman Portman. Thank you, Mr. Chairman, and thank you
    very much for giving me the opportunity to testify before you
    today. I am honored to do so.
        As you mentioned, I did co-chair the National Commission on
    Restructuring the IRS, along with your colleague, Senator Bob
    Kerrey. His vision, his ability to think outside the box from
    time to time and his creative ideas and commitment to reform
    were really key to coming up with the comprehensive commission
    recommendations and then our legislation.
        Another distinguished member of your panel, as you know,
    Senator Charles Grassley, was also an active member of the
    commission and made very important contributions to our work,
    especially in the area of taxpayer rights.
        And, as you may recall, Mr. Chairman, we met early in the
    process. I stayed in touch with you and worked continuously
    with your staff through the commission process and that input
    was very valuable, and we continue to work closely with you.
        The Restructuring Commission, as you know, was created by
    Congress. In fact, it started here in the Senate. It was
    charged with auditing the IRS. For the first time since 1952.
        We rolled up our sleeves. We spent over a year looking at
    all the problems at the agency, we conducted extensive public
    hearings and last June came up with a plan, a comprehensive
    approach to a new IRS. More responsive to the taxpayers; more
    respectful of their rights.
        In July, Senators Kerrey and Grassley, Congressman Ben
    Cardin and I introduced legislation to implement the reforms.
    That legislation was then the subject of hearings before the
    Ways and Means Committee and passed the House by a vote of 426
    to 4 at the end of the session.
        But it was this committee, the Finance Committee's work and
    particularly your hearings last September that really focused
    all of America on the need to fundamentally reform this
    troubled agency. And for that, Mr. Chairman, this committee
    deserves the gratitude of the commission members, of members of
    the House and the Senate and, most importantly, the American
    taxpayer.
        I commend this panel for now using the House passed bill as
    a foundation for your reforms and further improvements. I know
    I speak for Chairman Archer, Congressman Ben Cardin and others,
    who worked so hard on this in the House, in saying we are very
    eager to work with you as partners in improving the House bill
    and giving the President legislation--as soon as possible--for
    his signature.
        A number of questions were raised in your good hearings
    yesterday regarding the House passed legislation, and perhaps I
    can try to respond to them later, if there are questions this
    morning. But I would like to just briefly discuss a couple of
    issues that are difficult ones that this committee will be
    considering.
        As you have rightly pointed out, Chairman Roth, we only
    have one shot at major IRS reform. So it is important we insure
    that the reforms we enact are comprehensible and sustainable.
    That is why the oversight board we have proposed, I think, is
    so critical.
        Long after these important hearings have ended and the
    cameras and reporters have gone on to other stories, Congress
    and the American taxpayer need to know that there is a
    mechanism in place to hold the IRS's feet to the fire, a
    mechanism that provides ongoing oversight, with expertise,
    continuity and accountability.
        The oversight board's role, simply put, is to guide the
    development and oversee the implementation of long-term
    strategies at the IRS, a function that we think is sorely
    lacking now, and to hold IRS management accountable for its
    performance.
        In my view, to be effective, the board must focus on the
    big picture; strategic issues--like the modernization plan that
    the Commissioner unveiled before your committee yesterday--and
    allow the Commissioner then to be responsible for the day-to-
    day operations of the IRS.
        The oversight board's job is to insure that the train is
    running in the right direction, be sure it is running on time,
    but not to micro-manage the conductor.
        As envisioned in the House passed legislation, the
    oversight board is focused on strategic tax administration and
    not intended to get into specific tax cases.
        The withholding of Section 6103 authority from the board
    was deliberate, and it was done for two reasons. First, it
    serves to prevent actual or perceived conflicts of interest.
        As you may know, Mr. Chairman, there are a number of
    reasons that have been expressed for this. Most of them have
    been expressed very adamantly by the Secretary of the Treasury
    in previous testimony. Yesterday there was a different tone I
    detected.
        But one of my personal concerns about this is the potential
    for such problems as perceived conflicts of interest.
    Particularly, it may make it difficult for us to attract the
    kind of people we want to serve on this kind of a board.
        Second, the lack of Section 6103 authority, of course, will
    keep the board focused on the big picture and be sure that they
    are prevented from being mired down in individual tax matters.
        There may be a way to grant something short of blanket 6103
    authority to the oversight board without permitting access to
    individual taxpayer names and information. I am certainly
    interested in working with the committee on that.
        Finally, I would like to commend Chairman Roth and the
    members of the committee for their strong endorsement and
    confirmation of Commissioner Charles Rossotti. As I believe we
    all witnessed in the hearing room yesterday, he brings the kind
    of credibility, expertise and new ideas that are clearly needed
    to guide the IRS out of these troubled waters.
        The plans that he unveiled before this committee yesterday
    for a comprehensive modernization of the IRS, focusing on
    helping people comply with the tax laws and insuring fairness
    of compliance, are exciting to me, and they are entirely
    consistent with the commission report and the House-passed
    legislation.
        Essential to this concept is designing, organizing and
    measuring the work of the IRS around major taxpayer groups with
    similar needs. I support this concept, which was recommended by
    the Restructuring Commission, and Mr. Rossotti deserves credit
    for moving it forward.
        But, in order to be successful in this task, he must have
    the expanded authority and the personnel flexibilities that the
    restructuring legislation would give him. And, from your
    comment this morning, you would like to strengthen it even
    further.
        And second, a strong board is needed to be able to enhance
    and support the bold reforms, if they are to be driven all the
    way through the system, and we have the kind of continuity in
    place to make sure, down the line, it actually works.
        The era of big government, we are told, is over, Mr.
    Chairman, but now, of course, we must redouble our efforts to
    make sure that our government effort is more efficient; our
    government is more responsive.
        The IRS, in its current form, to me, represents the worse,
    really, of the impersonal, antiquated and inefficient
    Washington bureaucracy. Meanwhile, the private sector has
    redefined the standards of customer service over the past
    couple of decades, delivering world class products, while
    achieving new levels of efficiency.
        We should expect no less of the IRS as we enter the next
    century.
        Congress, of course, has responsibility here, and that is
    to give the IRS the tools and oversight it needs to get the job
    done, including a more simplified tax code.
        I commend you again for moving legislation forward to do
    just that; to give the IRS a board, to restructure the IRS, to
    put in place the taxpayer relief that you have talked about in
    your initial comments this morning, and I certainly look
    forward, Mr. Chairman, to working with you and the committee in
    the weeks ahead to provide this needed relief to taxpayers as
    soon as possible. Thank you.
        [The prepared statement of Congressman Portman appears in
    the appendix.]
        The Chairman. Thank you, Mr. Portman, for your very
    informative statement. Let me say I particularly appreciate
    your interest in working with us as we seek to strengthen the
    legislation that hopefully will be enacted and become law.
        Let me just make one comment. I support the concept of a
    board, and I thank the commission for recommending that. I do
    have some concern as to how we make sure they have adequate
    information to discharge the responsibility of oversight.
        I agree with you very strongly, that the board should not
    be involved in minutia and that type of oversight. At the same
    time, I think that they have to have adequate information.
        As I pointed out yesterday, you take the report that we
    have on the Oklahoma-Arkansas district office, and if you start
    deleting everything, how are you going to have oversight? That
    is very bothersome to me.
        I absolutely agree that 6103 should not be made available
    to handle individual cases, but systematic problems with the
    organization should be a matter of interest, concern and
    oversight of the board.
        So I think this is something that we have to try to address
    in a way that does not create a conflict of interest, but also
    enables the board to discharge its responsibility of true
    oversight.
        The last thing I want to see is an advisory group created
    that really has no effective function, and it just sort of
    withers away on the vine, because I thinkthe one critical thing
    we have to do in this reform is to insure that there is independent
    oversight of the agency.
        I may not be so concerned now, with Charles Rossotti and
    others there, but what we are trying to do is bring about
    reform that will last through the years ahead.
        And, for that reason, thank you very much for being here
    and your comments.
        Congressman Portman. Mr. Chairman, if I could just briefly
    respond? I couldn't agree with you more.
        I think one of the great things about the board is the fact
    that we have staggered five year terms, and you will get the
    kind of continuity that you are unlikely to get even with a 5-
    year term for an individual commissioner.
        And this is for the long term. After all, we haven't done
    this since 1952, and Congress may not be back at it for another
    40 some years.
        I will say that I also agree with you entirely on the need
    for independent oversight, and the question is whether 6103
    authority is necessary to get that or not. Audit reports, of
    course, could be reviewed by the board. Names could be deleted.
        I like your idea of having more independence, in terms of
    the Inspector General. Frankly, I think the commission report
    could have done more in that area. We did look at it.
        We didn't come up with a specific recommendation. But that,
    directly reporting to the board, having the IG at Treasury in a
    more independent role, in a strengthened role, I think would
    also help to insure that there is that kind of independent
    oversight.
        Finally, you might want to look at the powers of the board.
    As you know, I was always pushing for the board to have more
    power, in terms of actual approval, not just review, and there
    may be some things that could be strengthened there.
        So I think there are ways to insure that precisely what you
    have expressed as your concerns are indeed addressed, perhaps
    without going so far as to giving them blanket 6103 authority,
    which may have some negative implications.
        Particularly as it relates--I said earlier--to attracting
    good board members who may be from the private sector and who
    may not want to be in a position of being accused of conflict
    of interest, even though it is only a perception. It is not
    reality.
        Mr. Chairman. Thank you very much. Senator Moynihan, do you
    want to make any remarks?
        Senator Moynihan. I do want to thank Mr. Portman for all he
    has done and for his courtesy to come today and just to
    encourage us in our labors and to thank him for his comment
    about the need for a more simplified tax code.
        At the risk of encouraging Phil Gramm yesterday, I read
    from an article in the editorial page of the Wall Street
    Journal on the last day of the year, talking about the booming
    stock in H&R Block, in a press release they put out about our
    unsurpassedly complex Tax Relief Act of 1997.
        ``This bill creates the most relief and causes the most
    confusion.'' They went on and on. ``How can we not make
    millions more?'' And indeed. Their stock went up by a third.
        Just to point out that there is a metric here. When the H&R
    Block Income Tax Guide was first published in the 1960's, it
    had 196 pages. It now has 574. And that is our doing. You
    cannot find the regional director in Omaha, sir, who did that.
        You have, in any large government or agency, the same kind
    of problems you have in education. The tales of school
    performance are filled with accounts of how five Beta Kappas
    from Brown went off to an inner city school in Providence and
    in 2 years time performance was right up on top of the possible
    scales, and in four years time those five were in Wall Street.
        You are going to get average people doing these large tasks
    in government and making their life manageable is a task. If
    you were looking for a conspiracy in this town, and we seem to
    from time to time, do these K Street lawyers really write those
    bill because only they understand them?
        You may be sure they make more in a week than the average
    inspector makes in a year, but I will leave it there.
        Thank you for what you have done and for your comments,
    sir.
        Congressman Portman. Thank you, sir. One quick comment.
    There are some K Street lawyers here this morning this morning.
    We can talk to them.
        Senator Moynihan. Why not? [Laughter.]
        Congressman Portman. Last night I got home and, being a
    CSPAN junkie, I happened to hear your comments on
    simplification, and I will just make two quick comments.
        One is--as you saw, I know, in the commission report--we
    were quite precise as to the connection between complexity of
    the tax code and the problems at the IRS.
        Senator Moynihan. Yes, sir. You were.
        Congressman Portman. And we actually put that up front.
    Senator Kerrey deserves a lot of credit for that.
        When we initially began our process, that wasn't
    necessarily within our statutory mandate, and yet, we pushed
    the envelope and made sure that that was front and center. When
    it came time to implement that legislatively, it was more
    difficult.
        And I know the Joint Tax Committee is probably here this
    morning with us, but we came up with language which we think
    will help. It doesn't solve the problem. Ultimately we need to
    have this committee and the Ways and Means Committee and
    others, come up with major tax reform.
        What we say is there has to be now, under this legislation,
    a new tax complexity analysis, which every new piece of tax
    legislation would carry. And then there is a procedure, much
    like the unfunded mandate procedure in the House and Senate,
    where someone can raise a point of order on the floor of the
    House or in the Senate, if that complexity analysis is not
    complete.
        The complexity analysis is very simple. It saysyou have to
    say how many new forms is this going to require, what is the new burden
    on the IRS, what is the burden going to be on the taxpayer, so at least
    we, as members of Congress, and frankly, the press and the public,
    would have access to that.
        And we think that will be an encouragement toward
    simplification, when everything else in this town seems to be
    an encouragement in the opposite direction, toward more
    complexity.
        Senator Moynihan. Well done, sir. Thank you.
        The Chairman. Thank you very much, Mr. Portman. We
    appreciate your being here. We look forward to working with you
    in the future.
        Senator Kerrey. Can I ask a question, Mr. Chairman?
        The Chairman. Well, we have a number of witnesses today, so
    I had hoped that we could proceed with our two panels. It is
    10:25. But go ahead and ask one question, if you want.
        Senator Kerrey. Well, I would like to point out as well
    that one of the ways these tax codes get complex is not only
    the K Street lawyers write them, but very often, after we give
    a speech, and we see the audience give a round of applause and
    a standing ovation to this great idea that we have got, we go
    to our staff and say, ``Would you convert that speech into a
    law.''
        It is our intent, with our proposal--and I think, indeed,
    with the Chairman's vision as well--that whoever the IRS
    Commissioner is, under whatever configuration the board has,
    they have a sufficient amount of independence to be able to say
    publicly, ``Nice speech, Mr. President, but here is what it is
    going to do to the code.''
        ''You have got a standing ovation there and you have got
    them all cheering and stomping their feet, but this is what it
    is going to cost the taxpayer if we write that into law.''
        The Chairman. I couldn't help but think about the
    complexity the other night.
        Senator Kerrey. Well, I think about the complexity a lot
    when I get the crowd going too.
        Congressman Portman, one of the areas that both you and I
    think are important to address, and we attempted to address it
    both in our recommendations and the statute, and I would like
    to give you an opportunity to comment, is in electronic filing.
        Can you just briefly offer some comments as to why you
    think we need to pay attention; to write the law so that we
    provide a sufficient amount of incentives and resources to
    increasingly more to electronic filing?
        Congressman Portman. Absolutely. I must also mention, just
    briefly, along with the complexity analysis, Senator Kerrey has
    alluded to another provision in the legislation that I think is
    very important, which is to get an independent analysis from
    the IRS of tax legislation as it moves forward.
        It is our understanding, from talking to people who were at
    the Joint Tax Commission 20 and 30 years ago, that was much
    more common. In the Ways and Means Committee, where I sit, that
    is no longer the case--and that part of the complexity
    challenge is to get the IRS at the table in an objective role.
        Not representing Treasury, not representing tax policy,
    from the White House point of view, but saying, what is going
    to be the actual impact on the administration of the tax code.
    And, from the perspective of the taxpayer, how many new lines
    are going to be on the new schedule and so on.
        So, this is another aspect of the legislation that I think,
    Senator Roth, you will find entirely consistent with your
    approach to tax policy and I think is a major improvement.
        On electronic filing, it is kind of a no-brainer. It is
    win-win situation. The IRS currently spends somewhere like
    $7.00 to $8.00 to process a paper return. You have a 22 percent
    error rate. Half of that is caused by the IRS.
        Imagine the downstream costs that are entailed there to the
    taxpayer, in terms of receiving notices. You have brought up
    some of that testimony; of, administrative foul ups because of
    the error rate at the IRS.
        Electronic filing, on the other hand, probably costs a
    couple of dollars. About $2.85. When you take out the
    requirement to file a paper signature, of course, that cost
    goes down by more than half. And the paper signature, in our
    view, the commission's view, is unnecessary.
        The taxpayer can keep that on file, or perhaps once in a
    life you can require that.
        So, in terms of the cost to the system--roughly a dollar
    versus $7.00 or $8.00--and in terms of the cost to the taxpayer
    because of this enormous downstream cost that comes with the
    error rate that is so high, 22 percent, it seems, to us, that
    we should do everything we can, as a Congress, legislatively to
    encourage electronic filing.
        We tried to do that in our legislation. We don't do
    everything that I would have liked to have seen, but in the
    end, by taking away the signature requirement and putting in
    place incentives to electronically file, we believe we can get
    to 80 percent electronic filing, rather than, roughly, 20
    percent or less, within five or 10 years.
        The Chairman. Thank you very much for being here today, Mr.
    Portman, and we look forward to working with you.
        Congressman Portman. Thank you, Mr. Chairman.
        Senator Moynihan. Thank you, sir.
        The Chairman. It is now my pleasure to introduce our first
    panel, comprised of former commissioners of Internal Revenue.
    These witnesses have unique insight into the operations of the
    IRS, and we all look forward to hearing their views.
        Witnesses on this panel include Mr. Don Alexander, who
    served as Commissioner from 1973 to 1977, is with Akin, Gump,
    Strauss, Hauer & Feld, in Washington, DC. Mr. Sheldon Cohen,
    who served as Commissioner from 1965 to 1969, is with Morgan,
    Lewis & Bochius, in Washington, DC.
        Mr. Fred Goldberg, Jr., who served as Commissioner from
    1989 to 1991, and was a member of the IRS Restructuring
    Commission, is with Skadden, Arps. And, of course, Ms. Margaret
    Richardson, our most recent Commissioner, who is with Ernst &
    Young, in Washington, DC.
        Why don't we start with you, Ms. Richardson, and we will be
    happy to include your full statement, as if read.
        We would ask each of you to keep your comments to five
    minutes.
        Ms. Richardson.

      STATEMENT OF MARGARET M. RICHARDSON, ESQ., PARTNER, ERNST &
      YOUNG, LLP, WASHINGTON, DC; FORMER COMMISSIONER OF INTERNAL
                                REVENUE

        Ms. Richardson. I will certainly do my best, and thank you
    very much, Chairman Roth and other distinguished members of
    this Committee.
        I do appreciate the opportunity to be able to join you
    today, and I commend you, Mr. Chairman, for carefully
    considering the issues and the various proposals that are out
    there for restructuring the IRS.
        I believe it is important to take the time to weigh the
    potential impact of these proposals on our current tax
    administration system, the future of tax administration and on
    our self-assessment system.
        The 4 years that I served as Commissioner of Internal
    Revenue, from 1993 to 1997, did mark a period of great change,
    as well as significant accomplishment, although I would be the
    very first to tell you that there was more that needed to be
    done.
        We did set ambitious goals to improve service to taxpayers
    by providing more ways for them to obtain accurate and timely
    information to file their returns and to make payments. But we
    were also addressing concerns, expressed by many of you and
    your colleagues in the House of Representatives, about
    eliminating refund fraud, particularly the earned income tax
    credit program, closing the so-called ``tax gap,'' decreasing
    the accounts receivable and improving compliance levels
    generally.
        I actually began my career as a lawyer at the IRS in 1969,
    left in 1977, and when I returned as Commissioner, almost 25
    years later, I found many of the same issues were still there.
    Managing in the public sector was still very challenging, as it
    had been before, but it was even more frustrating.
        Not only had the Internal Revenue Code grown lengthier and
    more complex, but the IRS had been asked to shoulder many
    responsibilities beyond just collecting taxes.
        In addition, everyone attempting to manage in the Federal
    sector was struggling with the sometimes conflicting
    requirements of the Federal Managers Financial Integrity Act,
    the Chief Financial Officers Act, the Government Performance
    and Results Act and the Paperwork Reduction Act, just to name a
    few.
        But I also found a number of IRS employees who were quite
    concerned about finding ways to provide better service to
    taxpayers. Although they wanted to implement change--and many
    of them spoke the language of change--often they did not have
    the training, the tools or the resources to implement change.
        And frankly, there was a certain amount of skepticism, and
    I think, at times, even cynicism about whether or not change
    could be affected or whether there would be consensus among the
    overseers that could be reached on what kind of change should
    be undertaken. That was why so many of us at the IRS welcomed
    the creation of the National Commission on Restructuring the
    IRS, and we looked forward to its report.
        The specific focus of attention of that report had been
    whether or not there should be an oversight board with private
    sector members, and if so, what authorities and
    responsibilities such a body should have.
        I would just like to say that I don't believe there is any
    one form of organization or governance that is perfect, whether
    it be for the Internal Revenue Service or any other
    organization, nor do I believe that there is any one form of
    organization that will cause all of the concerns about the IRS,
    real and perceived, to evaporate.
        We have all heard repeatedly, during the past year, about
    the problems of the IRS, that they were a long time in the
    making and that they will take a long time to fix.
        But what we have to do, and I think what you need to do, is
    to identify with enough specificity what problems we are trying
    to fix, so that the steps to fix them can be specifically
    identified.
        Some of the problems at the IRS are, no doubt, present in
    any large organization. Some of the same problems are present
    in many other government agencies, and some other problems
    relate to the complexity of the code that the IRS is charged
    with administering.
        You in Congress have got to decide what you want to achieve
    through reform and restructuring. I think you really do have to
    identify what can be fixed and try to then find the best
    organizational structure and changes to produce those fixes.
        There has also got to be an agreement among interested
    parties, particularly in the executive branch and the Congress,
    about what the mission of the IRS should be. Then I think you
    can achieve some kind of agreement about what governance and
    organizational structure would likely accomplish that mission.
        Ideally, the structure would be so streamlined that there
    would be clear lines of authority and accountability throughout
    the organization, all the way from the top to the front line
    employee. The goal of the proposal that Commissioner Rossotti
    discussed with the committee yesterday was intended to do just
    that. I think it deserves very careful consideration.
        The Commission, as Senator Kerrey and Congressman Portman
    had pointed out, did consider such an approach, but didn't have
    time to fully explore it. Obviously, without more details about
    the proposal, it is very difficult to predict, with reasonable
    certainty, whether it will be successful.
        But what I can predict with reasonable certainty is that
    any new structure without the right kind of talent to perform
    the organization's mission will have little chance of success.
    Without maximum personnel flexibility so that the best
    qualified people can be recruited, trained and retained, any
    new structure will fail too.
        In addition, without stable funding and focused, consistent
    and constructive oversight, a new organizational structure will
    have little success.
        I see my time is short. I do want to mention that one of
    the things and one of the ideas that we talked about at the
    Commission, but we didn't think was politically feasible, was
    the idea of making the Internal Revenue Service an independent
    agency, much like the Social Security Administration.
        I would be happy to talk a little bit more about that
    later, but I think it would provide the opportunity for the
    Commissioner to have that independent voice for good tax
    administration that was talked about by Congressman Portman.
        And also, to be able to treat the agency somewhat
    differently. For personnel purposes, budget purposes and other
    purposes. Thank you.
        The Chairman. Thank you, Ms. Richardson.
        [The prepared statement of Ms. Richardson appears in the
    appendix.]
        The Chairman. Don, it is a pleasure to welcome you. Please
    proceed.

    STATEMENT OF DONALD C. ALEXANDER, PARTNER, AKIN, GUMP, STRAUSS,
       HAUER & FELD, LLP, WASHINGTON, DC; FORMER COMMISSIONER OF
                            INTERNAL REVENUE

        Mr. Alexander. Thank you, Mr. Chairman. First, I want to
    make it clear for the record that I am not on K Street. My
    office is on New Hampshire Avenue.
        Ms. Richardson. I guess I am not either.
        Mr. Alexander. Mr. Chairman, it is a pleasure to be before
    you and this committee today on this extremely important topic,
    and I want to second what Congressman Portman said and what my
    good friend, Peggy Richardson, said about complexity.
        One of the really fine things in S. 1096, diluted a little
    bit in the House bill, is letting IRS have a seat at the table
    when you think about a tax proposal that affects many, many
    individual taxpayers. Let's at least have a mock-up return to
    find out what the new capital gains Schedule D is going to look
    like before we embark on having, say, five rates instead of
    one.
        Let's look at what the child credit did, in comparison to
    an increase in the personal exemption.
        While IRS has been bashed--and it deserves some of the
    bashing--lately, I don't see how any agency, composed of normal
    human beings, most of them trying to do their jobs well and
    trying to be courteous and fair to taxpayers, can cope with an
    ever changing mess like the one we have now in the Internal
    Revenue Code.
        I am delighted to hear the approval that seems to be coming
    to study what is going to happen before you make it happen.
        And, Mr. Chairman, you raised a number of questions, and I
    will try to give my views on some of them.
        I was Commissioner during Watergate. That was a time when
    perception did equal reality. That was a time when all of us--
    and I was certainly not exempt--were accused of conflicts of
    interest, at a minimum, and out right crime, at a maximum. I
    went before two grand juries.
        The President that appointed me tried to fire me within 3
    months after I took office. I am delighted to see in both
    bills, the House bill and the Senate bill, a 5-year term for
    the Commissioner. The President could still fire the
    Commissioner under the House bill. But at least the President
    would have to give a reason for it.
        Under S. 1096, the board could fire the Commissioner, and I
    don't think that ought to be.
        I didn't want to serve at the pleasure of a President that
    tried to fire me August the 9th, 1973, and thereafter, nearly
    always about the 9th of the month, for quite a while. It is
    very difficult to make long range plans when you think you
    might have to leave the office the following day.
        The five year term is long overdue, and I am glad that you
    are doing it.
        Section 6103 authority for the board. All right. If IRS
    were an independent agency, as former Commissioner Richardson
    suggested a moment ago, the board would be a necessity. And
    given the political climate in which we live now, a board may
    be a necessity at this time.
        I have some doubts about the board, and particularly, I
    hope you don't give the board authority to look into individual
    cases. The Ways and Means Committee has that authority. The
    Joint Staff has that authority. The Senate Finance Committee
    has that authority, and you certainly exercised it last fall.
        That should be enough, rather than give the authority to
    the board, because the board members are going to be accused,
    rightly or wrongly--and I would say 99 percent of the time it
    is going to be wrongly--of conflicts of interest, particularly
    if the board includes CEOs or former CEOs.
        If the board includes practitioners, you are going to have
    the same problem. So, giving them 6103 authority is going to
    exacerbate a problem that already exists.
        The new Commissioner, Mr. Rossotti, has already put in some
    rules that I think make eminent sense.
        Requiring further high level approval of seizures of
    property. I think the right of IRS to seize property from say a
    repeat offender who has been using trust fund taxes is
    necessary to the operation of an effective tax system, but that
    right has to be exercised very carefully.
        I hope you leave Inspection where it is. The Commissioner
    needs to have a strong inspection arm, and certainly what has
    been shown recently about collection activities demonstrates, I
    think, the wisdom and the need of that.
        On penalties and interest, clearly they need to be
    reconsidered. We pile penalty on penalty in an effort to raise
    revenue. That is not the purpose of a penalty, Mr. Chairman, as
    you know well.
        Thank you for letting me appear, and I look forward to
    answering questions.
        The Chairman. Thank you very much, Mr. Alexander.
        [The prepared statement of Mr. Alexander appears in the
    appendix.]
        The Chairman. Mr. Cohen.

        STATEMENT OF SHELDON S. COHEN, PARTNER, MORGAN, LEWIS &
     BOCHIUS, LLP, WASHINGTON, DC; FORMER COMMISSIONER OF INTERNAL
                                REVENUE

        Mr. Cohen. Thank you, Mr. Chairman, members of the
    committee. I appreciate the opportunity to give you my views on
    the restructuring bills, both the House and Senate, and the
    commission's report.
        I served at a different time and there were different
    climates, of course. Wilbur Mills was chairman of the Ways and
    Means Committee, and Wilbur Mills used to invite me to his
    office and discuss the administerability of a bill or the
    effective date.
        He would look me square in the face, ``Can you do it this
    year?''
        And I would say no, sir or yes, sir, as the case may be,
    and he would change the effective date to suit the
    administerability. I mean, I doubt if he would announce that in
    public, and I certainly wouldn't, but he was concerned, and we
    had regular chats about that.
        Now, it would be difficult for the Commissioner to do that
    in public, when the Secretary is saying I want the effective
    date to be January 1. Or the President is saying I want the
    effective date to be January 1, or indeed, the chairman of
    either one of the two tax writing committees is saying publicly
    that he wants the effective date to be January 1.
        So, you had better be careful how you structure that
    because you are going to put the Commissioner, whoever he or
    she might be, in a terrible vise.
        On Section 6103--and I am skipping around, because you have
    my full testimony, and you know my views on a variety of
    things.
        The Chairman. Your full statement will be made a part of
    the record.
        Mr. Cohen. But I will try to address some of the issues
    that have come up this morning.
        On Section 6103, Don is correct. He was the Commissioner.
    At the request of the Senate Government Affairs Committee,
    there was a study made of Sec. 6103 by the Administrative
    Conference of the United States. The Chairman of the
    Administrative Conference of the United States, at the time,
    happened to be Antonin Scalia (now Justice Scalia).
        He was the chairman of the committee that studied that
    issue, and he made me vice chairman.
        So much of what is the modern in section 6103 that was
    amended shortly after that conference report, encompasses what
    Justice Scalia, at that time, thought, and it was well thought
    through. It was an effective study.
        Tax return information is terribly sensitive. Ifyou put a
    corporation president or a presently practicing lawyer or accountant on
    this board, or a past practicing lawyer or an accountant who has
    affinity to a variety of people, his friend will ask him, ``I had this
    terrible thing happen to me,'' he will have to go looking.
        Or some--one of them--silly, will go look into an issue,
    and God forbid, there will be a favorable result come out, even
    if he didn't do anything to cause the favorable result. And it
    will be on the front page of every newspaper in the United
    States, and you will have a scandal.
        So you have to think about all the ``what ifs,'' because
    the ``what ifs'' will happen. Washington doesn't change. These
    things have happened over the years.
        You see in my statement that I am wary of giving the board
    too much authority. I think the IRS does need an independent
    view, and it needs that independent view in private. I don't
    know whether this board meets in public or private. I can't
    tell. The two bills are somewhat vague on that.
        This kind of oversight and this kind of effective
    discussion with the commissioner about the very essence of tax
    administration can't happen in a fish bowl. It won't be
    effective. Nobody will say what they really think, in the open.
    And, if you do say what you really think, you are giving a road
    map to tax evasion.
        Anybody who listens to this discussion will know what you
    are planning to do and knows how to walk around it. So you have
    to think about your government in the sunshine and your other
    acts that require boards to have open meeting.
        The commissioner meets by himself, in his or office, but
    boards have to meet in public, unless there are certain
    exceptions in the statute. I don't see any exceptions in the
    statute, so I think this board has to meet in the public.
        I just don't think people are going to be candid in an open
    meeting. While I am not a great advocate of this board, as you
    will see from my testimony, if you are going to have the board
    [and I have been run over by this train before, so I know it is
    going to happen] be careful how you draft it, because you may
    get what you want, and you have to be careful what you want.
        I am concerned about the union leader being on the board. I
    think the union leader is a fine person. He happens to be a
    first rate human being, but he has inherent conflicts of
    interest.
        I think he should be an advisor to the board. I think he
    might be able to sit in on the board, but I don't think he
    ought to be a board member.
        The five-year term for Commissioner is fine. I am one of
    the few--three commissioners, since the reorganization, to have
    served as long as 4 years. I am one of those three. So the odds
    of you getting someone to serve 5 years is slim or none.
        The FBI director has had a 10-year term. Since Mr. Hoover
    left, no director has served yet more than four years, as I
    remember it. The present one is close to five. My bet is that
    he won't go 10 years.
        So, naming the number doesn't make the event. I think there
    are a lot of things in your bill that require some careful
    thought.
        The burden of proof is a mistake because it will give
    people the idea they have more rights than they really have,
    because they will misunderstand. I think the privilege is a
    mistake for the same reason, and I discuss that in my written
    testimony.
        The Chairman. Thank you very much, Mr. Cohen.
        [The prepared statement of Mr. Cohen appears in the
    appendix.]
        The Chairman. Mr. Goldberg.

      STATEMENT OF FRED T. GOLDBERG, JR., PARTNER, SKADDEN, ARPS,
    SLATE, MEAGHER & FLOM, LLP, WASHINGTON, DC; FORMER COMMISSIONER
    OF INTERNAL REVENUE AND FORMER TREASURY ASSISTANT SECRETARY FOR
                               TAX POLICY

        Mr. Goldberg. Thank you, Mr. Chairman. I would like to
    begin by thanking Senator Kerrey for his leadership on the
    Restructuring Commission and to thank you and your colleagues
    for the hearing you conducted last fall.
        I think they focused a level of attention on this issue
    that will make action certain.
        Yesterday's testimony by Commissioner Rossotti, I think,
    painted a compelling vision of reform for the IRS. In my view,
    he is absolutely right on the mark. I think his statement
    reflects a clear understanding of what tax administration is
    all about. I think it reflects an understanding of what is
    expected from the IRS and how to go about getting the job done.
        It is all about focus on the taxpayer, the critical
    importance of using the right kind of measures and the need to
    keep it simple.
        His testimony is the most graphic possible illustration of
    why the reforms you are considering, the reforms that were
    recommended by the Restructuring Commission and the reforms
    that have been approved by the House are absolutely essential.
        There is no chance that he deliver on that promise without
    a 5-year term. By his statement, he is not going to start until
    some time next year. That is 1999. There is an election in the
    year 2000.
        There is no chance he can deliver without giving him the
    authority and tools to build his own team. There is no chance
    he can do the job without continuity and oversight. Personnel
    are going to change in the administration. They always do.
        Without the continuity afforded by an oversight board, he
    will not be able to do what he has promised to do. Without that
    kind of continuity and coordination from the Congress, he will
    not be able to do what he has promised to do.
        Unless the members of the Senate and the members of the
    House, with all of the different pieces of the IRS under their
    jurisdiction sit in a room together, with him and his
    colleagues, to keep focus on his mission, he can't deliver.
        If he doesn't have stable funding for his agency, he can't
    deliver. And if he does not have work force flexibility to make
    the changes that he wants to make, to reward the employees who
    perform and to get rid of the ones that don't, he can't do his
    job, and that is why the commission came up with a set of
    recommendations it came up with, why the House has improved on
    those recommendations, and why I believe you and your
    colleagues are considering moving forward.
        It is the real world of why those recommendations make
    sense.
        Now, the governance and management provisions have received
    a lot of attention, and I think they currently strike the right
    balance. I think the issues with respect to governance and
    management are in the all important details at this point.
        I would encourage you to look at a smaller board. I think
    it may be unwielding in its current size. I would look very
    carefully at the work force provisions. We know what they are
    intended to; maintaining protections for workers, respecting
    the workers right, but at the same time giving necessary
    flexibility. But I would look at the details very carefully.
        I think I would try to strengthen the provisions on
    Congressional oversight. I think I would vest, if anything,
    more authority in the Joint Committee on Taxation and the Joint
    Committee staff. I think I might formalize more directly some
    of the procedures for coordinated hearings. I would look at
    that area as well.
        If you can find a way to minimize micro-management, do it.
    It is a problem up at that end of the street and, with all due
    respect, it is a problem down here.
        I would like to comment briefly on access to taxpayer
    information. I agree with my colleagues. I think, on balance,
    it would be a serious mistake to give the board 6103 authority,
    for three reasons. It is a distraction, it creates the
    potential for appearance of conflicts of interest, and I
    believe it will make it harder to recruit people who will
    serve.
        Don mentioned the tax writing committees and the joint
    committee. You have the IRS itself, you have the IRS inspection
    function, you have the Treasury Department and the Inspector
    General. You have lots of people looking at that. I think that
    is sufficient.
        To the extent there are problems with 6103, I think you
    ought to deal with those separately.
        I would like to comment on the Taxpayer's Bill of Rights
    provisions briefly. I think, on balance, changing the burden of
    proof is a mistake. It is a very powerful and very positive
    symbol, and I think people who disregard that are making a
    mistake.
        On balance, however, my judgment is that at the end of the
    day it will do more harm than good.
        The second reason is very practical. It is expensive. I
    believe there are other changes you can make that will have far
    more real world impact in helping taxpayers. You shouldn't
    nibble at the margins.
        I believe attorney's fees should be pure and simple.
    Taxpayer wins, taxpayer gets it. No complexities, no lawyers
    words. They win, they recover.
        Don't nibble at the edges of penalties and interest. Those
    provisions are crushing people. They are doing untold damage to
    the tax system. And don't worry about a little bit revenue
    here, a little bit of revenue there and try to fit it in a tiny
    box. Do it, in my judgment, and do it dramatically.
        Look at the Anti-Injunction Act. There is room there. Look
    at codifying the ability of the IRS to act reasonably.
        The notion of common sense in tax administration--there are
    a lot of folks there who want to do what is right, and they are
    told it is right, it is fair, but you can't do it. Give them
    the authority to act the way they want to act, because most of
    them want to get it right.
        Thank you very much, Mr. Chairman.
        The Chairman. Thank you, Mr. Goldberg.
        [The prepared statement of Mr. Goldberg appears in the
    appendix.]
        The Chairman. We will limit the first round of questioning
    to 5 minutes. Senator Moynihan and myself will have 10 minutes.
        First of all, let me thank you, each of you, for your
    helpful testimony.
        Our hearings have indicated a need for the committee to
    consider protection for the taxpayer in a number of very
    specific ways. Some of these were touched upon by one or more
    of you, but I would like to get the reaction of the panel.
        I have to say that taxpayers are very angry that the IRS
    can arbitrarily assign income to taxpayers, who then have to
    prove that they didn't have such income.
        I know some of you are opposed to any change, but if we
    change the system, should we change the system so that
    taxpayers must continue to maintain appropriate records, but
    the basic rule would be that the IRS carry the burden of proof
    on income and the taxpayer the burden of proof on deductions?
        How does the burden of proof on the IRS square with the
    legal duty of taxpayers to file a correct return? Mr.
    Alexander, do you want to comment?
        Mr. Alexander. Yes. I will try to, Mr. Chairman. I would be
    quite concerned about a change which would put the burden of
    proof on the IRS on anything that would, say, increase the
    taxpayer's reported income, as opposed to reducing the
    taxpayer's claimed deductions.
        In my limited experience, the assignment of income question
    comes up primarily when we are dealing with very large
    companies, very sophisticated taxpayers who have perhaps very
    much to hide; where we are dealing with whether a foreign
    subsidiary in a tax exempt or nearly tax exempt country
    actually earned the income which the IRS believes was actually
    earned by the U.S. parent.
        The assignment of income to taxpayers comes up frequently
    in that area, and I don't think that the multi-nationals need
    any particular protection. In fact, you don't give them under
    any the burden of proof change, because it has a $7 million
    asset limit for corporations.
        Individuals, many of them--most of them--are law abiding.
    They pay their taxes, and they stop at red lights. [Some not].
    But some don't stop at red lights and some don't pay their
    taxes, and sometimes, particularly if they are in industries
    that permit the receipt of cash, they don't like to report that
    cash, and IRS has to try to arrive at some accommodation
    between the impossible practical task of unearthing everything,
    which IRS certainly shouldn't do, but trying to make the tax
    system work in cases where there are transfers of cash.
        The IRS has a hard enough time there anyway, sir. I think
    it would be extremely difficult to carry that additional burden
    in a situation where someone is reporting $10.00 annually in
    cash tips, and he work at one of the fanciest restaurants on K
    Street.
        The Chairman. Before I go to you, I just want to make one
    observation, and that is, admittedly, as the Commissioner said
    yesterday, we have four different groups, and I think the
    problems are different for the large corporation, for example.
        But I have to say that our hearings last fall showed that
    the assessment of taxes, the claim that an individual has more
    income than reported, in many cases, was directed at the low
    income. That was one of the real shockers of the hearing, that
    much of the time and the attention was on the low income, and I
    just put that into the mix.
        It would be interesting to hear what you have to say, Ms.
    Richardson.
        Ms. Richardson. Well, I think Mr. Goldberg touched on one
    of the biggest problems that comes upand particularly for lower
    income taxpayers--perhaps disproportionately--and that is the whole
    penalty regime, which, in many cases, the penalties are mandatory.
        They can later be abated, if it is shown that there is
    reasonable cause for the taxpayer having done something, but
    that is how one can build up a significant tax debt before very
    much time passes.
        What concerns me, and I think many people who have worked
    in the tax area, is that the taxpayer really is in possession
    of the facts and does have the knowledge about----
        The Chairman. Isn't a person accused of a crime, a murder,
    also the one, peculiarly, with the knowledge and information?
        Ms. Richardson. Well, we are talking about civil
    proceedings here, not criminal proceedings, and I think that
    there has always been a burden of proof on the government in
    criminal proceedings, as it well should be.
        One of the concerns that this committee has expressed, and
    many taxpayers have, is that the IRS should be less intrusive,
    as opposed to more intrusive. One of the earliest challenges to
    the burden of proof in the 1920s, before there was a Tax Court,
    was heard by the Board of Tax Appeals. The judges concluded
    that taxpayers were in the best position to provide the
    information to the government. And once having provided it,
    then the presumption shifts to the government to go forward to
    determine if they are not entitled to the deduction or that
    they did mis-report their income.
        But their conclusion was that without the burden of proof
    on the taxpayer, you might as well pass the hat, because it
    truly would become a voluntary income tax system before very
    long.
        So I think that a less intrusive process is one that we
    have today. I understand the fairness issue or that there is a
    perception of being unfair, but I think there may be better
    ways to address this issue than shifting the burden of proof
    the way the House bill did.
        The Chairman. Any recommendations in that area, we would
    welcome.
        Ms. Richardson. I would be delighted to.
        Mr. Cohen. I would like to tell you my father's favorite
    joke. It is about the customer who comes into a cleaning store
    and hands the clerk his receipt, and he hands him a bill. And
    the clerk is the co-owner, and he gives the customer the
    cleaning and gives him change for a $5.00 bill.
        Then he looks down and sees that he got a $50.00 bill, and
    he is struck with an ethical problem. Does he tell his partner?
    Or the IRS? [Laughter.]
        The joke illustrates the point. That is, there are lots of
    small businesses in the United States; where the owner mans the
    cash register. I'm a painter. Do I report all my income? I know
    what I got in income. How does the IRS find it?
        If you want to create an intrusive system, then the IRS is
    going to have to go out and subpoena the banks and subpoena all
    of a business' credit operations. I can go on and on and on,
    and you have just created a nightmare for that person who could
    have produced the records on his income, because he has them.
        The Chairman. Mr. Goldberg.
        Mr. Goldberg. This is getting very embarrassing, Mr.
    Chairman. I agree with my colleagues on this point as well. Two
    points, and I think it goes to a lesson that at least I learned
    from your hearings.
        The IRS gets lots of messages from the Congress. One of the
    messages that the IRS gets from Congress is deal with a tax
    cap; improve compliance. All of the data says that the biggest
    areas of non-compliance and the most difficult areas of non-
    compliance for the IRS is unreported income.
        The IRS tries to deal with this, and one of the ideas that
    the IRS has is a so-called lifestyle audits. That is what
    lifestyle audits are all about; people living at a lifestyle
    that is absolutely inconsistent with the income they are
    reporting.
        And then Congress says, ``Don't do lifestyle audits.
    They're too intrusive.'' And then Congress may say, ``Oh. But
    by the way, IRS, in the context of unreported income,'' which
    involves lifestyle audits, ``you have got the burden of
    proof.''
        That is a very confusing set of messages for the IRS, and I
    think you want to be careful about how you are sending those.
        The final point, the Portio case. If you will pardon me.
    There was a case about unreported income, or the IRS said the
    taxpayer had income, and the poor taxpayer didn't know how to
    prove he didn't have income.
        Hard cases make bad law, and I think that the way to deal
    with those kinds of cases--if you conclude on those facts, the
    IRS is way off the reservation--the taxpayer wins. The taxpayer
    gets his costs back. I think that is a surrogate that is going
    to get you a lot closer to where you want to go.
        Low income taxpayers? One of the problems is that it is
    earned income tax credit, and it turns out, on the earned
    income tax credit, in figuring out that income you are talking
    about, the measure of income has nothing to do with taxable
    income. It has to do with Social Security payments and Welfare
    payments and whether the third generation--the extended family
    living in.
        So it is a very difficult set of problems, and I just don't
    think that shifting the burden is the way to get at it.
        The Chairman. Senator Moynihan.
        Senator Moynihan. Mr. Chairman, I found this absorbing, and
    I wonder if we could just continue on this matter of burden of
    proof.
        When first presented, it seems so obvious that the burden
    of proof should be on the government addressing an individual.
    Then one learns that known in common law--codified I believe in
    1993--in civil matters the burden of proof has always been on
    the individual.
        We are also told by learned persons--Mary Ann Cohen, who is
    chief judge, has written us, and a whole group of law
    professors who write a nice opening sentence. ``We are law
    professors who teach tax.'' They ought to teach English, don't
    you think?
        Mr. Cohen. They are not English professors.
        Senator Moynihan. The actual event will be to increase
    burdens on the individual. Is that your judgment? Could you
    volunteer this?
        Mr. Goldberg. Without question, Mr. Moynihan.
        Mr. Cohen. Absolutely. The IRS will begin to ask questions
    the first time because that is the only time they are going to
    get to ask their questions. So, they will go after everything,
    rather than what they believe is necessary the first time.
        Ms. Richardson. There is no doubt in my mind. And I think
    Judge Cohen's letter was excellent. It made some excellent
    points, and it has an excellent recommendation for what the
    committee could do, in lieu of shifting the burden of proof.
        Mr. Alexander. I agree completely with my colleagues and
    with Judge Cohen's letter. The burden of proof provision in the
    House-passed bill will create expectations that will be dashed;
    will create problems for the IRS; will create massive problems
    for the courts.
        Ms. Richardson. I had an interesting experience, Senator
    Moynihan, if you will permit me. Last week I had the occasion
    to run into someone who runs clinics for low income taxpayers
    to assist them in preparing returns.
        She was very concerned, and I think has written this
    committee; that particularly people in low income situations
    might misunderstand what kind of records they may need to keep.
    Many of them don't keep good records today.
        But she had also felt that a number of them had
    misunderstood what had gone on with the House-passed bill and
    thought that today they no longer had to keep any records.
        So I think that that is a perception that could get fairly
    widespread and cause even more problems.
        Senator Moynihan. So, in that counter intuitive mode so
    much in life, this could have the opposite of what we seem to
    have been intended to fix.
        Ms. Richardson. Exactly. Exactly. And it may burden the
    people who need to be the least burdened.
        Senator Moynihan. Mr. Chairman, I just hope we can stay
    with this subject, and I thank you for the opportunity to hear
    these extraordinary public servants. It has been a joy.
        Mr. Chairman. Thank you, Mr. Moynihan.
        Mr. Chafee.
        Senator Chafee. Thank you, Mr. Chairman. These are
    difficult problems. There is no question about it. I think the
    IRS collects something in the neighborhood of a trillion
    dollars a year?
        Mr. Cohen. A trillion five; a trillion six.
        Senator Chafee. I missed that.
        Ms. Richardson. About a trillion and a half.
        Senator Chafee. A trillion and a half. And I like the
    analogy that Mr. Alexander had in his statement about people
    obeying the red lights. Somehow the suggestion seems to be that
    this is all going to work out in a lovely fashion if it is
    completely voluntary.
        And Mr. Alexander, in his analogy, points out that most
    Americans do stop at red lights, but he also indicates that
    probably most of them stop there, because if they don't, they
    are liable to be arrested or summoned by the police.
        I think this whole discussion we have had here on the
    burden of proof is a very, very valuable one and extremely
    helpful.
        Was it you, Mr. Alexander, or you, Ms. Richardson, that
    said the largest single problem with the IRS is unreported
    income?
        Ms. Richardson. We would all say the same thing.
        Senator Chafee. You would all agree with that? And so, that
    obviously leads you into the whole burden of proof question.
        I can remember, as many of us here on this podium standing
    up and applauding our chairman in 1986, when we reported out,
    unanimously, a bill that greatly simplified the Internal
    Revenue code, and I think we got down to--was it two brackets?
        Senator Moynihan. Two brackets.
        Senator Chafee. That was in 1986. And since then, we have
    done nothing but make the code more complex, and it isn't some
    villain out there some place. It was done right here, in this
    room and over in the other chamber.
        Step by step by step, we reversed what we did in 1986.
        When we marked up tax bills, one of the things that I felt
    was very valuable for this committee, was the presence of the
    Secretary of the Treasury. I can remember Secretary Baker, for
    example, being right with us as we marked up the bills.
        I also think the suggestion that there be a--how did you
    refer to it? An accountability statement?
        Ms. Richardson. A complexity analysis.
        Senator Chafee. What do you call it?
        Ms. Richardson. A complexity analysis.
        Senator Chafee. Complexity analysis is a good one, and I
    presume that would be given to us in advance. These mark ups
    are fast moving. Up pops somebody with a splendid suggestion,
    and it carries.
        Suddenly a new credit is established, and I don't know
    quite whether the Commissioner will be quick enough to be able
    to give us a complexity analysis right at the spur of the
    moment. But, in any event, the idea is a good one, and I think
    we should follow up on that, Mr. Chairman. Thank you.
        The Chairman. Thank you. I have a lot of sympathy for the
    approach. I will have to say that a lot of the complexity does
    come into conference. Efforts are made to compromise, and the
    result of a compromise is to complicate. But it is still a
    significant proposal.
        Mr. Cohen. Senator Roth.
        The Chairman. Yes?
        Mr. Cohen. When I was Commissioner and when I was a staff
    person, I sat in on a number of executive sessions, which the
    committees used to meet in, and I sat in on any number of
    conferences. I mean, IRS people were routinely invited 30, 40,
    50 years ago. I started in this business about 45 years ago.
        The Chairman. Another point I was making; that often, in an
    effort to bring two sides together, some kind of a compromise
    is made that is necessary, politically, but doesn't make sense
    from the standpoint of simplicity.
        Senator Baucus.
        Senator Baucus. Thank you, Mr. Chairman. I would like to
    follow up on that point.
        It is clear that generally we act too quickly. This is a
    hot house, Washington, with TV, the national press,
    politicians, media, and we often don't think through and
    usually don't think through the consequences of what we don't
    and don't relay it to something else that we have done in the
    past.
        A minor example is pension law, which is layer upon layer
    upon layer; lots of dead wood that we never clear out, which
    has to be cleared out.
        And with respect to this last point, it is true. Somebody
    comes up with an idea. It sounds good. It is a tax credit or
    deduction or whatever it might be. It has a lot of political
    appeal. The press trumps it up or we trump it up back home, and
    it is in law.
        And it is true we often compromise in conference, which
    adds further complexities, and it is a mess, in many respects.
    And I agree with the statement made. I don't know how an agent
    or, let alone, a practitioner really knows what to do.
        My uncle was a tax lawyer years ago. He told me he couldn't
    sleep at nights because he was afraid he wasn't giving the
    proper advice to his client, that he had forgotten something.
    It really rattled him.
        So I would like you to think about how we kind of slow down
    a little here, be a little more reflective. I think the mock up
    return is a good idea. The complexity analysis is a good idea.
        That is all mechanical. It is probably a good idea, but it
    is a bit mechanical. We need a little more thought even than
    that, frankly.
        I would appreciate it if some of you could give your
    initial thoughts as to how we begin the process of starting to
    kind of slow down a little here and to think through what we
    are doing here much more and so forth. I think that is a good
    idea, but frankly, I don't think that really gets to the heart
    of some of the problems that are really causing the problems.
        Mr. Cohen. Senator, there is no constituency for
    simplification. That is the problem.
        Senator Baucus. Well, there is here.
        Mr. Cohen. We were all for it in principle, but none of us
    are for it in fact.
        Senator Baucus. In this room there is a constituency.
        Mr. Cohen. Well, I will give you an illustration. In 1966
    or 1967, the then chief of staff of the Joint Committee and I
    said it would be a wonderful idea if we got rid of the deadwood
    in the bill, in the Tax Code.
        So we had a group. I provided some staff, Larry Woodworth
    provided some staff, and we set them off, and they had a bill.
    And that bill sat from 1966 or 1967 until about--it was 9 years
    before the committees would--and they finally attached it on to
    something.
        In the meanwhile, of course, we had nine more years of
    deadwood that just accumulated. That is, provisions that were
    no longer effective. We all had to wade through them.
        Senator Baucus. You defined the problem. I am looking for a
    solution.
        Mr. Cohen. Well, the solution is discipline.
        Senator Baucus. The idea isn't how we get there.
        Mr. Goldberg. I think the problem with complexity analysis
    and mock ups of forms is it is defensive. You may slow the
    inevitable decline of the code, but it is still going to fall
    apart. I think you need a much more aggressive strategy.
        And in looking around the government and having had the
    privilege of serving in a number of positions, there really is
    only one natural advocate for simplification, and that is the
    Commissioner.
        The Commissioner does not have competing loyalties to
    political issues or constituents or theoretical policy. The
    success of tax administration depends on an easier system, and
    the Commissioner is the only one with an unambiguous job to get
    that done, and that is why it is not just giving the
    Commissioner a seat at the table to minimize the damage. I
    think it is much more fundamental.
        The way Peggy was suggesting is giving the Commissioner to
    authoritatively be the public spokesman for making this stuff
    easier. You need an offensive component. A make it better
    component, as well as a slow the damage component.
        Senator Baucus. All right. Ms. Richardson, do you have a
    comment?
        Ms. Richardson. I agree with what Mr. Goldberg said. And I
    also think one of the things, in terms of slowing the process
    down, is several years ago, or many years ago, there used to be
    draft legislation on which hearings were held.
        Now, concepts are voted on. People never see the
    legislation until longer it has been ``passed,'' and so some of
    the complexity that creeps in might be able to be addressed by
    having it see the light of day before you actually vote on it.
        Senator Baucus. A very good point.
        Ms. Richardson. The other thought that I had, as a young
    lawyer--and I will throw it out, and I don't mean this
    facetiously--is I think if people who voted on the legislation
    had to read it and understand it, it would make a significant
    difference, and I mean that sincerely.
        Mr. Alexander. I agree with what Peggy said, and I agree
    with Fred, and I disagree with Sheldon. I think there is a
    constituency for simplicity. You did it in 1986. You can do it
    again.
        Senator Baucus. Well, my time is up. The idea is that the
    Commissioner, Mr. Rossotti, should initiate ways to get at this
    problem.
        Mr. Chairman, I just think that is critical, that we are on
    the verge of having the code fall of its own weight, and I just
    think we have an obligation to take the initiative to find some
    way to deal with this problem of complexity. We have no choice,
    in a fundamental way.
        Ms. Richardson. The Commissioner and the IRS probably know
    better than anyone in this country what provisions cause the
    most difficulty, in terms of administerability for taxpayers
    and in terms of enforcement. I think reports along those lines
    could be extremely helpful.
        Senator Baucus. Thank you. Thank you, Mr. Chairman.
        The Chairman. Mr. Bryan.
        Senator Bryan. Thank you very much, Mr. Chairman. I must
    say, as I have listened to each of you offer your comments, I
    am immensely impressed with the public service that you have
    rendered to our country during the times of your own service
    and how helpful and thoughtful your responses have been in
    response to the questions by members of this panel.
        Let me ask you. In general there is a perception, not by
    the multi-nationals, not by the big mega corporations, but the
    average citizen, that when there is a conflict between him or
    her and the IRS, that what they face is a star chamber
    proceeding.
        We are not talking about huge policy questions. We are
    talking about what I would call the garden variety of conflict
    and dispute that is part of any kind of a tax code and made
    considerably worse, as we have all agreed, because of the
    complexity of the code.
        Let me ask each of you what your suggestion may be, if any,
    if there is some way, short of getting involved in a protracted
    legal proceeding that involves expense, which most taxpayers
    cannot afford to either have a high-powered legal counselor or
    sophisticated tax experts come to represent them, some type of
    resolution mechanism, short of a formalized procedure, in which
    the taxpayer would have the sense, ``Look, I got a fair shot.''
        Obviously that person or that office--I understand what we
    have done with the taxpayer advocate--cannot be a part of the
    IRS. Or the inference is, Hey, look. I am not getting, truly, a
    person who is detached and independent.
        Your thoughts. Is that possible? And, if so, how could we
    construct such a impasse resolution mechanism that would deal
    with, literally, the great garden variety of these cases?
        Mr. Cohen. You have got it, sir. I mean, there is a system,
    whether the people have confidence in it is different question,
    but you have--the IRS provides for an appeals mechanism
    internally, which generally, by and large, operates fairly. As
    with any system, you can't say it is perfect.
        Senator Bryan. Mr. Cohen, without being rude, let me say
    that you may be right. That is not the perception.
        Mr. Cohen. I see it as a perception problem. That is why
    the Tax Court was created--The Tax Court--maintains a small
    claims procedure, because some taxpayers are of such a mind
    that they need somebody sitting on a dias with a robe in order
    to tell them yes or no, and the Tax Court procedure works
    relatively fairly.
        That is, the tax court has special trial judges who ride
    circuit and go to the various large cities in the country, so
    that anybody who wants to, can appear before that judge,
    present his or her case and have an impartial judicial person
    make that decision.
        Most of those people don't have much of a case. Every once
    in a while you have got somebody who does have a travesty, and
    the judge usually straightens it out.
        If you are going to go further than that, the question is
    how much elaborate gingerbread work do you want to build on
    this house?
        Mr. Goldberg. Senator, there is a study out of the
    University of Wisconsin that suggests that the ``S'' case
    procedure in the tax court--it compared it to small claims--is
    one of the most effective systems in the country.
        And I realize this is a very different perception, but it
    is a success story, in my judgment. My reaction is maybe there
    is a different place to start that question, and the
    Commissioner hit on it yesterday.
        I think the lot of the frustration of the taxpayers is it
    takes so long to get it over. You know, they are dealing with
    this person, and then they are dealing with that person and
    they can't get a straight answer, and I think that that is
    really--of all of the surveys I have seen, what taxpayers want
    most is they want it over quickly, and they want to be treated
    courteously.
        It gets to GIPRA. It gets to all of the stuff. All we
    measure now is enforcement. There are no measures out there
    that let the taxpayers say, ``Yeah, I was treated fairly. Yeah,
    it was over quickly.''
        And I think, if you introduce those kinds of measures, you
    will change the behavior of the agency very quickly. It is not
    a direct answer to your question, but I think that in terms of
    getting something accomplished rapidly that makes a big
    difference, I would be inclined to focus my attention there.
        Senator Bryan. May we get the comments of the other
    panelists, if they have any thoughts?
        Ms. Richardson. I agree with Mr. Goldberg. I think that the
    place to start really is with that front line employee. I think
    many of them need additional training. They need to understand
    what kind of provisions they are dealing with.
        I think many of them have to be more sensitized to the fact
    that anyone coming in for an audit is going to be very
    uncomfortable. I have to tell you, the first time I got my
    paycheck with a return address IRS on it, as Commissioner, I
    had to stop and shake a minute before I opened the envelope.
        So I am very sympathetic. I do understand. And I think that
    training of employees and, as Fred said, finding ways to
    measure what it is you want them to do is probably the most
    critical thing, because if there was one thing that the
    hearings last fall demonstrated, you do get what you measure,
    which is not just limited to the IRS I might add.
        But I think it is very important to find measures that do
    achieve the results that you want.
        Mr. Alexander. Now that we are on measurement, I put out,
    when I was Commissioner, in November of 1973, a policy
    statement, P-20, which said that you cannot use enforcement
    statistics to evaluate enforcement employees.
        If that had been followed recently instead of ignored, as
    it was in certain districts, perhaps we wouldn't have many of
    the problems we have today. Certainly the IRS needs to move
    quickly, certainly the IRS needs to treat taxpayers
    courteously, and certainly we do have in place a good system
    for resolving small cases where a taxpayer can go before a
    judge in a robe and have his or her case carefully considered
    and dealt with.
        There is a good, recent article in the New York Times that
    explains how that system is working.
        The Chairman. Mr. Cohen, I think you have a very important
    point about resolving these problems quickly. The point was
    made yesterday that in the private sector, most credit claims
    are resolved within six months.
        If it is beyond 6 months, it is looked at as almost
    impossible to do anything about it, whereas we have just the
    opposite situation. So I think there is a lot of merit to that.
        Mr. Goldberg. Senator, it is so core to the problem.
    Commissioner Richardson's comment about penalties and interest,
    it is excruciating. It takes forever.
        When a citizen has a problem and screws up, they don't file
    their return. I mean, that is the wrong thing to do. But when
    the IRS has institutional information on that failure to file 9
    months later, but doesn't contact that taxpayer for 6 years----
        The Chairman. You are subject to interest and penalties.
        Mr. Goldberg. You are getting killed. And sure. The
    taxpayer should have filed the return. It is not to excuse the
    taxpayer, but it is to say that the government has some kind of
    responsibility here in making it systems work right by the
    citizens.
        Whether you are talking the interest, whether you are
    talking the frustration of the taxpayer, whether you are
    talking problems in collecting taxes due, if your receivable is
    more than 6 months old, you are not going to get it.
        So it affects every piece of what is going on in tax
    administration, and I think you are right. That is what needs
    to be attended to.
        The Chairman. Senator Kerrey, please.
        Senator Kerrey. Thank you very much, Mr. Chairman. I thank
    you and I thank the panelists. This has been very helpful as we
    try to write this law, and I appreciate very much your
    experience and your willingness to come before this committee
    to give us the benefit of experience.
        One of the concerns that I have got, and I suspect there
    won't be time to get all your answers, and it may be necessary
    to provide them in writing afterwards, is in the creation of a
    board, I think we should not create two bosses.
        In other words, there is going to be a chairman for this
    board, and you don't want an IRS commissioner and a chairman
    competing for power, because I think it would make it difficult
    to function and create disfunction.
        What I would like to do is to take a piece of work and
    examine through that piece of work what might happen with the
    board in accomplishing it. Yesterday Mr. Rossotti came before
    this committee. First of all, may I presume that you all would
    support his recommendation of having four service
    organizations? No?
        Mr. Alexander. I would not want to do that right now. I
    would want to study it very carefully. Right now, IRS is
    demoralized. IRS' morale is very poor, and I am sure that is
    not surprising to anyone in this room.
        Announcing the concept, if you will, of a reorganization
    that might abolish as many jobs as apparently would be
    abolished does very little to improve morale.
        Senator Kerrey. I appreciate that. In fact, he is alert to
    that and knows that. Indeed, one of the reasons that I would
    argue, Mr. Cohen--in fact, we did argue, as the Commissioner
    did--for representation of the Treasury Employees Union. As we
    know, there is going to be a lot of tough personnel decisions.
    We wanted them inside rather than outside.
        We have dealt with the morale issues, and now we are going
    to do this particular problem. Let's say now the Commissioner
    has made the decision that he or she believes that this kind of
    structure reorganization would be beneficial.
        Mr. Alexander. There are several problems that I can see
    with the proposed reorganization, one of which is where estate
    and gift taxes fit if at all.
        Senator Kerrey. What I was trying to do is not set off a
    debate as to whether or not Mr. Rossotti's proposal was sound,
    but trying to pick a piece of work and then walk through the
    steps necessary to accomplish that work. So I was just trying
    to presume.
        Let's presume that you have decided that you are going to
    modify the proposal in some way; you have made a major decision
    like this, and you now want to accomplish it. You now want to
    do some kind of structural reorganization. I am using two or
    three years.
        Mr. Alexander. Two or 3 years. First, you have got to clear
    everything with the union. Will it be feasible at all?
        Senator Kerrey. But, does the law allow you to do this?
    Does the law allow you to make these kinds of personnel
    decisions? I mean, can you make these kinds of personnel
    decisions? Could you do the restructuring of this kind, of any
    kind like this, without some change in the law?
        Ms. Richardson. I am not certain that you can because the
    1952 Reorganization Act, which Commissioner Cohen is much more
    familiar than I am--but I looked at it when we reduced the
    number of regions and districts--it requires a three-tier
    structure, I believe. A national office and district offices.
        It basically provides for a three-tier structure, and we
    were not in a position, administratively, without legislative
    change. You can have a district that is comprised of part of a
    state, but you cannot combine parts of states.
        So, in California, for example, I think there are now three
    districts, and we would like to have had Hawaii aligned with
    that because it made some sense. We could not do that.
        Senator Kerrey. Can I presume that all of you believe that
    whoever the commissioner is they should be given more
    management authority than they currently have to make these
    kinds of decisions, presuming that there is morale problems and
    details that have to be worked out?
        Mr. Cohen. There was a reorganization act that gave the
    President, at the time, in 1952, that brought authority. That
    ended up in the 1952 IRS reorganization, a very elaborate
    procedure. It was continued several more times after that. But
    I don't think it is still in existence.
        Ms. Richardson. I think that you probably would need some
    legislation. I think the flexibilities, the management
    flexibilities and personnel flexibilities, are extremely
    important. And one of the major shortcomings in the House bill
    is the fact that it carves out about three quarters to 80
    percent of the work force from those flexibilities.
        If you are a member of the union, those personnel
    flexibilities do not apply to you, and so I think that could be
    a very serious problem.
        Senator Kerrey. I would appreciate very much your examining
    that question for us in the legislation, because I, for one,
    want to make certain that we give the commissioner the
    authority needed. Whatever the commissioner decides they want
    to do to manage this agency, we need to provide the authority,
    subject to rights and general personnel procedures that we have
    in the rest of the government.
        And secondly, I would appreciate very much your evaluation
    of what I think could be a problem and that is we end up with
    two masters, and we definitely do not want that. We do not want
    to have a chairman of the board with so much power that you end
    up unable to carry out whatever management decision you decide
    you want to carry out.
        The Chairman. I would say to the distinguished Senator that
    we did discuss at some length with the current commissioner
    what authority did he need, because I don't think there is any
    question we are going to have to address that if he is going to
    be able to carry out, I think, very promising proposals of
    reform.
        I would now call on Ms. Moseley-Braun.
        Senator Moseley-Braun. Thank you very much, Mr. Chairman,
    and thank you for convening these hearings, and the witnesses
    for their very thoughtful testimony.
        I have a question. In my former life, I was an Assistant
    United States Attorney, and in that capacity, I represented the
    IRS, on more than one occasion, with different taxpayer cases.
        And the thing that comes to my mind, the most vivid image I
    have of those cases was of a litigant who was about the size of
    Phil Gramm, a big football player looking guy, who sat in my
    office. Handsome, too. Handsome, too. A handsome devil. No. No.
    He wasn't a devil. But he was a very handsome, big guy.
    [Laughter.]
        And he sat in my office one day, literally with tears in
    his eyes, over a case that we were prosecuting. He said,
    ``Look, I am going to win this case.'' He said, ``I will never
    get my reputation back, but as much the point, I won't be able
    to recover the money that I have spent in trying to defend
    myself against you and the government who have all the money
    and the resources and the time in the world.''
        And I mention that in connection with this issue because
    the whole question of taxpayers being able to recover--as it
    turns out, he did win, largely, the case that we were involved
    with. I won my part, by the way.
        Looking at this code section 7430, which is the section on
    recovery of fees, quite frankly, it is anexercise that is
    second to none, frankly, in complexity. I am going to try to summarize
    as best as I can put this down and make it logical.
        If you prevail and you get to the IRS within 91 days, you
    might possibly be able to recover the cost of expert witnesses
    and case preparation fee costs, and possibly for your lawyer,
    up to $110.00, unless the IRS decides--except that the IRS
    might decide that their case was justified, in which case you
    don't have to get paid anything, and only for those costs that
    happen after the notice of deficiency.
        I think I have got that right. I have been sitting here
    trying to parse through this like you would an old grammar
    text, and it is impossible.
        An individual who spends money on bookkeepers and auditors,
    on accountants, on lawyer fees over $110.00--now I understand
    the Court can make it more than $110.00, and the IRS can make
    it more than $110.00. I don't know. And I would like to know to
    what extent that ever happens.
        But all of these costs, you could wind up breaking the
    average person if somebody goes in there with an investigation
    that turns out to be wrong. And, if it never gets to a notice
    of deficiency, a person is just out of that money.
        Is there a reason why we are being so scrooge-like with
    regard to the taxpayers? After all, I think you have to start
    with the proposition that this is a service to taxpayers, and
    it shouldn't be this kind of punitive and draconian, I think,
    in its transaction costs if you will.
        Mr. Alexander. Well, if IRS is punitive and draconian and
    continues to litigate after it has lost and puts the taxpayer
    through that effort and that cost, IRS will properly have to
    pay up to the limits, which are still fairly low, in 7430, and
    IRS will have to pay the taxpayer's administrative costs, as
    well as a taxpayer's litigating costs.
        I think that 7430, as proposed to be amended, draws a
    fairly good balance between the rights of the person that you
    describe, Senator, and the obligation of the Internal Revenue
    Service to try to make the tax system work, work sensibly, work
    fairly, but also work somewhat effectively.
        Mr. Goldberg. Senator, I guess I come down a somewhat
    different place from Commissioner Alexander. We use these
    words, and people don't understand what we are talking about,
    and I think that this is an area where it is clear and it is
    simple.
        If a citizen wins, a citizen recovers. That is easy to
    understand. It comports with notions of fair play, and it gets
    the incentives going in the right direction.
        As we talked about burden of proof before, I believe in the
    real world the burden of proof gives the IRS an incentive to
    push taxpayers harder and harder and harder. I think, if you
    make it a no-fault recovery on attorney's fees, I think you
    give the IRS an incentive to say stop. Why am I doing this?
    Does it really make sense to go forward?
        I come down where you do. I just think you ought to make it
    simple, get it done and get it over with.
        Mr. Cohen. I will come out in the middle. You write the
    rules. You write the rules any way you want to write them. The
    law is what the Congress says the law is.
        Now, if you are asking me if it is sensible, tell me
    whether you want to collect revenue or not. I mean, if you are
    going to put the IRS through this kind of reaming, and if you
    are not going to appropriate the money for the payments of
    these fees, and you are not, then you are going to stop tax
    administration.
        Senator Moseley-Braun. Excuse me.
        Mr. Cohen. Excuse me. Nobody will raise a questionable
    case. The question is not whether they will win the case. The
    question is, is this a fresh point of law that has not been
    decided, which has no controlling authority and does the IRS
    need to know it?
        Well, it needs to know it. So it has to find somebody.
    There is somebody out there who will do this thing, and then
    the IRS will test the point. That's what you told them to do.
        Now, you have to be willing to pay the freight. Are you
    willing to pay the freight? If you are, then follow Fred's
    rule. If you are not, then you have to follow a different rule.
        Senator Moseley-Braun. If I may. We do write the rules. Or
    they were written before I got here. I am not going to take any
    responsibility for some of this language.
        I mean, I am a University of Chicago trained lawyer, and I
    am telling you, just to determine who has won after you go
    through the definitions, you get down to sub 2, and it says--
    and I am going to quote this because it is just ridiculous--
    ``which meets the requirement of the first sentence of Section
    2412D, Sub 1, Sub B of Title 28, as in effect on October 22nd,
    1986, except to the extent differing procedures are established
    by rule of court and meets the requirement of Section 221, Sub
    D, Sub 2, Sub B, of such Title 28 (as so in effect).''
        Now, you tell me.
        Mr. Cohen. You wrote the rules.
        Senator Moseley-Braun. We are talking about reform here. So
    I think we should have some conversation about just plain
    English; that a citizen who goes into the situation at least
    can know what does prevailing party mean.
        I think I won my case, but this language makes it not so
    clear.
        I thank the Chair, and I didn't mean to go past my time.
        The Chairman. Next, we have Senator Nickles.
        Senator Nickles. Mr. Chairman, thank you very much. I
    appreciate the panelists. This has been very interesting.
        Also, I want to compliment you because I know that there
    was a great deal of effort to pass the legislation that passed
    the House last year in the last few days. I remember some of
    our colleagues--even this committee, one or two--saying let's
    pass this unanimous consent, and I think you wisely said wait a
    minute. I think we need to do some more homework.
        And clearly, if one listens to the panel, although it
    wasn't unanimous, there were several suggestions, and I think
    several of them were very constructive suggestions.
        Senator Grassley. I am the member you are talking about.
        Senator Nickles. Well, no. Actually, a couple of members,
    and I think it showed wisdom. Sometimes the Senate should be
    the source to look and couldn't we improve upon what the House
    did.
        As a result of the hearings that you had here, plus, I
    might mention, the hearings we had in Oklahoma, I think we can
    improve upon the House-passed language, and I think the House-
    passed language is good language, but I think we can make some
    further improvements.
        So I appreciate your patience in saying let's look a little
    further.
        I know that there has been some discussion as far as
    schedule. I would hope that we could meet this by the April
    15th deadline, and I know that is a lot of work for the
    committee, because the more you get into this, the more
    significant of a challenge it is.
        I would like to again thank the Chairman too for the
    hearing that we had in Oklahoma. I might mention that it had an
    impact. The day that we announced the hearing, we sent out the
    notice requesting the district director to testify, he
    resigned. I find that interesting.
        This is a life-long employee of many, many years, but he
    resigned. He didn't testify before the committee.
        We did have abuses in Oklahoma, in the Oklahoma/Texas
    district. We did find that seizure rates were about eight times
    the national average. We did find that people were compensated
    as a result of the number of seizures that they had on
    taxpayers. We did find cases where taxpayers were abused.
        We did have some very interesting testimony. We did have a
    change in IRS policy as a result of the hearings.
        They have expanded the protection from IRS liens and
    seizures, levies, by requiring a higher level management
    authorization and/or a court hearing. Used to be there was a
    very low level person that could authorize a seizure of an
    asset. Actually go in and lock the door.
        We had Steve Nunno, who is the coach of Shannon Miller. An
    IRS agent had a problem. He was in arrearage. He worked it out.
    They were two thirds of the way of working it out, they changed
    agents, and the next agent came in and said, if you don't pay
    up by such and such a date, we are going to lock the doors.
    This made no sense.
        We had another case where a female who had a pet grooming
    business and drove a bus, and she realized that she was paid as
    a contractor. So, she was supposed to pay self-employment. She
    realized that, went to the IRS, owed some money, was going to
    pay, make the payments, started making the payments, and IRS
    puts a lien against her home; a large amount.
        She was willing to make payments and work it out in about 3
    years. It wasn't a very large amount of money. The net result
    is the penalties and interest now exceed the value of the home,
    and IRS is embarrassed. And I think Shirley has fixed that case
    now.
        But my point being, as a result of the hearings that we
    have had, post the Senate hearings here, just the field
    hearings, we have had a change in IRS policy, which I think we
    should codify in the language to require a higher level of
    approval by IRS before they seize assets.
        I think we need to strengthen the current law language that
    deals with making sure that bonuses aren't paid on quotas and
    goals, because we did clearly find, and IRS reported in the
    report that was dated September the 12th, that there were cases
    of people being compensated directly on the number of dollars
    and stuff that were raised.
        And I compliment several aspects of the IRS internal audit
    that came out December 12th. They pointed out that one third of
    the districts revenue officers feel like they were pressured
    from management to use enforcement tools, including seizure
    authority.
        Thirty-four percent of the seizure cases reviewed by
    investigators did not meet IRS procedural requirements and
    resulted in the inappropriate treatment of taxpayers. At least
    five groups of revenue officers broke the law by setting
    statistical enforcement goals in violation of the taxpayer's
    bill of rights, and they also said that group manager
    evaluations were sometimes based on illegal statistics.
        And those were bonuses, and bonuses, in many cases, in
    $10,000.00 or something. So, I think the hearing has uncovered
    some things, and they have been helpful.
        So again, I wanted to thank the Chairman. I would like to
    incorporate some of the things we found through the IRS audit
    to see if we can enhance the bill that is already passed. I
    heard several suggestions this morning, when I was here earlier
    and also in my office, when I was waiting to come back, from
    our panelists that I think are good suggestions.
        So I look forward to working with the Chairman, and I throw
    out the goal of April 15th. I know we have a lot to do, but I
    think, time-wise, if we can accelerate this and try to get it
    done in the next two or three months, I think it would be
    productive, I think it would be wise, and I look forward to
    working with other members in the committee to try to make that
    happen.
        And again, I wanted to thank our distinguished panel for
    their contributions in this effort as well. Thank you, Mr.
    Chairman.
        The Chairman. Well, I just want to make one comment. I do
    think it is important that we move as expeditiously as
    possible, but I do feel we cannot set an artificial date as a
    goal, because it is more important that this time we do it
    right, rather than that we merely do it.
        Senator Nickles. I agree.
        The Chairman. And I think that has been borne out by what
    the panel has had to say to us today, and I appreciate it.
        Thank you, Senator Nickles. We now call upon Senator
    Rockefeller.
        Senator Rockefeller. Thank you, Mr. Chairman. I agree with
    what you said just now, and I also agree with what Don Nickles
    said.
        And I think it is possible to marry the two, either through
    intensive hearings--but also, this is the kind of thing which,
    if we don't stay on it, will slip away from us, or the interest
    of the committee will slip away. So I would agree with Don and
    also agree with you, saying that we have to do it right.
        The question that I have stems out of, I guess, my major
    concern about the bureaucracy itself. The only really good
    evaluation system of a bureaucracy that I have ever seen work,
    and firsthand, in fact, was when the Peace Corps was started,
    and it is still in effect.
        That was not a large proxy. I think IRS is 100,000 plus.
    VA, which has these problems rife within it, 200,000 employees
    plus. So, employee morale, people doing their jobs each day,
    how they feel about it, how quickly they operate, how much
    optimism and self-esteem that they have is incredibly
    important.
        But then, on the other hand, somebody has to evaluate that.
    An independent board has been suggested. An independent board
    is originally in the language of the House bill. I think it has
    to do with budgets and things of that sort, but there is some
    who want to get into the management of the IRS, which is
    something that I would want to ask all of you about.
        But the way that the Peace Corps thing worked--and maybe
    the Peace Corps is to be significant in this case--there was
    simply an evaluator. An entirely independent person. Senator
    Moynihan knows this person as Charles Peters. He runs something
    called the Washington Monthly right now, which gives, pretty
    much, everybody equal doses of the Dickens.
        But what he would is he went out and he got entirely
    unbiased--and he tended to get writers, people who were skilled
    in analytic thinking. In your case, it would more than just
    that. I would be in some tax thinking.
        And then, he would have an eyes only relationship with
    Sargent Shriver, then the director of the Peace Corps. The
    first director of the Peace Corps.
        Nobody else saw what went on, and he had that confidence
    and his evaluators had that confidence. So, they told the
    truth.
        And the truth really isn't very hard to tell, either good
    or bad, if you feel that it is going to get to where you want
    it to get, unopened by others so to speak, and thus, not
    putting yourself at risk.
        Now, my question, therefore, from that, perhaps too easy an
    example, really stems about the independentboard and the
    ability to focus on employee training. The question of low morale has
    been brought up.
        I don't know that to be a fact, but, Mr. Alexander, you
    have said that. You wouldn't have to tell that to me. I mean, I
    would just know it automatically, simply having worked on the
    VA as long as I have, the Veterans Administration.
        The morale is very low. Things are very big. People
    complain all the time. You never get good stories. It is always
    bad stories. You get hearings like this.
        So, could you comment on the independent board and where
    you think its position, if you think its position belongs at
    all, does belong? And secondly, how is it that you address,
    most effectively, increasing the performance of the on-line IRS
    employees.
        Mr. Alexander. I will try to give a fragmentary answer, and
    I am sure my colleagues will join in, Senator Rockefeller.
        First, the independent board and its need and its position
    and its activities. In my written statement, I expressed some
    concerns about the board. I heard this morning--and I agree
    with the thought--that 11 members in the House-passed bill is
    perhaps a little few too many.
        I don't believe the union head should be on the board at
    all, and I think the commissioner should be on the board.
        The board's relationship to the commissioner and to the
    Secretary of the Treasury is going to be awkward, I believe.
    What if the majority of the board wanted to take one action and
    the White House, speaking through the Secretary, wanted to take
    an entirely different action? Problems.
        Nevertheless, the board, I think, is necessary in these
    times in which we live, and I think the board can serve a
    useful purpose in making sure, in this imperfect world, that
    some of the concerns that you and others have expressed are
    met.
        The IRS has a very difficult job to do--we all know that--
    to try to make our tax laws work--where we don't have a truly
    voluntary system--and work fairly and reasonably and treating
    taxpayers with respect, at the same time that it must try to
    extract money from their pockets, in certain cases.
        The Chairman. Could I ask that they answer an additional
    question related to what you just propounded?
        If you are going to have an oversight board, and you don't
    have 6103 authority, how are they going to have the information
    necessary to make a decision as to whether or not the
    organization is functioning properly?
        We agree that they should not be involved in micro-
    management, but where do they get the information?
        Mr. Alexander. I think they will get it, Mr. Chairman, from
    the commissioner, who will report regularly to the board; from
    an internal audit that produced the audit reports dealing with
    Oklahoma and dealing with the other districts that have been
    mentioned at the hearings this morning.
        I think they will get it from their work with other
    executives of the Internal Revenue Service, and I think they
    will be able to hear and will undoubtedly hear from the
    exercise of oversight responsibility by this committee, by the
    Ways and Means Committee, by the Joint Committee staff and by
    the press and the public.
        Ms. Richardson. I agree with that point as well. It seems
    to me that the board--and when we talked about it in the
    Commission, we debated between five and seven members. Now it
    is up to 11.
        I think that is really an unwieldy number that would make
    it very difficult to reach any kind of consensus, much less
    have meetings that most people could attend, based on busy
    schedules that people have.
        I think the board should be a smaller organization. I think
    it needs to be very clear what its duties are. We had talked
    about it having strategic focus, not day-to-day management
    responsibility, which may go a long way, Mr. Chairman, to
    resolving your concern about 6103.
        If they are not looking at operational details, but looking
    at strategic plans, strategic focus, it may be much less
    critical to have that 6103 authority. And I think that the
    oversight that the internal audit function and this committee
    and other committees would provide is where the 6103 issues can
    be dealt with more effectively.
        I think all of us worry that people who might serve on this
    board would feel a conflict or feel concern about accepting
    that responsibility if they had 6103 authority. So I think that
    is something you need to look at very carefully.
        The Chairman. Would you please answer Senator Rockefeller's
    question.
        Ms. Richardson. I guess I would need to know a little bit
    more about that evaluation system.
        Senator Rockefeller. I only did that to set my question. My
    real question was what would you do to simply to take the
    employees that you have and to give them a better sense of
    focused mission, self-esteem and better morale so they can do a
    better job?
        Ms. Richardson. Well, I think it takes a combination of
    things. I mentioned earlier some training, but I think they
    also need to have some sense that they have some credibility
    with their overseers here in the Congress and in the
    administration.
        I think that it is a difficult job, and it is never going
    to be particularly pleasant for some people to have to pay
    taxes, and so it has never been something that was an easy job
    at best.
        But I think getting some respect from their overseers, from
    the administration would be very, very important in beginning
    to restore morale. I think also having a clear mission, and I
    think this is where Congress really needs to be very specific.
        In the 4 years I was Commissioner, I would go from one
    hearing where we were very concerned about fraud and compliance
    and closing the tax gap, to another hearing where members
    asked: ``what is a couple of billion dollars worth of fraud?
    You need to answer more telephones; you need to provide better
    taxpayer service.''
        And we tried to achieve a balance and met with some success
    in improving the quality of phone service and the amount of
    phone service, although it is certainly not at levels anybody
    is happy with.
        But a really mixed message goes out when you tell people we
    want you to collect more money, and, in fact, you are doing
    such a bad job, we are going to go out and hire private debt
    collectors, hire private tax collectors to collect the tax
    debt, which is what happened.
        So I think Congress needs to be very clear about what
    mission and what focus they want the Internal Revenue Service
    to have, and I think it will make it a lot easier for the front
    line employee to understand what their focus should be.
        Mr. Cohen. I was a trench IRS employee. I was a first-year
    lawyer. I used to draft legislation in the IRS, in 1952, just
    after the scandals. Just at the time of the reorganization. So,
    the IRS was at the bottom of its morale.
        I mean, we wouldn't admit we worked for the IRS. If
    somebody asked where I worked, I worked for the Treasury
    Department, which is literally true.
        So I understand that. I have two daughters, both of whom
    are tax lawyers, both of whom work for the IRS. I know what
    their problems are, because we sit at the dinner table and talk
    about what is going on.
        But the IRS is a very goal-oriented organization, as most
    large organizations are, and therefore, they need to know what
    your goals are. If you tell them go for that, they will go for
    it.
        I often had to be very careful how I enunciated what I
    wanted them to go for, because by asking questions, often they
    went off running because they want to please the boss. They
    want to please you, and they want to please the commissioner.
        So, mixed messages will get you bad results. If you, being
    the Congress, the Senate and the House, and the commissioner,
    can unite on what your goals are and can enunciate them
    clearly--and that is not so clear, I understand, because we are
    in a political climate. But, if you can, the organization will
    be responsive, given good leadership, and I think it does have
    good leadership.
        It needs training. It will need a lot of other things.
    Assuming that you give it the money for the training and
    understand that taking people off the line to train them will
    cost you revenue, you have to understand that. I mean, if you
    take every employee off the line for ``x'' days, he or she is
    not doing their regular job for ``x'' days. They may be getting
    more important lessons. I understand that, and it is absolutely
    important.
        All I am saying is you must have a goal, and you must
    enunciate it, Mr. Rossotti and his staff must agree with it and
    then you will set about achieving it. And you will. I mean,
    that is not hard to do.
        The commissioner has enough resources now, used properly,
    in the inspection service, in internal audit and internal
    security, to get the kind of information that he and the board
    will need.
        There are three people who could walk into my office any
    time of the day or night. Really, in first of importance was
    the head of the inspection service, the deputy commissioner and
    the chief counsel. I mean, my door was never closed, except if
    there was a meeting going on.
        So anybody could. Any assistant commissioner or anyone of
    that level could get in to see me, if they had an emergency,
    but those people were in every day. That is not a problem.
        Your problem with your board is that we are all being too
    nice to you. I am not going to be. This board is going to be a
    political board. I mean, I don't know whether it is Republican
    or Democrat. That is not the problem.
        It is going to be a political board because this committee
    is going to want Joe or Sarah and the other committee is going
    to want Sam or Ike, and the President is going to want
    somebody. This is going to be a political board. Now, I don't
    know how that is going to work.
        This is not going to be an apolitical board. That isn't the
    way Washington works.
        Mr. Goldberg. I think you are hearing two things, Senator.
    One is clarity of mission, and the second is the tools to do
    the job. I think there are some overlays on that, and if I have
    a very clear mission, but that very clear mission changes, it
    is sort of serial clarity, you are not anywhere.
        I think we are all saying the same thing. How do you get
    there? That is what gets you back to the recommendations. The
    best we could come up with was a board with staggered
    membership that would give you the kind of continuity you need
    and give you the kind of expertise that you need to get, not
    just clarity of mission, but long term focus on that mission,
    and it is filling a hole.
        And I think that is the same reason that we made the
    recommendations about Congressional oversight. Each committee
    has its own responsibilities, and it's important to respect
    that. Each chamber has its own responsibilities.
        But at some level, the tax writing committees in the Senate
    and the House, and the budget folks in the Senate and the House
    and what used to be government operations in the Senate and the
    House, if you are getting six or seven different messages and
    they are changing, it is very hard.
        I agree on the description of what is required, and at
    least my own judgment is that the combination of the board
    recommendation and the coordinated Congressional oversight
    recommendation is the best you can do to fill those holes.
        Senator Gramm. Mr. Chairman.
        The Chairman. Yes. Just let me make one observation.
        As far as the inspection division is concerned, they were
    pretty much in a state of denial until we held our hearings. So
    I am not satisfied that that guarantees the kind of independent
    overview that I think is so essential.
        Senator Gramm.
        Senator Gramm. Well, Mr. Chairman, let me first say that I
    was in the Budget Committee with Alan Greenspan, discussing the
    budget. I am sorry I missed the testimony.  I will read all of
    them.
        I don't want to jump into the issue of loser pay, since I
    was not here to hear all testimony, and I don't want to re-plow
    the same ground. I simply don't want, through silence, to
    consent. I am not convinced about the loser pay issue.
        The fact that our number one problem with the IRS is
    unreported income does not sway me. The number one problem in
    murder is the absence of an eye witness. Often, the murderer is
    the only person who really knows who committed the murder, and
    yet, we are still able to convict people, and every once in a
    while we put one to death.
        So, this is something that I want to look at very closely,
    and I won't use my time to get into because I didn't get a
    chance to hear your testimony. But I want to make it clear to
    the members of the committee that I am unconvinced.
        The second issue I want to mention is that I am in
    agreement with Carol, that we ought to have a system where if
    the IRS decides to audit a person and that person has to spend
    thousands of dollars defending themselves, and they are found
    to have done nothingwrong, the Federal Government and the IRS
    ought to have to compensate them for their costs.
        Now granted, we will have to pay for it. There will be
    judgments against the Federal Government. But I think, to take
    a view that we shouldn't pay for it really violates the taking
    clause of the Constitution, because we are serving a public
    purpose by random audit.
        If there is a public purpose and a public benefit, why
    shouldn't the public pay for it, rather than a taxpayer who
    just happened to be audited and he spends 15 or 20, or 50 or
    $100,000 and he didn't do anything wrong. And I think it will
    be a check on the IRS in terms of when to cut bait on some of
    these lawsuits, if, in fact, you force them to pay the cost.
        Now, they don't pay. The taxpayer pays. The point is
    ultimately they have got to answer to it. I think it does
    affect behavior.
        Let me try to direct my questions to two other areas.
    Number one, it seems to me that it might be beneficial to have
    a general guideline where maybe--the idea I have raised
    previously is that we have a third of the senior people at the
    IRS come in from the private sector, serve for four or 5 years
    and then rotate back into the private sector, so that not every
    senior person in the IRS would have had to have been there for
    20 or 25 years in order to get into that position.
        I think it would bring new insight, new perspective and
    might be beneficial. I would like to get, sort of quickly, your
    response to that.
        Mr. Alexander. I guess I will lead off, Senator. Getting
    new blood and new thought in the IRS is a very worthy goal.
    Right now, the Commissioner and the Chief Counsel and also some
    assistants to the commissioner basically represent the new
    blood, unless someone comes in, like Mr. Arthur Gross, from New
    York State, to run the information program.
        But balanced against the desirability of having new blood
    is a couple of things. First, I think the IRS is really trying
    to respond to what it believes and think it understands to be
    its goal, as laid down by Room 3000, the Commissioner, the
    Secretary of the Treasury and the Congress.
        Sometimes it gets mixed signals. We talked about those.
        Secondly, if you brought people in wholesale, bringing in
    folks from the outside who are going to serve the IRS in say
    major positions for four or five years and they are going to go
    back to the private sector, there is certainly a perception, if
    not the reality, of great big conflicts of interest.
        I don't know whether, when they go out again, after serving
    5 years, they would be subject to a 1-year rule, a 5-year rule
    or whatever rule, but having been accused several times when I
    was Commissioner--falsely--of serving my former clients, I
    think I know what it is like.
        And I am sure that there would be crescendo of criticism,
    particularly if the people that came in were people that made
    their living for taxpayers, representing taxpayers against the
    IRS or in tax jobs with taxpayers, and they would be the
    logical ones to go out.
        Senator Gramm. Well, they would be the people.
        Mr. Alexander. And then went back out and did the same
    thing for the same taxpayers. What if a taxpayer got a great,
    big break, although the taxpayer actually deserved it, while
    that person was in the job of overseeing that taxpayer's case?
        Senator Gramm. Well, I think you would want to force them
    to recuse themselves on any case they worked on, but you would
    want people who knew something about it, who were involved in
    it and I think the trade off you make is the potential conflict
    of interest versus having new ideas and new blood and a check
    on the culture.
        Ms. Richardson. I think there is a concern conflict of
    interest. I think there are probably ways you can address that,
    and I don't know whether a third is the right number.
        Senator Gramm. I don't either.
        Ms. Richardson. I think it is good to have some fresh
    blood, but I think there is a practical reality and that is
    that it is not that easy to get people to come in.
        When I was Commissioner, we had the vacancy in the chief
    information officer's position for almost one year. We had a
    national search firm go out to try to recruit people. The
    amount of the salaries being paid and the conditions under
    which they were being asked to work drove a lot of really
    potentially good talents away. They wouldn't even interview.
        And I think that one of the advantages I mentioned in my
    testimony of the Internal Revenue Service being an independent
    agency, like the Social Security Administration, is the
    prospect of being able to recruit and retain good people from
    the outside because the Agency would have more status.
        Right now, it is a bureau of the Treasury Department, and
    by the time you get down all the layers of the Treasury
    Department to hire someone at the IRS, the salaries are not
    competitive with people in the private sector.
        Senator Gramm. I think that is a very good point.
        Mr. Cohen. Senator, two points. On your first point, one is
    a civil case and one is a criminal case, and they are vastly
    different, but we can get into that at length. We don't have
    time now.
        On the second point, we tried this in the 1960's. John
    Macy, who was then chair of the Civil Service Commission, had
    an idea. I worked with the Justice Department and John to work
    out rules, and, as Peggy indicates, many of the rules got hung
    up on these conflict issues.
        That is, the very people who were useful to you on day one
    were people who were out of a law firm, an accounting firm, the
    tax manager of a large corporation, and you had these just
    perceived and real conflicts and the salary.
        Our salary deferential back then was minor compared to
    today. That is, the government salaries were probably 80, 90
    percent of the outside world in the 1960's, thank goodness, and
    it made recruiting easier.
        Ms. Richardson. Some were actually paid more, Sheldon.
        Mr. Cohen. But you now have situations where it is a half
    or a third of what is being paid on the outside. A kid coming
    out of a very good law school, at the top of their class will
    get about $35,000.00 in the government, and they will get about
    75 or 80, depending on where they go, in a law firm. Maybe even
    more. The better law firms even higher.
        Mr. Goldberg. I have a bidding war, Senator Moynihan, for
    the guy behind you.
        Senator Moynihan. Goldberg is $100,000.00.
        Mr. Cohen. My line supervisor was another Commissioner of
    Internal Revenue later. John Walters. Both of us came out of
    law schools. Johnnie out of the University of Michigan, and I
    out of George Washington University. I was first in my class. I
    think he was third or fourth in his.
        But the IRS has trouble getting those kids today when
    Fred's firm and all of our other firms are paying, 70, 80 or
    90, depending on where they go. Now, that is just lawyers.
        In accountants, we didn't recruit below the 40th or 50th
    percentile. That is, we were not taking talents below that.
    Now, today, they are lucky if they get 50th percent.
        Mr. Goldberg. I think there is a little bit of a divide
    here, Senator. I agree with the issue about conflicts, but my
    view is that what the service is most sorely missing--I think
    lawyers and accountants are an issue--in today's world of the
    IRS is technology based skills, management based--there are too
    many lawyers already, in my judgment.
        Senator Gramm. In the world.
        Mr. Goldberg. In the world at large. Absolutely. The first
    thing we do is shoot them. Right?
        So I think the conflicts are less serious when you are
    looking for those types of skills. I think there may be a
    misapprehension. I know Mike Murphy, back here, was a deputy
    when I was a commissioner. Mike was a career IRS person.
        He and his colleagues, all of whom were career folks, we
    worked as hard as we could to get 25 to 30 percent of the
    executive development class from outside the IRS. It is not a
    lack of effort, and I think the IRS understands that. I think
    that the folks who have been there a long time appreciate the
    insularity. It is just very hard to recruit, and that is where
    I would be focusing my attention.
        Senator Gramm. Mr. Chairman, I think the question of
    independence is an important issue. I think we need to look at
    the pay scale too.
        And I would just like to say that it is nice, every once in
    a while, to be reminded of your past as head of the IRS, as we
    work with people, like Don Alexander, who is one of the
    sweetest, mild mannered people I know. It is important to
    remember that in another life he was getting blood out of
    turnip. [Laughter.]
        Mr. Alexander. It was hard to get, too, Senator Gramm.
    [Laughter.]
        The Chairman. Let me thank the former commissioners for
    being here today. I think your information has been extremely
    helpful, and we look forward to continue working with you.
    Thank you very much.
        Our second panel consists of representatives of various tax
    practitioner groups who have a unique perspective as to the
    interaction of the IRS, with taxpayer and their
    representatives.
        We are very pleased to have on this panel Mr. Douglas C.
    Burnette, President of the National Society of Accountants; Mr.
    Paul Cherecwich, Jr., International President of the Tax
    Executives Institutes, Vice President, Taxes and Tax Council of
    Thiokol Corporation; Mr. Bryan Gates, Chair of the Federal
    Regulatory Subcommittee of the National Association of Enrolled
    Agents; Mr. Michael Mares, who is the Chairman of the Tax
    Executive Committee of the American Institutes of CPAs, and
    finally, Mr. Stefan Tucker, who is Chairman-elect of the
    American Bar Association, Section of Taxation.
        Gentlemen, I would ask that each of you keep your remarks
    to 5 minutes. Your full statement, of course, will be included
    as if read.
        Mr. Tucker, we will start with you.

        STATEMENT OF STEFAN F. TUCKER, CHAIR-ELECT, SECTION OF
    TAXATION, AMERICAN BAR ASSOCIATION, AND MEMBER, TUCKER, FLYER &
                         LEWIS, WASHINGTON, DC

        Mr. Tucker. Thank you, Mr. Chairman. As one of those
    lawyers of whom there are too many already obviously, it is a
    pleasure to start off. I am the chair-elect of the ABA Tax
    Section, and we are the national representative of the legal
    profession with regard to our Federal tax system.
        Having heard what has gone on before, inasmuch as we do
    have a printed statement that has been presented, I would
    really like to just concentrate on a few items in our comments.
        The first is on governance and the oversight board,
    recognizing that we may be swimming somewhat upstream or
    against the tide. It is our view that the oversight board ought
    to be very narrowly constricted. We think that it is both
    unwise and impossible to try to split the fiscal management of
    the Internal Revenue Service from other issues involving
    administration, enforcement and policy.
        Until you decide where your resources are going to be
    allocated and how your resources are going to be allocated, it
    is very difficult to decide how you aregoing to allocate your
    financial resources and your fiscal management.
        We believe that Commissioner Rossotti's modernization
    concept, as was articulated yesterday, will, as and when
    implemented, go a long way to achieve both the control and the
    accountability that you are looking for. But it is clear, in
    our view, that the day-to-day management of the Internal
    Revenue Service ought to be left in the Internal Revenue
    Service, through the Treasury Department.
        We would look to an oversight board as, in effect, a board
    of review. We think that it ought to be able to, through
    various procedures, understand what is going on and be, in
    effect, a watchdog for Congress and Congress', hopefully, joint
    oversight committee, in terms of watching over the Internal
    Revenue Service and reviewing the IRS.
        We would, as an aside--and it is not in my statement--be
    very concerned about giving this board, whether an oversight
    board or board review, any Section 6103 power. We would agree
    with those persons who have said that this could cause micro-
    management.
        It could cause either actual or perceived conflicts of
    interest, and we have learned, as we know everybody else has
    learned, that perception can be reality, and people do tend to
    talk too much because they are in fish bowls.
        And I am always reminded of what my father told me was a
    slogan of World War II, that loose lips can truly sink ships,
    and we think that that is something that could occur here quite
    regularly.
        You might want to think about putting this board together
    on a sunset. You might want to think about looking at a five
    year plan for the board, with the objective of determining,
    after 5 years, whether or not that board should be continued.
        If it is seen as a need because of what we have seen
    through the hearings and what we have learned about Oklahoma
    and Texas and other places, 5 years should help us determine
    whether we still need it.
        Sometimes you eliminate bureaucracy. You have a very fine
    tuned focus by simply putting a sunset into effect and your
    retaining the right, up here on the hill, to determine whether
    or not it should go forward and not having a constant
    evergreening bureaucracy that sometimes grows like topsy. And
    we would put that out to you.
        We would also put out to you, and we may be the only ones
    suggesting this, that you consider putting into the Treasury
    Department an under secretary of taxation, somebody whose sole
    responsibility is to act as the person from the Treasury
    Department who would, in effect, oversee the operations of the
    Internal Revenue Service.
        We have found that in the past there have been persons in
    that position. They have either been sporadic or they have been
    really in absence as to their oversight on behalf of the
    Treasury of the Internal Revenue Service, and we think that is
    something that is truly needed.
        You have heard a lot about personnel policies and the need
    to get the best and the brightest. We agree with that. We think
    that a lot of fiscal impact on the Internal Revenue Service has
    come from the hill.
        As a practitioner, and I am, my clients are, as a whole,
    entrepreneurs. One of the things that we run into is, as you
    have cut resources, the Internal Revenue Service has been
    compelled to cut back on both their appeals conferees and their
    district counsel, and it can take us 3 years to actually get an
    agreement that we have already received orally from an appeals
    conferee in writing and through the Internal Revenue Service
    mechanisms.
        And, in the meantime, as you have said and others have
    said, interest and penalties continually run. And the other
    thing we ought to note that other people haven't said about the
    interest and penalties is they are an IRS negotiating tool.
        Recognizing that in the case of many clients the interest
    and penalties exceed the deficiency, the IRS will often say, if
    you don't settle, we are going to assert the penalties. If you
    do settle, we may not assert the penalties. Interest, of
    course, cannot be abated, and that creates significant
    problems.
        We have two other things that I would like to note. One is
    the burden of proof. We really agree the burden of proof ought
    not to be shifted to the Internal Revenue Service. We recognize
    the House has narrowed the shift to some extent. We think it
    ought not to be shifted at all. It is where it ought to be.
        And lastly, on the extension of privilege to other tax
    advisors, we would note that we think that privilege for
    attorneys comes out of the English common law concept. It is,
    in effect, the everyday person's fifth amendment right against
    self-incrimination. You tell your lawyer because your lawyer is
    your advocate.
        The accountants are not your advocate. They operate out of
    the public interest. What you are telling them is that you
    might grant a limited privilege in your bill, but that
    privilege will not extend to other matters. It will not extend
    to state law. It will not extend to domestic relations, to
    criminal matters.
        You may be opening up a Pandora's box of unintended
    consequences. By seeking to do something in what you think is a
    relatively narrow context, it can be destroyed in every other
    context. Thank you, sir.
        The Chairman. Thank you, Mr. Tucker.
        [The prepared statement of Mr. Tucker appears in the
    appendix.]
        The Chairman. Mr. Burnette.

     STATEMENT OF DOUGLAS C. BURNETTE, PRESIDENT, NATIONAL SOCIETY
                     OF ACCOUNTANTS, ALEXANDRIA, VA

        Mr. Burnette. The National Society of Accountants is
    pleased to testify today. My name is Douglas Burnette, and I am
    a practicing accountant from South Carolina.
        I am testifying today in my capacity as President with the
    National Society of Accountants. NSA represents 17,000
    practicing accountants and provide accounting, tax and
    management advisory services to four million individuals and
    small business clients.
        The National Society commends Chairman Roth and the Finance
    Committee for holding today's hearing on IRS reform, as well as
    last fall's meaningful hearings.
        We feel confident Americans can rest assured that
    meaningful restructuring legislation will be enacted into law.
    NSA also commends Senators Kerrey and Grassley for their work
    on the Restructuring Commission.
        For the convenience of time, I will summarize my written
    statements. With respect to the oversight board, Chairman
    Roth's statement in November, that the Finance Committee would
    investigate whether the oversight board should be permitted to
    look at audit and collection activities, was a point well
    taken.
        According to NSA members, examination and collection
    activities of the IRS are the two areas generating the greatest
    number of taxpayer complaints. We hope the committee's
    investigation will result in legislation that will include
    oversight of examination and collection functions.
        The National Society of Accountants also believes that an
    important function of the oversight board should be to address
    issues related to the ethics, integrity and civility of IRS
    employees. The hearings held last fall punctuated the need for
    this. Our organization strongly supports it.
        In this connection, attorneys, certified public accountants
    and enrolled agents are subject to enforceable Federal
    regulations imposing rigorous standards of professional conduct
    with respect to their dealings with clients and the IRS.
    Perhaps IRS employees should be subject to a similar code of
    conduct for the work they perform.
        At the very least, there must be oversight of their
    professional behavior.
        It has been observed that 85 percent of the businesses in
    this country are comprised of small businesses. Compliance with
    the requirements of the tax laws and dealings with the IRS are
    an integral part of the lives of small business owners, yet
    they rarely have the people on staff to do such work and often
    cannot afford the cost of representation.
        NSA strongly recommends that the legislation include small
    business representation on the IRS oversight board. The House
    bill already mandates that large businesses be so represented.
    Small businesses must be provided direct representation on the
    board as well. Without such representation, this critical
    constituency's needs will not be addressed.
        Mr. Chairman, you mentioned last fall that the Finance
    Committee will investigate whether the taxpayer advocate should
    be made completely independent of the IRS and responsible
    directly to the oversight board. While we recognize the merit
    of the competing views on this subject, on balance, the
    National Society of Accountants feels the independence of the
    taxpayer advocate will be beneficial to the efforts of
    improving IRS customer service.
        The National Society urges the Finance Committee to examine
    and consider changes to the offer in compromise program.
    Currently, less than half of the offering compromise submitted
    by taxpayers and deemed processable by the IRS.
        Of those that can be processed, approximately one half are
    resolved. The program is administered by the IRS collection
    function, is plagued by complicated application instruction,
    inordinate delays in processing, unprocessable submissions,
    delayed notifications and lack of consistency.
        The National Society recommends the Finance Committee
    consider removing the offer-in-compromise program from
    collections and place it in a more suitable location within
    IRS, such as appeals or an expanded and independent taxpayer
    advocate's office.
        By doing this, the committee will be protecting a
    taxpayer's right to a speedy and fair resolution of collection
    matters and bring the taxpayer back into compliance on
    succeeding years.
        Another area of concern by this committee is the IRS
    conduct of employee performance evaluations, including the
    granting of performance awards to employees. NSA believes that
    a fundamental principle of the evaluation process is that no
    IRS employee should receive a cash reward based on quotas.
        On the issue of electronic filing, the National Society
    strongly recommends the Finance Committee include in its bill
    provisions designed to encourage more tax professionals and
    taxpayers to utilize the electronic filing program.
        We urge the Finance Committee to use the language on
    electronic filing contained in the Kerrey-Grassley bill,
    thereby avoiding what could be interpreted as a mandate for
    electronic filing. Congress and the IRS, therefore, are likely
    to circumvent many other perception problems that have
    underlaid implementation of the EFTS over the last 2 years.
        The House bill calls for the Joint Committee on Taxation to
    complete a study on tax penalties within 9 months of the bill's
    enactment. The National Society not only supports this study,
    but believes that the tax penalty reform should become the next
    most serious phase of IRS restructuring.
        The practitioner community has become increasingly
    concerned with the requirement that a paid preparer's Social
    Security number must appear on tax returns filed with the IRS.
    Practitioners feel that the requirement violates their privacy,
    as it can provide an unscrupulous taxpayer with the opportunity
    to access certain records that would otherwise be unavailable.
        NSA suggests the committee review this requirement with the
    IRS and develop a separate system for identifying tax return
    preparers.
        The National Society of Accountants is pleased to provide
    these comments on IRS reform and restructuring. NSA stands
    ready to work with the Finance Committee in any way we can.
        The Chairman. Thank you, Mr. Burnette.
        [The prepared statement of Mr. Burnette appears in the
    appendix.]
        The Chairman. Mr. Cherecwich.

    STATEMENT OF PAUL CHERECWICH, JR., INTERNATIONAL PRESIDENT, TAX
    EXECUTIVES INSTITUTE AND VICE PRESIDENT, TAXES AND TAX COUNSEL,
                     THIOKOL CORPORATION, OGDEN, UT

        Mr. Cherecwich. Thank you, Mr. Chairman. I am the Vice
    President of Tax and Tax Counsel for Thiokol Corporation, in
    Ogden, Utah, but I am here today as President of the Tax
    Executives Institute, the largest group of in-house tax
    professionals in North America.
        Mr. Chairman, TEI commends the committee for holding this
    hearing and for its work in this area, because we believe the
    IRS Restructuring and Reform Act holds great promise for
    improving the management and oversight of the IRS and for
    enhancing taxpayer rights, while giving the agency the tools
    necessary to fulfill its mandate.
        My written statement describes TEI's position on the
    various provisions of H.R. 2676, as approved by the House of
    Representatives. Rather than summarize our entire testimony, I
    want to highlight just a few items.
        But before doing so, I want to say that TEI is encouraged
    By Commissioner Rossotti's plans for reorganizing the IRS.
    Although still in the formative stage, the service organization
    approach he outlined not only is consistent with private sector
    trends toward organizing along lines of business, but it also
    compliments perfectly the overall thrust of H.R. 2676.
        TEI looks forward to working with Commissioner Rossotti in
    refining and implementing his reorganization plan and ensuring
    that the IRS's goals of service and fairness to taxpayers are
    attained, while fulfilling the congressional mandate of
    collecting the revenues needed to fund the government.
        Turning now to the bill, I wish to confirm that TEI
    supports the establishment of a balanced private sector/
    government IRS oversight board. We agree that the Secretary of
    the Treasury and the Commissioner, still appointed by the
    President, should serve on the board. Other members should be
    selected on the basis of their expertise in areas such as
    general management, finance, technology, and personnel.
        Under the bill, the oversight board will review and approve
    the IRS's strategic plans and budgets. Although the board's
    involvement in these areas should be helpful, TEI does not
    believe the board should be involved in the development of tax
    policy or in managing the day-to-day operations of the IRS, and
    we do have significant concerns about granting board members
    access to confidential taxpayer information.
        We believe such an approach is fraught with risks. Not only
    for maintaining taxpayer privacy and avoiding conflicts of
    interest, but in distracting the board from providing high-
    level, strategic advice to the Commissioner.
        TEI supports proposals to streamline congressional
    oversight of the IRS by coordinating both the myriad GAO
    studies and the sometimes duplicative hearings by various
    committees and subcommittees. By making congressional oversight
    less reactive and more integrated, Congress can conserve the
    agency's resources and ensure that mixed signals are not being
    sent about what the IRS's priorities should be.
        Better and more focused oversight should also contribute to
    an environment where the IRS can receive the stable funding
    that it needs to fulfill its mission.
        An essential component of increasing confidence in the IRS
    is preserving and strengthening taxpayer rights. To this end,
    TEI believes the Taxpayer Advocate's position should continue
    to be strengthened, and we applaud Commissioner Rossotti's
    decision to recruit the next Taxpayer Advocate from outside the
    agency.
        Among the most important taxpayer rights proposals is the
    provision to eliminate the so-called interest deferential,
    which imposes a higher interest rate on deficiencies than on
    tax refunds and can have the effect of penalizing taxpayers who
    simultaneously owe and are owed funds by the IRS.
        TEI supports the elimination of the differential for both
    individuals and corporations and urges the committee to
    confirm, in legislation rather than in committee reports, the
    IRS's authority--and responsibility--to deal with the
    inequities of the past by implementing comprehensive crediting
    procedures for all open years.
        The Institute also supports efforts to clarify IRS's
    authority to issue a summons for third-party tax-related
    computer source codes. Mr. Chairman, taxpayers have found
    themselves stuck in the middle on this issue, obliged to
    respond to IRS requests for information while being legally
    bound by their licensing obligations to third-party vendors. We
    urge that this issue be addressed.
        Mr. Chairman, I now wish to turn to a proposal that causes
    TEI considerable concern, the provision to shift the burden of
    proof. TEI opposes the legislation. Not so much because of how
    it will affect the few cases in which a court ultimately
    concludes the proposal's requirements are satisfied, but
    because it could diminish the overall level of voluntary
    compliance and lead to an even more intrusive IRS.
        Listen to the sound bites, Mr. Chairman, and what you hear
    is not a limited proposal, but an extraordinarily broad one.
    Scan the headlines, and what you see is that the limitations
    and nuances have been lost and taxpayers are being told, or at
    least they are hearing, that they will not have to keep records
    or substantiate their claims.
        The sky might not fall on those cases where the burden
    shifts, but the cumulative effect of the legislation and how it
    has been promoted will be to undermine voluntary compliance.
    What is more, we regret that if the proposal is enacted, the
    IRS will have no choice but to intensify its enforcement
    activities to satisfy a sustained burden. That certainly is not
    consistent with the overall thrust of this legislation.
        Before concluding, I want to underscore a point that has
    been almost a mantra to TEI members. The most important step
    Congress can take to the meaningful reform of the IRS is
    simplifying the tax law. The biggest abuses of taxpayers come
    not from excessive actions by IRS personnel, but from highly
    complicated laws and onerous administrative procedures that
    Congress enacts and the President signs into law.
        Mr. Chairman, Tax Executives Institute appreciates the
    opportunity to provide its comments. I should be pleased to
    respond to any questions you may have.
        The Chairman. Thank you.
        [The prepared statement of Mr. Cherecwich, Jr., appears in
    the appendix.]
        The Chairman. Mr. Mares.

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

        Mr. Mares. Thank you, Mr. Chairman, and thank you for
    inviting the AICPA here today to testify before you. I am
    Michael Mares, Chair of the AICPA's Tax Executive Committee.
        Your committee hearings last September highlighted the need
    for major reform at the IRS. While we commend Acting
    Commissioner Dolan, Treasury Secretary Rubin, and more
    recently, Commissioner Rossotti for their reform efforts, we
    believe more needs to be done.
        Accordingly, the AICPA supports H.R. 2676 because it
    presents many sound and exciting ideas for revitalizing and
    reforming the IRS, thereby restoring public confidence in that
    agency.
        My comments today will be limited to four issues of
    particular importance. Privacy in tax matters, the taxpayer
    advocate, electronic filing and tax law complexity. Of course,
    upon request, we will be happy to provide any additional
    comments the committee may desire.
        First, the complexity of the federal income tax laws and
    the often surprising ways in which those laws apply to
    taxpayers means that millions of taxpayers must or elect to
    choose tax advisors. Advisors become privy to much private
    information about their clients in the course of forming
    recommendations.
        For individuals, this may include intensely personal
    information. For businesses, it may include trade secrets and
    other sensitive data. The recommendations or tax advice given
    to clients may be based, in part, on such private information.
        They may also involve professional recommendations and
    opinions, even pure speculation as to the outcome of financial
    transactions or events over time.
        Taxpayers expect privacy and confidentiality in discussing
    tax matters with their advisors. As a matter of public policy,
    we believe a taxpayer has the right to expect the same
    protection of privacy for all information concerning tax
    matters provided to his advisor, if the advisor is authorized
    to practice before the IRS, regardless of that advisor's
    specific professional classification.
        Section 341 of H.R. 2676 affords taxpayers needed
    confidentiality protection in non-criminal proceedings before
    the IRS for tax advice from any federally authorized tax
    advisor, to the same extent such advice would be protected
    under the attorney/client confidentiality privilege.
        The AICPA supports the section 341 proposal, but we believe
    some changes are needed to clarify the appropriate taxpayer
    protections. We believe the key in this situation is
    recognizing the disparate treatment of taxpayers, based upon
    their choice of tax advisors, and providing all taxpayers the
    needed privacy protections.
        With respect to the taxpayer advocate, the taxpayer
    advocate is in the unique position of being inside the Internal
    Revenue Service, yet charged with the responsibility of
    zealously representing the interests of American taxpayers.
        For the taxpayer advocate to fulfill these
    responsibilities, he or she must have the taxpayer's trust,
    even though that office is part of the IRS. It is, therefore,
    crucial that the taxpayer advocate be regarded by taxpayers as
    being independent, both in fact and in appearance.
        We urge this committee to incorporate into the IRS reform
    legislation measures to enable the taxpayer advocate to operate
    in a manner that is truly independent and that is perceived as
    being independent.
        The AICPA has supported, for many years, the concept of
    electronic filing; however, there are problems with filing
    electronic returns today. For example, all forms cannot be
    filed electronically, and there is no ability to attach white-
    paper schedules, disclosures or elections electronically, among
    other issues.
        The AICPA supports the H.R. 2676 provisions that call for
    the removal of the barriers to and for promoting the use of
    electronic filing. We are concerned, however, that the language
    of section 203 of the current bill is weaker than that of the
    comparable provision in H.R. 2292, its predecessor, and we
    recommend that the language of H.R. 2292 be accepted.
        It provides more time sensitive filing deadlines, and I
    think pushes the issue of electronic filing forward in a faster
    manner.
        Finally, we recognize that the problem of tax complexity
    originates with complex tax legislation, not tax
    administration. We urge you to adopt section 422 of H.R. 2292
    instead of the weaker provisions of H.R. 2676.
        During our testimony before the National Commission on
    Restructuring the Internal Revenue Service and before the House
    Ways and Means Committee on its hearings on this provision, we
    made a number of recommendations concerning simplification and
    provided much detail on the type of complexity analysis we
    believe should be made part of every legislative initiative.
        We believe that H.R. 2292 reflects that and better
    addresses the complexity problem in a practical, useful manner.
        As always, the AICPA appreciates the opportunity to offer
    comments at today's hearing and stands willing to provide your
    committee with whatever resources and assistance we can as this
    bill moves forward. Thank you for your attention, and I will be
    happy to answer any questions.
        The Chairman. Thank you, Mr. Mares.
        [The prepared statement of Mr. Mares appears in the
    appendix.]
        The Chairman. Mr. Gates.

        STATEMENT OF BRYAN E. GATES, CHAIR, FEDERAL REGULATORY
        SUBCOMMITTEE, NATIONAL ASSOCIATION OF ENROLLED AGENTS,
                            GAITHERSBURG, MD

        Mr. Gates. Chairman Roth, my name is Bryan Gates. I am an
    enrolled agent from Clearwater, Florida. I am speaking in
    behalf of some 10,000 enrolled agents who have elected to be
    members of the National Association of Enrolled Agents.
        Our testimony is divided into three parts. Briefly, with
    respect to the oversight board, we applaud that decision and
    will cooperate in whatever the outcome is. It is to our members
    benefit, and we see that as a positive move to change the
    culture at the service, which everybody talked so much about
    today.
        With regard to electronic filing, we are totally and
    completely in favor of it. Our members love it. The faster the
    service is able to implement it and we are able to bring those
    services to our clients, the better off we are going to be.
        As far as the taxpayer advocate is concerned, it has been a
    boon to tax practice as long as it has existed. Sometimes it is
    the only way we could get ever difficult problems solved for
    our clients, and we felt almost like we were taking from the
    public, because it was set up for them, but we probably use it
    more than anybody else.
        But in your areas of concern, Senator Roth, we want to
    spend a little more time. We are believers of Senator
    Grassley's efforts many years ago. At first, a taxpayer bill of
    rights was absolutely unbelievable to us; to establish, for the
    first time, the taxpayer's right of representation or right of
    consultation, in Section 7521 of the code.
        We just wish all the taxpayers knew that they have that
    statutory right, because we have been trying to explain it to
    them for 10 years, and they are still not fully aware of it.
        For 10 years, however, the service has not been aware of it
    as we are, and they continue to discourage and deny taxpayer's
    right to representatives. We believe that this is a rule
    without a sanction. You have given a taxpayer a statutory right
    to be represented, but when the Internal Revenue Service
    violates this right, there is no sanction; there is no
    punishment. There is nothing.
        We strongly suggest you look into Section 7521 and see if
    perhaps something as stringent as an IRS employee who breaks a
    taxpayer's right of representation be suspended while the
    inspection service determines the facts of the case and IRS
    management determines what discipline is in order.
        Secondly, Senator Roth, payments, installment agreements
    and offers in compromise, which is what our clients are all
    about, as Commissioner Cohen mentioned, we are in the trenches
    all the time.
        The bill of rights gave the taxpayers, in Section 6159, the
    right to propose installment agreements. Or at least gave the
    Commissioner authority to listen to them. That was the first
    time they ever, in history, had the right to propose payment of
    tax in less than the full amount.
        Offer and compromise has been on the books for years and
    years, but until Commissioner Fred Goldberg discovered that
    code section, 7122, very few people even knew about it. As a
    result, after he issued IRS policy statement P-5-100, saying
    offers exist, some parts of the country got them in boxcar
    loads because that was the only solution taxpayers saw to an
    inability to ever pay taxes in their entire life.
        However, I can't say the service has done a wonderful job
    in administering either one of these provisions. They use
    enforcement personnel to investigate these proposals,
    enforcement minded revenues officers who are supposed to be out
    there preventing employers from incurring $9 and $10 million in
    employment taxes, not sitting down at a table with a small
    family who has to negotiate an $11,000 payment agreement.
        So we really believe, if by legislation if necessary, that
    the investigation of installment agreement proposals and offers
    and compromise be taken away from enforcement personnel and put
    in this new taxpayer service area where they belong.
        And third, Senator Roth, your area of seizures. Without
    question, the Internal Revenue Service has had the right to
    seize property of any kind, virtually with very few exemptions,
    for years and years, except they have a tendency to abuse that
    authority.
        Now, if they abuse it by taking a bank account or if they
    are taking some stocks or bonds, that is one thing. But if they
    close down a man's business or physically seize a pickup truck
    from a person's backyard, that is the most serious
    confrontation that taxpayers and their Internal Revenue Service
    ever have.
        We really truly believe those kind of seizures should
    require a pre-deprivation court hearing.
        The Internal Revenue Service went out under black of night
    in the GM Leasing case, entered on private property without
    warrants and the Supreme Court was horrified in the GM Leasing
    case. Since, the Internal Revenue Service has had to get a writ
    of entry any time they want to enter on private property to
    seize assets.
        We believe your committee should increase that to a writ of
    seizure so the taxpayer has an opportunity to present, in a
    show cause order, why his business shouldn't be closed or why
    property should not be physically taken away from him.
        In the few seconds I have left, consider the statutes of
    limitation. Congress has seen fit to have 3 years to assess
    taxes and 10 years to collect, which is an increase from six,
    yet the Internal Revenue Service still coercively insists that
    taxpayers extend these statutes by agreement.
        It is time for Congress to say 3 years to assess and 10
    years to collect is enough. No extension.
        I am going to steal a little bit of time because I know it
    is dear to your heart, Senator, as to financial status audits.
    You call it assignments of income.
        Without question, the Internal Revenue Service, confronted
    with a person who has not kept records for years and years, who
    has failed to file, doesn't know exactly what to do.
        So they will go to the Bureau of Labor Statistics and say,
    well, let's see. You are a construction worker in Philadelphia,
    and during those years, you should have made $57,000. So, since
    you have no records, we are going to take the position that you
    owe taxes on $57,000.
        That is very convenient for the Internal Revenue Service,
    but terribly burdensome for that taxpayer, even though he may
    be somewhat of a non-complier. He now has to go to the United
    States Tax Court or United State District Court to undo that
    presumption against him.
        I am sorry I took the extra time.
        The Chairman. Thank you, Mr. Gates.
        [The prepared statement of Mr. Gates appears in the
    appendix.]
        The Chairman. I am going to ask a couple of questions. We
    have a series of questions. We will submit those to you and ask
    you to answer them in writing, if you would be so kind.
        But I would like to go back to the question about liens,
    levies and seizures authority. Mr. Gates addressed that in
    part.
        I am concerned about taxpayers who do not receive real
    notice and wake up in the morning only to find that the IRS has
    taken their bank accounts, business or other assets. Sometimes
    their home.
        Should the taxpayer have a right to a judicial hearing
    before seizure? Mr. Tucker, do you want to start?
        Mr. Tucker. Frankly, my practice does not entail seizures,
    liens and levies. My clients don't tend to run into those. The
    ABA tax section certainly has experience, and we would be more
    than pleased to answer that in writing.
        The Chairman. Mr. Burnette.
        Mr. Burnette. One of the most horrifying things that a
    taxpayer can do is find out that his bank account has been
    levied. Not only does that cause him embarrassment with his
    community, but a lot of the times the checks that he has
    already written that were outstanding are now going to bounce
    and cause him further distress.
        I think, most definitely, we should have some measure
    before any levy is taken in this nature.
        The Chairman. Mr. Cherecwich.
        Mr. Cherecwich. Sir, our organization does not get involved
    in those issues. We work for large corporations, and we pay our
    taxes and don't tend to have that issue arise. I would add, Mr.
    Chairman, that in striving to enhance the rights and
    protections of noncompliant taxpayers in lien and levy
    situations, Congress must take care not to send the wrong
    signal to the overwhelming majority of taxpayers who fully
    comply with the law.
        The Chairman. Mr. Mares.
        Mr. Mares. Mr. Chairman, I think there are three or four
    issues the committee should consider in addressing this.
        First of all, I think it is important to recognize that the
    use of a judicial proceeding is a burdensome affair, both for
    the taxpayer and for the government, and would require
    additional resource allocations by both parties. But I think
    there are a number of steps that the committee and the law can
    take to prevent it from ever going that far.
        First and foremost, I think it is very important that
    taxpayers be provided explicit, clear, understandable notice
    and procedures for appealing any collection action at the first
    notice that the taxpayer owes money.
        Many times, as the former commissioners have noted and I
    have experienced in my practice, receiving a notice from the
    IRS creates a great deal of fear and apprehension, and many
    people tend to ignore it, simply hoping it will go away or
    there is a mistake.
        We believe that by providing early notice, providing clear
    directions to the taxpayers as to what steps they have to take
    in order to appeal that decision, that many of the problems can
    be relieved. Secondly, we believe that a substantial change in
    the offer and compromise program will accomplish, again, much
    relief for the taxpayers.
        We have recommended, in our written testimony, that a
    number of the standards be re-examined and that there be more
    local allocations of standards, rather than one national
    standard, which may not apply. We also believe that the offer
    and compromise provision should be reworded to encourage the
    IRS to use deviations from those standards, when appropriate.
        My experience has been, and I think some anecdotal
    experiences of other members of the AICPA has been, that while
    this discretion exists now, it is not used very frequently by
    the IRS, and we believe that a more reasonable use of that
    discretion will, again, go a long way towards alleviating this
    problem without the necessity of judicial intervention.
        The Chairman. Mr. Gates, do you have anything to add?
        Mr. Gates. Yes, sir. The idea of judicial notice to every
    taxpayer who has fallen behind and is probably, by this stage,
    ignoring a lot of notices, we have anticipated, is probably
    more than the courts could conceivably handle.
        In addition, the Congress has seen the need to give them
    more time when you instituted the 21 day holding period, so
    that a bank has to hold their funds 21 days now, and yet, gives
    them an opportunity to straighten out their difficulties with
    Internal Revenue.
        But we cannot say so lightly of the closing of a growing
    business, what you are talking about--generally, our clients
    are small business; one, five, six, seven, eight employees.
    They are struggling with withholding tax. They don't fully
    understand it. The deposit system is incredibly difficult. They
    get behind.
        The concept of cascading penalties is just absolutely
    unbelievable. When you explain to a small businessman that by
    your failure to make deposits, compounded by your late filing
    of the tax return, which now puts delinquency penalties on you,
    followed by late payment penalties, in just a few quarters, a
    couple of quarters--6 months to a small businessman is nothing.
        But he has accumulated so much liability that he is
    overwhelmed by it and probably will need a year or more to work
    out an installment agreement to both remain viable and get back
    into full compliance.
        Now, an IRS officer, until recently a very low level--until
    Commissioner Rossotti, almost on an emergency basis, raised
    that to the chief collection division level, a relatively low
    ranking revenue officer can make a decision, at that point, to
    close his business down.
        At one time revenue officers needed no managerial approval
    whatsoever. Now he needs the approval of his manager, and as a
    result of Commissioner Rossotti, the approval of his division
    chief.
        We don't think that is enough to close down a going
    business, of the small businessman, who has not got a record of
    over and over again avoiding his withholding tax
    responsibilities. It should require the scrutiny of a Federal
    judge before it takes place, and the Internal Revenue Service
    should have to go for a pre-deprivation hearing.
        The Chairman. My final question is with respect to the
    inspections division. Should it be made more independent?
    Should the IRS inspection division be transferred to the
    Treasury IG? Mr. Tucker.
        Mr. Tucker. We believe that you ought to have more
    independence at the Inspector General division. We think,
    however, it ought not to be transferred to the Treasury
    Department. Treasury has a much broader scope. The Internal
    Revenue Service has to have a very definite delegation of
    authority to that inspector general, and it needs to be
    strengthened.
        But we need it inside the Internal Revenue Service and not
    focusing on overall Treasury types of functions, but we do
    believe it ought to be strengthened.
        The Chairman. Would you make it a report to the board, if a
    board is created?
        Mr. Tucker. I believe that the reports would go to the
    commissioner, we think to the Under Secretary of Treasury, for
    purposes of oversight on the IRS and to the board.
        The Chairman. Mr. Burnette.
        Mr. Burnette. I definitely think it should be more
    independent and should be referred to the oversight board. I
    feel like the oversight board gives us a breath of fresh air in
    looking at such issues.
        The Chairman. Mr. Cherecwich.
        Mr. Cherecwich. Sir, I think that the best way to look at
    this is to use the corporate business model. The inspection
    division is analogous to the internal audit function that
    corporations like my employer have, which serves as a very
    valuable tool for the chief financial officer and chief
    executive officer to use in effectively running the business.
        I really think, as Mr. Rossotti said yesterday, that the
    IRS needs to have a very strong internal audit function that
    reports to and, therefore, assists the Commissioner of Internal
    Revenue.
        As to the interaction of the inspection division with the
    board, board members can meet with the persons who conduct
    these studies to assure themselves that those persons have the
    freedom and the unhampered ability to dig in and find out what
    is truly going on.
        In the corporate business world, the internal auditor who
    is an employee of the corporation periodically meets with
    members of the board of directors, and particularly the outside
    members of the board of directors, just to reassure them that
    that internal audit function can operate in an unimpeded
    manner. I think that there is much that the IRS can learn from
    following that model.
        The Chairman. But, of course, in a corporation you also
    have the independent audit annually, which is a further check.
        Mr. Mares.
        Mr. Mares. I was going to comment on that, Mr. Chairman. I
    think that the analogy of an internal audit program in the
    corporate world to that of the inspection service within the
    IRS is a reasonably valid analogy.
        However, as you pointed out, the outside corporations that
    are publicly traded--in fact, many privately held
    corporations--do have an audit for the purpose of assuring the
    financial statements reflect the income or loss of the entity.
        To strengthen, if it were this committee's goal, for
    example, the oversight of the board, you could certainly make
    that internal inspection agency or the internal inspection
    report to the board. But I, again, would be concerned that it
    would not allow the commissioner or other executives within the
    IRS ample opportunity to act on those, many of the problems of
    which will be day-to-day operational problems.
        The Chairman. Thank you. Mr. Gates.
        Mr. Gates. Inspection within the Internal Revenue Service
    is of two categories. The internal audit and what they call
    internal security.
        The first is a true internal audit, much as my colleagues
    up here were speaking to. That service ultimately finds fault
    with the operations of a district or a service center or even a
    region, and the commissioner needs to know how well the regions
    are operating and so forth.
        So, to that extent, it is a tool, as you heard the former
    commissioners themselves say, to improve management. How they
    work their peer relationship since it is essentially internal
    audit criticizing one of the top 25 or 30 executives of the
    service and how they work out the politics would depend, I
    suppose, from commissioner to commissioner.
        However, from a practitioner's point of view, the other
    side of the inspection service is the one that deals with
    dishonesty of employees and operates much like the internal
    affairs division of a police department.
        The most frustrated persons I heard speaking to you in the
    fall were current and former inspection officers of Internal
    Revenue Service who evidently were the most frustrated
    individuals I had ever heard, because they conducted internal
    affairs investigations and found IRS employees guilty, so to
    speak, of serious infractions, and it was their perception that
    nothing was ever done.
        To the extent that that sort of activity goes on within the
    Internal Revenue Service, it, of course, has to be curtailed,
    because if the internal affairs people are whitewashing
    misconduct and not punishing it, then it should be transferred
    to somebody other than the commissioner so that the appropriate
    disciplinary actions can take place.
        The Chairman. Well, gentlemen, thank you very much. I
    apologize for the lateness of the hour, but your testimony has
    been very helpful.
        We will submit a number of questions to each of you, and I
    will appreciate their being answered as promptly as possible.
        The committee is in recess.
        [Whereupon, at 1:00 p.m., the hearing was concluded.]

                               IRS RESTRUCTURING

                                  ----------

                           THURSDAY, FEBRUARY 5, 1998

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 10:00
    a.m., in room SD-215, Dirksen Senate Office Building, Hon.
    William V. Roth, Jr. (chairman of the committee) presiding.
        Also present: Senators Chafee, Grassley, D'Amato, Nickles,
    Lott, and Graham.

    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.
        Today we begin our third day of hearings on reforming the
    Internal Revenue Service. The goal of our series of hearings is
    to lay the groundwork for legislation that will improve the
    oversight of the agency, better protect taxpayers from unfair
    treatment, and change the IRS internal culture.
        The first part of our hearing will focus on the Executive
    Branch, as well as congressional oversight of the IRS. Within
    the Executive Branch, the Treasury IG and the IRS Office of
    Chief Inspector share oversight responsibilities for the IRS.
        To be effective, it is imperative that these units operate
    in a cooperative and complementary manner. I am concerned that
    this may not be the case right now.
        I am also concerned about the serious problems raised about
    the IRS Office of Chief Inspector in our oversight hearing last
    September.
        The Office of Chief Inspector is the equivalent of an
    internal affairs unit within a police department. It is
    responsible for investigating employee misconduct and
    conducting internal audit review within the IRS.
        Yet, we heard testimony from IRS employees of the work
    environment at many IRS offices is one of fear, intimidation,
    and retaliation.
        And we have heard testimony that the IRS Office of Chief
    Inspector may have close working relationships with IRS
    management.
        I am concerned that the IRS Office of Chief Inspector is
    not sufficiently independent to enable it to conduct effective
    oversight of the agency. Serious problems abound within the IRS
    and have gone unchecked. This is not acceptable.
        I am pleased that Commissioner Rossotti has recently
    requested a top to bottom review of the IRS Office of Chief
    Inspector. That is a positive step.
        But let me be clear, I will not be satisfied until there is
    an effective, independent oversight process established for
    this agency.
        We are going to hear from the Treasury Department's Deputy
    Inspector General, Richard B. Calahan, who will discuss the
    current role of the IG in overseeing the IRS and its working
    relationship with the IRS Office of Chief Inspector.
        We will also hear from the General Accounting Office on the
    role of the Treasury IG and the IRS Chief Inspector, as well as
    the role of the Taxpayer Advocate.
        Our second panel today consists of tax practitioners from
    around the Nation who will discuss their views on current IRS
    collection tactics and their recommendations to enhance
    taxpayer protection.
        Everyone has a responsibility, of course, to pay their
    taxes, but I am concerned that taxpayers may not be provided
    appropriate protections when property is levied or seized. The
    IRS should not be able to seize property from a taxpayer
    without sufficient warning.
        I think it is just common sense that before the IRS is
    allowed to take property of any kind from the taxpayer, that
    taxpayer should receive sufficient notice and an opportunity to
    be heard.
        Our witnesses will discuss this issue. I look forward to
    hearing the views on these and other IRS reform issues from our
    distinguished panel.
        Now, I am pleased to introduce our first panel which
    consists of Mr. Richard Calahan who, as I said, is the Deputy
    IG for the Treasury Department.
        We are happy to welcome again Ms. Lynda Willis who is the
    Director of Tax Policy and Administration Issues of the U.S.
    General Accounting Office. Would you care to introduce the
    gentleman with you?
        Ms. Willis. Mr. Chairman, I have Mr. Mark Gillen with me.
    He is our Assistant Director who is responsible for our work
    around the IRS IG and Inspection Service.
        The Chairman. We are pleased to welcome you, as well.
        Mr. Calahan.
        Mr. Calahan. Thank you.
        The Chairman. I will say to both of you, your full
    statements, of course, will be included as if read.

    STATEMENT OF RICHARD B. CALAHAN, DEPUTY INSPECTOR GENERAL, U.S.
               DEPARTMENT OF THE TREASURY, WASHINGTON, DC

        Mr. Calahan. Chairman Roth, Senator Moynihan, and members
    of the committee, I appreciate the opportunity to appear before
    you today to testify on the proposed legislation for
    restructuring the IRS and on the ways to strengthen the
    independence of the audit and investigative functions of the
    IRS' Office of Chief Inspector. I believe that this is a very
    important subject.
        My written statement is rather long. And with your
    permission, Mr. Chairman, I would like to submit it for the
    record in its entirety and briefly discuss some of the most
    important points.
        The Chairman. So ordered.
        [The prepared statement of Mr. Calahan appears in the
    appendix.]
        Mr. Calahan. As the committee is aware, the Office of the
    Chief Inspector performs the internal audit and investigative
    functions for the IRS. It is part of the IRS. And it is under
    the supervision of the IRS Commissioner's office.
        The Treasury Office of the Inspector General has oversight
    authority for the Office of the Chief Inspector, but not line
    management authority.
        The IRS Office of the Chief Inspector performs one of the
    most important audit and investigative functions in the
    government, but does not have the most important elements of
    independence provided to Presidentially appointed Inspectors
    General.
        The most significant of these are that the Inspector
    General is (1) nominated by the President and confirmed by the
    Senate; (2) can be removed only by the President; (3) reports
    to the head or deputy head of the agency; (4) generally cannot
    be prevented from conducting an audit or investigation, in the
    case of some departments though, including Treasury, the
    Secretary may in unusual situations prevent an audit or
    investigation by giving written notice which the Inspector
    General must provide to Congress; (5) has a legislative mandate
    to communicate directly with the Congress; (6) has a separate
    line item in the administration's budget; and (7) generally has
    its own legal counsel.
        Without these elements of independence, the Office of the
    Chief Inspector continues to face public and internal
    perceptions of its lack of independence.
        The current arrangement for IG oversight of the Office of
    the Chief Inspector does little to mitigate the lack of
    structural independence. The present oversight arrangement is
    too cumbersome. And the resources provided for this function
    are too few to offset this lack of structural independence and
    the concerns that have resulted.
        In fact, this has been implicitly recognized by the
    Congress, as it has requested the OIG to perform more and more
    assignments at the IRS over the years, several of which are
    ongoing.
        Legislative impediments to the OIG's authority have
    resulted in cumbersome oversight arrangements. Current
    difficulties centers on two provisions of the 1988 Inspector
    General Act Amendments. First, the OIG is required to provide
    notice to the IRS of its intent to access income tax return or
    return information. Second, with reference to chapter 75 of the
    Internal Revenue Code, the OIG may report to the Attorney
    General only offenses under section 7214 without first
    obtaining the consent of the Commissioner of the Internal
    Revenue Service.
        In terms of resources, let me point out that the Office of
    the Chief Inspector is four times larger than the OIG. This
    fact and the many other OIG responsibilities that require the
    use of our resources has limited severely the extent of OIG
    oversight coverage at the IRS.
        I believe it is important to study the need for greater
    independence for the audit and investigative functions of the
    Office of the Chief Inspector, or at least to consider the need
    for strengthening OIG oversight.
        I know that there are many considerations involved in this
    facet of IRS restructuring. I encourage you to maintain the
    need for independence and objectivity of the audit and
    investigative functions as a high priority in your
    deliberations.
        Thank you, Mr. Chairman. I would be pleased to respond to
    any questions.
        The Chairman. Thank you, Mr. Calahan.
        I see our majority leader here. I wonder, would you care to
    make any comment?
        Senator Lott. Thank you, Mr. Chairman. No, I just want to
    be here to hear the testimony of the witnesses. Thank you, Mr.
    Chairman.
        The Chairman. Thank you, Senator Lott.
        Ms. Willis.

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

        Ms. Willis. Good morning, Mr. Chairman and Senator Lott. As
    always, we are pleased to be here today to assist the committee
    in its continuing efforts to do oversight of the IRS.
        At your request, my statement today covers four basic
    areas. The first is the adequacy of IRS systems to identify
    allegations of taxpayer abuse and employee misconduct. The
    second is the responsibilities of the Inspection Service of the
    IRS, as well the Treasury IG. The third is the placement of the
    Inspection Service. And fourth is the discussion of the
    Taxpayer Advocate which is another important office within IRS
    for protecting taxpayer rights.
        Mr. Chairman, in spite of IRS senior management's
    heightened awareness of the importance of treating taxpayers
    properly, we continue to be unable to determine whether IRS
    controls for fair treatment of taxpayers are adequate to assure
    that process takes place.
        This is because neither IRS systems nor other Federal
    information systems provide the information that is needed for
    management to identify allegations that are made, actions that
    are taken, or any remedial steps that are needed to prevent
    systematic actions from recurring.
        From our review of the data from these systems, none of
    them have the common data elements necessary either
    individually or collectively to roll up the allegations and to
    be able to look at them from a service-wide perspective.
        Our reviews that we have done over the years through
    Treasury and OIG, one in 1986 at your request, Mr. Chairman,
    have revealed that they have separate, but also some shared
    responsibilities.
        The IRS Inspection Service is responsible for auditing and
    investigating the programs of the Internal Revenue Service on a
    day-to-day basis. They have responsibility also for
    investigating allegations against employees who are at the GS-
    14 level and below.
        The OIG, under the statute, is responsible for providing
    oversight of the Inspection Service. They are responsible for
    investigating allegations against employees that are at the
    senior level, although they may refer these allegations back to
    the Inspection Service if they do not have either the resources
    or the expertise to pursue the allegations.
        When we looked at the relationship between the two
    organizations in 1994 and 1996, we did not find that the
    relationship was not working. We found that according to the
    officials, it was working well. But it appears since that time
    that the situation has deteriorated and there are now problems
    between the two organizations.
        Regardless of where the Inspection Service is located,
    whether it is the Internal Revenue Service or whether it is
    located in the Department of Treasury or a separate IG is set
    up, we believe that there is certain critical features that it
    must have.
        And these include independence. They include proper
    resources, adequate staff expertise, and reporting lines that
    allow for the Congress, the management of the organization and
    the administration to be able to identify problems within the
    service.
        We have always supported a strong statutory IG, believing
    that this would provide additional independent oversight of the
    agency, but we also have recognized that the Commissioner of
    Internal Revenue needs his or her own resources within the
    organization to be able to evaluate the programs and the
    employees of a very complex system of tax administration.
        Moving now to the Taxpayer Advocate, 20 years ago, IRS set
    up its first executive level Taxpayer Advocate. It was
    originally known as the Taxpayer Ombudsman. It was later
    codified in the Taxpayer Bill of Rights.
        Despite 10 years of executive level involvement in
    protecting the taxpayer, there is still serious questions about
    the advocate's office. We are currently in the process of
    examining these issues and the management of the office for the
    House Ways and Means Committee.
        But some of the questions that have been raised include the
    organizational independence of the office, how the office is
    staffed. Frequently, they must rely upon line staff to assist
    them in their evaluations. And these line staff report to the
    same people who may have caused the problem in the first place.
        And we are also concerned about whether the advocate has
    thoroughly looked at the systemic issues that are frustrating
    taxpayers across the board.
        Mr. Chairman, that summarizes my statement. I would be
    happy to take any questions.
        [The prepared statement of Ms. Willis appears in the
    appendix.]
        The Chairman. Thank you very much, Ms. Willis. Let me ask
    you, you said I think since 1995, problems have developed
    between the two groups, the Treasury Inspector General and the
    Inspection Service within the IRS. Could you be more specific
    as to the nature of what has caused these problems, what they
    are?
        Ms. Willis. Mr. Chairman, I am not aware of the root cause
    of the problems. But when we issued our report to you in 1996,
    officials from both organizations indicated that the
    relationship was working well.
        Since then, however, there have been indications,
    especially around the response to referrals that things are not
    working as well as they had been. This is basically anecdotal
    information that we have received from members of the staffs of
    the various organizations. And perhaps, Mr. Calahan could
    comment more specifically.
        The Chairman. Mr. Calahan.
        Mr. Calahan. Well, I would like to comment that as our
    scrutiny of the Office of the Chief Inspector has intensified,
    the problems have been more frequent and more severe. And we
    have had less cooperation as our work has intensified.
        The Chairman. Well, let me add, the Treasury IG has
    responsibility for overseeing the IRS internal audit, internal
    security functions, both of which, of course, comprise the
    Inspection Service. Are you able to provide effective oversight
    under the current situation?
        Mr. Calahan. As discussed in substantial detail in my
    written statement, there are problems. More specifically, we
    have four categories of problems. We have resource problems. We
    have issues related to what is oversight, and how far does it
    go in terms of our authority. We have issues in terms of IG
    access authority. We have issues that are basically----
        The Chairman. What do you mean by access?
        Mr. Calahan. Whether or not certain records should be
    available to the Inspector General's Office. Sometimes, we are
    allowed to read things, but not copy them. There is a variety
    of those kinds of things.
        The Chairman. Are you talking about 6103 now?
        Mr. Calahan. Those are not 6103 issues. 6103 is a totally
    separate category in my written statement that is referred to
    as legal impediments.
        Senator Lott. Mr. Chairman.
        The Chairman. Yes.
        Senator Lott. What is 6103?
        Mr. Calahan. Internal Revenue Code section 6103 refers to
    taxpayer privacy, protecting taxpayer information from
    unauthorized disclosure to people who do not have a need to
    know.
        Senator Lott. Mr. Chairman, could I pursue your line of
    questioning just one minute more?
        The Chairman. Sure. Please.
        Senator Lott. I was under the impression that the Office of
    the Inspector General had almost carte blanche authority. And
    as we look for ways to get a handle on the culture of the
    problems with IRS, perhaps this is one place we need to take a
    look. Is that what--are you saying that in effect?
        Mr. Calahan. Well, that is true. I think one of the most
    severe problems that the IG's office has regarding the Internal
    Revenue Service is that for our office to access taxpayer
    information, we have to first notify the Internal Revenue
    Service of exactly what it is that we want to look at.
        And, I might say related to that is when we find a
    disclosure problem regarding taxpayer information, we have to
    first obtain the approval of the Internal Revenue Service
    before we can refer it to the Department of Justice. Those are
    very significant issues.
        Senator Lott. Thank you, Mr. Chairman.
        The Chairman. Yes, I cannot underscore how important that
    is. How you can have effective oversight and not have the
    necessary documents available to you is incomprehensible to me.
    I think this is a very key problem.
        Mr. Calahan. Well, it goes a step beyond that even in terms
    of just an investigative approach. The general strategy for any
    investigation is that you want to acquire information without
    the subject of the investigation knowing that you are doing it.
    You start the investigation under this requirement by providing
    a notification.
        The Chairman. Now, it is my understanding that the Treasury
    IG is responsible for investigating the allegations of
    misconduct against senior IRS officials, grade 15 and above,
    and allegations concerning the IRS inspection employees.
        However, the practical matter, you refer many of these
    allegations back to the chief inspector's office for action. Is
    that correct?
        Mr. Calahan. That is correct. And a lot of that is because
    of resources. The number of employees, grade 15 or higher at
    the IRS is sizable. I do not have that number with me, but it
    is a large number.
        The IRS itself has more than 100,000 employees. And the
    IG's office has 37 criminal investigators on its staff.
        So we retain only the allegations on the highest level
    officials.
        But allegations against lower level employees that are less
    significant, we refer to the IRS Chief Inspector. We do that
    through a letter that requests they provide us within 60 days
    their position in terms of what they are planning to do with
    the allegation. We also follow up on what they do with them.
        The Chairman. I would like to go back to this idea of the
    importance of the independent audit. What concerns me is that
    what you are telling me is that grade 15 and above
    theoretically or by agreement is normally or should be handled
    by the Treasury IG. In fact, many of them go back to the
    Inspection Service.
        So there is no independent audit in many cases of these
    higher IRS employees. Is that correct?
        Mr. Calahan. In some cases, that is true. We do follow up
    on those issues. And we have an Office of Oversight that
    reviews the quality of work performed by the inspection
    service.
        The Chairman. But you just told me you often do not have
    the data necessary. So that as a practical matter, you really
    do not have in many cases effective oversight. Would that not
    be a fair statement?
        Mr. Calahan. I think that is a fair statement. I think it
    is fair to say that because of lack of resources, we do not
    know what happens in terms of the thoroughness of the
    investigations that are performed. We would have to perform a
    much larger sample of testing of those investigations than we
    do.
        The Chairman. Now, what level are the auditors and those
    involved in collection? Are they grade GS-15s and below as a
    general rule, the ones that have contact with the taxpayer?
        Mr. Calahan. I believe the regional managers for collection
    efforts are GS-15s, but the people that actually have contact
    with the taxpayer are below the GS-15 level.
        The Chairman. So the ones that have the most--or the ones
    that have actual contact with the taxpayer, their oversight is
    within the hands of the inspector's office?
        Mr. Calahan. I believe that is true.
        The Chairman. So again, we really have no independent
    oversight probably at the most sensitive spot with those
    employees who have the direct contact with the taxpayers. Is
    that correct?
        Mr. Calahan. I think you are right, Mr. Chairman.
        The Chairman. Ms. Willis, would you like to comment?
        Ms. Willis. I would just like to reaffirm what Mr. Calahan
    has said about the importance of independence. And he is right
    that most of the collection people are below the GS-15 level in
    the field.
        You might have a GS-15 level branch chief at a district
    office. You would have that, but the people who are out there
    working with taxpayers are below that level, the ones who have
    the most interaction.
        The Inspection Service is independent within IRS from the
    standpoint that it is a separate entity. It is not independent
    within IRS that the chief inspector is appointed outside the
    service and reports outside the service. That is very true.
        The Chairman. And that is contrary to most departments. Is
    that not true?
        Ms. Willis. That is contrary to the Inspector General.
    Right.
        The Chairman. Yes, normally, the Inspector General is
    nominated by the President.
        Ms. Willis. Right.
        The Chairman. And confirmed by the Senate.
        Ms. Willis. Right.
        The Chairman. But that is not the case here.
        Ms. Willis. That is not the case for the IRS inspection
    group.
        The Chairman. Senator Lott.
        Senator Lott. Mr. Chairman, you were focusing on the points
    and Ms. Willis' testimony that causes me the greatest concern,
    too, the organizational placement of the IRS inspection.
        Obviously, there was concern in 1988 about how that was
    being done. And those concerns have been expressed again in the
    testimony we heard last fall. And it continues.
        You also noted that this problem has really been going on
    for 20 years. I mean, why is it so difficult to get appropriate
    oversight and inspection within this agency? Why are they so
    resistant to any transparency into how they do business?
        I mean, that is why there is such outrage. One of the many
    reasons I think why there is such outrage in the Congress and
    by the American people because we have tried before to make it
    clear to them that there are problems and they had to be
    addressed. And they continue to resist. How do you react to
    that?
        Ms. Willis. Senator Lott, it is very difficult to go into
    the minds of the people who work in these offices and say why
    they are resistant.
        My experience as a GAO auditor, nobody likes being audited.
    And there is always a certain amount of resistance there. And
    there is always a certain amount of I know what I am doing
    better and I do not need oversight that takes place.
        In terms of the placement and the debate around the
    Inspection Service, there have been a variety of policy issues
    that have been traded off through the years.
        One of those is the issue of size. The IRS Inspection
    Service has about 1,200 people in it. IRS is by far the largest
    component of the Department of Treasury.
        And there has been concern on the part of IRS and others
    that if they are folded into the IG's office that those
    resources will no longer be available for the audit of IRS,
    that they might be moved to other critical parts of the
    department, but basically, they would not be available for
    auditing the programs of the tax system.
        Another issue deals with expertise. There has been concern
    expressed historically that there is expertise needed in the
    evaluation of IRS programs that may not sit in the Office of
    the Inspector General and that in fact some of the people in
    the Inspector General's office have told us that when they make
    referrals back, sometimes it will be because there is a need
    for tax law expertise that they do not have.
        There has also been concern around the issue of taxpayer
    data and how much the Congress wishes to wall that data off
    from people outside IRS, including Treasury and the Inspector
    General, although like us, they do have fairly broad access.
        So I think there has just been through the years a number
    of sides that have had competing policy perspectives on these
    issues that led to the compromise which created the--or allowed
    the Inspection Service to continue in the IRS with the
    Department of Treasury OIG providing oversight. But those were
    some of the issues that have been debated historically.
        Senator Lott. With regard to the taxpayer advocate, we have
    tried in the Congress to put that in place. And we have really
    addressed it at least twice. And yet, you know, it is still a
    question that it is effective at all or is effective as we had
    hoped it would be even though it says it has handled, you know,
    a number of cases in 1997.
        I think maybe you touched on it, but what could we do to
    help make that Taxpayer Advocate Office effective or more
    effective than it is?
        Ms. Willis. I think you have some of the same issues with
    the Taxpayer Advocate Office that have been addressed with
    inspection. Is it truly independent and outside of the
    mainstream, day-to-day activities of IRS?
        And what we have found so far in terms of staffing,
    etcetera, is that, no, it is heavily dependent upon the staff
    of the units that it is, you know, answering problems around.
        There are also issues in terms of their ability to look
    systemically at problems, as opposed to a taxpayer-by-taxpayer
    basis.
        I think there needs to be the capability in that office to
    kind of step back a little bit, take a look at cases, such as
    those that we saw in the hearings before this committee last
    September and say beyond this taxpayer's problem, what does
    this tell us about what is wrong with the system?
        But I think most importantly, Commissioner Rossotti was
    very articulate in explaining that the culture of the
    organization has to shift its focus from being inward to being
    taxpayer based, to looking at its functions, its programs, and
    its responsibilities from the perspective of a taxpayer,
    especially a taxpayer who is attempting to be compliant.
        Senator Lott. How is the taxpayer advocate and how are the
    employees within that office selected? Who controls that?
        Ms. Willis. The advocates are selected by the Commissioner.
        Senator Lott. Is that not the problem?
        Ms. Willis. Well, it could be part of the problem in terms
    of independence.
        Senator Lott. And not reflecting on the Commissioner. I
    mean, you are automatically beholding to and you are there
    because.
        Ms. Willis. They do report, yes.
        Senator Lott. We ought to move that somewhere else. Do we
    need to isolate it, wall it off, make it independent of and not
    dependent in any way in my opinion on IRS?
        If you are connected, if you are selected, if you are paid
    by, you are not going to be independent. It just will not
    happen.
        Ms. Willis. Senator, the thing I would be concerned about
    and one of the reasons that we are undertaking this review is
    that the Commissioner also has need of the information and the
    insights and the perspective that the taxpayer advocate can
    provide. And there also needs to be the ability to provide
    oversight, etcetera, of the advocate's office.
        So I think in trading off organizational placement,
    etcetera, that there are a lot of different things that need to
    be considered.
        And whether that means that the advocate has to be outside
    IRS, I do not know because I think you do have the issue of
    wanting someone in the system whose job is also to advocate for
    the taxpayer, as opposed to that person always being on the
    outside.
        Senator Lott. The lines are real simple, you know. You have
    the Treasury Secretary up here, the President above that. But
    if you have the Commissioner of IRS here and then a line
    somewhere below him to the advocate, it is lost. The lines have
    got to be parallel. Now, there has got to be somebody over him.
        But I mean, I assume the Secretary of the Treasury and the
    Commissioner of IRS talk. So I would hope that the taxpayer
    advocate would be talking to the Commissioner, but without
    being beholding to or subservient to the Commissioner.
        I think we really need to look at that, Mr. Chairman, and
    see if we could find a way to wall it off, but at the same time
    do make sure--I mean, they have got to be answerable to
    somebody, too, perhaps the Secretary of Treasury. I do not know
    for sure.
        I mean, there is no system that is perfect. All we know is
    we have been muddling around with this for 20 years trying to
    make it better. And it has gotten worse. It has gotten worse in
    the last year. I believe you said that, did you, in your
    testimony? One of you did.
        So we appreciate your input. We will read your statements
    carefully. And we will be looking for suggestions as we move
    toward making some hopefully helpful changes.
        The Chairman. Thank you, Senator Lott.
        Senator Graham.
        Senator Graham. Thank you, Mr. Chairman. Again, I
    appreciate your bringing before us such a knowledgeable group
    of individuals who can help us understand the kind of questions
    that Senator Lott was just asking.
        I would like to start by asking of the representative of
    the IG office, 2 weeks ago, we held a hearing in Orlando which
    we received testimony from citizens, as well as current and
    past employees of the IRS relative to how their offices were
    functioning, what the perception of treatment of taxpayers was.
        One of the issues that we got into was the Inspector
    General Report on the use of statistics in collection in among
    other things the evaluation of IRS employees.
        The north Florida office based in Jacksonville was one of
    the dozen or so offices which were selected for that IG
    evaluation.
        Were you involved in that report, Mr. Calahan?
        Mr. Calahan. I believe that the product that you are
    talking about was done by the IRS Inspection Service.
        Senator Graham. It was not done by your office?
        Mr. Calahan. It was not done by the IG's office.
        Senator Graham. I see. Well, I had a very interesting
    question to ask, but I will ask it of someone else.
        At that Orlando hearing, one of the concerns that we heard
    that appeared to be systematic, as opposed to anecdotal to a
    particular taxpayer was the difficulty of getting the IRS to
    make a decision.
        We had one case that sort of epitomized this in which there
    had been a decision made relative to the taxpayer's non-
    liability, but there had been some discrediting comments made
    relative to the taxpayer which it took several years to get a
    letter to the appropriate agency to be removed from his files.
    It was just a matter of nobody would make the decision to send
    the letter.
        Is that a difficulty that in your evaluation of the
    agencies you have found a recurrent problem? And if so, what
    cause and what recommended solution?
        Mr. Calahan. Well, maybe, Ms. Willis can speak to that. I
    do not know. Generally, the IG's office does not get involved
    directly in tax matters. So that is really a question I am not
    going to be able to answer for you.
        Ms. Willis. Senator, we have not looked at the issue of
    taxpayers having difficulty in getting letters of that type out
    of IRS. So I do not know, but I do recall that this came up
    last year at the hearings, as well that several taxpayers did
    express frustration about being able to get some of these type
    of issues resolved. But we have not looked at it in any detail.
        Senator Graham. Another issue that came out of that hearing
    was a pattern of insensitivity to taxpayers where taxpayers
    would have almost arithmetic questions to ask and could not get
    an agent to review their information. Any comment about that
    particular issue and how prevalent it is?
        Ms. Willis. Again, we have not looked at it in terms of
    prevalence, in terms of how often where and under what
    circumstances that it looks, but it is a common complaint. And
    I think it is also one of the complaints that is driving the
    change in focus, you know, at the Internal Revenue Service.
        Certainly, behind the problem-solving days, that was one of
    the issues was whether the IRS was meeting the needs of the
    taxpayer in responding and resolving their questions and having
    the people available to meet and make those decisions. So I
    think this is an issue that IRS needs to look at very seriously
    and is in the process of reexamining.
        Senator Graham. Related to that, the shift which you refer
    to and which I applaud as well of Mr. Rossotti to make the IRS
    more of a service-oriented, looking at the world from the
    perspective of the taxpayer rather than an internal
    perspective, I strongly support.
        One of the concerns that I have is that in the evaluation
    of individual IRS agents, when you evaluate their collection
    function, it is subject to a high degree of quantification. In
    fact, maybe, this report indicates an excessive amount of
    quantification. Whereas, evaluating service is a more
    intangible quality.
        What advice would you have as to how that concept of
    service as opposed to a collection orientation ought to be
    operationalized on things like the selection of IRS agents, the
    evaluation, the training of IRS agents?
        Ms. Willis. Senator, coming up with performance measures or
    evaluation measures that address such things as customer
    service is difficult.
        And I think that is one of the reasons why agencies, IRS as
    well as other agencies, have tended to evaluate their programs,
    etcetera, on what they can count, things that are much more
    easy to measure.
        But what you value is communicated to people by what you
    measure. So I think it is imperative, as we have stated for any
    number of years, that IRS develop a balanced set of indicators
    that takes into account all of its roles, all of its values,
    and all of the things that are important to taxpayers and to
    the American public.
        The fact that it is not easy does not excuse the lack of
    having those kinds of indicators. And again, I think IRS has
    acknowledged that and in their recent moves to develop customer
    satisfaction is making an attempt to somehow start collecting
    that information about their different functions and
    components, like much of the work that agencies are doing on
    the results act.
        I think it is going to have to be an evolutionary process
    that the government will get better at over time. But you are
    absolutely right. If we are concerned about the quality of
    service that is provided to taxpayers, then that needs to be
    one of the things that employees are evaluated on.
        Mr. Calahan. I might just add to that that I think there
    are serious tradeoffs between quantity and quality of work. And
    when you concentrate solely on quantities then often quality
    suffers. I think that that is perhaps part of the problem that
    we have seen here.
        Senator Graham. Can I just ask one last question?
        The Chairman. Yes.
        Senator Graham. Over the time you have been evaluating this
    issue of quality versus quantity, service versus collection, is
    the situation today better than it was 5 years ago, about the
    same or worse in terms of having a capacity to make that
    service quality an equal component in the evaluation of IRS
    agents?
        Ms. Willis. On a day-to-day basis, I think it is probably
    about the same. But I think the fact that IRS as an
    organization is now acknowledging that it needs a broader set
    of indicators, it is now acknowledging that it has to develop
    indicators that will measure quality of service provided to
    taxpayers that at least it is a step in the right direction.
        The Chairman. I would just like to make the observation
    that the problem of evaluating performance is not unique to the
    government. The private sector constantly has to do it. And if
    it succeeds, it has got to provide service. And that is true of
    credit agencies, those that have credit cards.
        So it seems to me while I agree that it is going to take
    time, I would also say that it should not take that much time
    because there is experience in the private sector with this
    problem.
        I would next call on Senator Nickles. We are getting a
    number of people here. We are going to try to limit questioning
    to 5 minutes.
        Senator Nickles.
        Senator Nickles. Thank you, Mr. Chairman. And to our
    panelists, thank you very much. I am not sure exactly who I
    should direct this to. I guess Mr. Calahan. You are involved in
    the investigation review in the Oklahoma-Arkansas district?
        Mr. Calahan. No, Senator. The IG's office was not involved
    in the Oklahoma City audit. That was performed by the Chief
    Inspector's Office of the IRS.
        Senator Nickles. The Chief Inspector's Office of what?
        Mr. Calahan. The Internal Revenue Service.
        Senator Nickles. I thought you all were involved in it. So
    that is what I was going to ask a question about.
        Mr. Chairman, I will pass for the time being.
        The Chairman. All right. We will go ahead with Senator
    Grassley.
        Senator Grassley. Mr. Calahan, could you please explain to
    us why the Inspector General is not testifying here today in
    place of you?
        Mr. Calahan. The committee requested that I testify today.
        Senator Grassley. All right. Is the IG going to receive a
    compensation package once she leaves office in March?
        Mr. Calahan. I have no idea.
        Senator Grassley. All right. Then, would you please look
    into that and get back to me?
        Mr. Calahan. I would be happy to do that.
        Senator Grassley. Let me just say for the sake of my
    colleagues that the Inspector General was forced to resign
    because of her abuse of authority in at least two matters.
        First was her involvement improper investigation of two
    Secret Service agents which at first she denied on an
    investigation by myself and some of my colleagues, especially
    the Senator from Maine. Senator Collins proved that the IG had
    in fact improperly investigated two Secret Service agents. She
    later apologized for that.
        The second was two illegal sole source contracts that she
    let to two friends. They were found to be illegal by the
    General Accounting Office.
        Otherwise, the IG has presided over an office whose moral
    has been severely damaged and in much need of repair.
        Mr. Calahan, you were the one individual who had
    responsibility to oversee the two illegal contracts. You also
    approved improper reimbursements to the contracts. You were
    also involved in the Secret Service investigation.
        The reason I raise these issues is important because in
    November in a speech on the floor of the Senate, I called for
    the IG's resignation which, of course, eventually happened.
        I also mentioned that other changes needed to be made
    because Congress had lost confidence in the office there at
    Treasury, that absence of Congress applies to you I think as
    her deputy, as well as it does to her and your testimony as
    well.
        This committee, I bring this up, is considering whether or
    not to give the Inspector General more authority to oversee the
    IRS. That might be a good idea in theory. But because of the
    questions of credibility surrounding your office, that, of
    course, might not be an idea that we would have confidence in.
        Your office has simply been too close to the department
    that you were charged with overseeing. And that includes, of
    course, what this committee is very much interested in and
    going to take major Congressional action on within the next few
    months.
        And that is the restructuring of the IRS and obviously the
    relationship of the Inspector General to the IRS.
        And we are looking at making sure that there is plenty of
    independence for the IRS and independence in the sense of doing
    their job, but also to make sure that there is adequate
    oversight over the IRS because there has not been some of that.
    And, of course, related to that is the powers and the resources
    that we would give to the Inspector General.
        The problems that this committee uncovered were not
    uncovered by the Inspector General. In fact, according to
    information that you supplied to the Permanent Subcommittee on
    Investigations, your office conducted only 5 audits of IRS-
    related functions under this Inspector General.
        That compares to 122 audits of other bureaus and functions
    within Treasury that arguably have far less impact on the lives
    of Americans than the Internal Revenue Service has.
        So my question is then, what does this comparison of 5
    audits that IRS related by the Inspector General compared to
    122 audits of other bureaus and functions have to say about the
    priority of the Inspector General's agency in regard to
    overseeing wrongdoing within the IRS?
        Mr. Calahan. Senator, I would like to point out that prior
    to the date that I became the Assistant Inspector General for
    Audit in March of 1995, there had been no program audits
    performed by the IG's office of the IRS. I initiated this type
    of auditing of the IRS by the IG's office.
        Currently, we have several assignments that are underway.
    We would be happy to provide you a list of those for the
    record.
        Senator Grassley. Well, let us look at one of those. I
    understand that 1 of the 5 audits that you are referring to,
    the last one was the Office of Chief Counsel of the library
    deposit accounts. Does the IG think that the library deposit
    account is a major problem at the IRS?
        Mr. Calahan. I do not know if I would refer to it as a
    major problem. I will say that that item was referred to us by
    the IRS Deputy Counsel as a potential violation of law. We have
    sole cognizance over the Chief Counsel's Office. So we, of
    course, performed that assignment because we are the only
    agency that could.
        Senator Grassley. Let me ask you to be very candid with me,
    whether or not you understand that some of us might have a real
    question about the IG's office when its big contribution to IRS
    oversight is an audit of the library deposit account?
        Mr. Calahan. Well, I think that the question should be
    phrased probably more broadly in terms of what the IG's office
    has done at the IRS in terms of the resources it has available
    to it for that and for other activities.
        We are currently involved in the financial statement audit
    of the IRS which I think is a very important assignment. We
    have performed audits of the integrated data retrieval system,
    which was the computer snooping work we performed at the
    request of Senator Glenn. And we did a follow-up audit to test
    corrective actions. I think these were very important jobs.
        I think our office has performed some important work at the
    IRS. And I think we are performing more work there now probably
    than we have at any time in the recent past.
        As I noted earlier, the intensity of our scrutiny of the
    IRS has increased over the last year or so. And I might say
    that I think that the Congress itself has validated the
    independence of our office by increasingly asking us to do more
    and more work at the IRS.
        And I think that those requests are not related to the
    situations that the Inspector General of this Office might be
    involved in.
        These requests from the Congress are related to a respect
    for the office and the people who work there and work hard and
    do independent work and work that is unbiased. I think that our
    independence and objectivity has served the office well in the
    past and will continue to do so in the future.
        Senator Grassley. Well, my time is up. But just remember
    that the Inspector General herself said that low morale was a
    very major problem in the Inspector General's office. And she
    had a program to bring that morale up.
        I would also suggest to the chairman that the chairman is
    absolutely right in looking at how we can have better oversight
    over the IRS, both from the Congress, as well as other
    processes within our government.
        But, Mr. Chairman, maybe, we need to take a look at the
    inspector General's office and see if there might not be some
    major changes that need to be there if we are going to give
    them more responsibility over the IRS. In other words, I think
    that we also need to start watching the watchdogs to a greater
    extent, as well.
        I have great confidence in the inspectors general system
    generally throughout out the bureaucracy, but I think we have
    seen some very major problems with the Treasury IG that we need
    to consider, as we consider what do we do about their
    involvement in greater oversight over the IRS. I would just ask
    you to consider that.
        The Chairman. Well, as the distinguished Senator knows, one
    of the major reforms we are going to put about is the question
    of independent oversight. And it has to be effective. We do not
    have it now. And the question is, how do we establish it for
    the future?
        Senator Grassley. Thank you.
        The Chairman. Senator Nickles.
        Senator Nickles. Mr. Chairman, thank you. And I would like
    to reclaim my time. And I appreciate very much the statement
    that you just made. And I kind of want to go back to this
    Oklahoma city investigation.
        Mr. Calahan, you said that--did you say the IG was not
    involved in the Oklahoma city investigation?
        Mr. Calahan. That is true.
        Senator Nickles. Not presently involved? The investigators
    in that situation now, that is all internal?
        Mr. Calahan. If you will, excuse me, I would like to check
    with a member of my staff before clarifying my statement.
        [Pause.]
        Mr. Calahan. I would like to respond to that in two ways.
    First of all, IRS is a big place. It has a lot of district
    offices. And we were informed by the Chief Inspector's Office
    that they were performing both a nationwide investigation and
    audit of this whole matter.
        The staffing for the performance of this job was
    significant. I believe I have pointed out in my written
    testimony that just the audit side of the Chief Inspector's
    Office alone was assigning 80 people to this work.
        So our involvement was influenced by our available
    resources. We have fewer than 300 people in our office, and the
    Chief Inspector's Office has more than four times that many.
    For us to be involved in any kind of meaningful way with the
    same kind of resource commitment was just not realistic. We had
    to look at the more significant facets of the review on a
    nationwide scale and be involved in those and not be involved
    to any large extent at the district office level.
        Now, in terms of investigative matters, we are involved in
    some investigative matters, but I cannot speak to those.
        Senator Nickles. Well, then, let me just ask a question. At
    the Oklahoma city hearing, one, we had allegations of abuse. We
    had a district director who resigned a week before we had the
    hearing, the day after we had notification of the hearing.
        I understand that your office has responsibility to
    investigate that level and higher. Is that correct?
        Mr. Calahan. That is true. That is true.
        Senator Nickles. We also had assurances from some top
    officials in this committee hearing and in Oklahoma. I think
    the Chief Compliance Officer, Del Hart, promised that there
    would be no retaliation taken against the employees who
    testified. Can you at least assist me to make sure that that is
    not the case?
        I am concerned about an independent investigation. One, it
    does not sound independent. And this committee has said we are
    going to protect people who testify.
        And I have now had people who testified say that they have
    had retaliation, retaliation in the form of their leave
    requests not being approved, travel vouchers not paid, negative
    evaluations from managers, managers who are under investigation
    are the ones who are giving--they are still in their jobs,
    still giving problems.
        And I want to make sure that people are not retaliated
    against. And I am not saying that every person that speak
    before the committee is a saint either, but I want them to be
    treated fairly. And I am not positive that is the case if we do
    not have an independent investigation.
        And I said that we are going to make sure that people were
    not retaliated against for presenting their views to Congress.
    And I want to make sure that that happens.
        Mr. Calahan. I would like to point out two things. One is
    that we do have jurisdiction over grade 15s and higher. In this
    situation, we did ask the Chief Inspector's Office if the
    involved grade 15 employee was being investigated. We were
    informed that there was an audit being performed, but that
    there was not an investigation. And that is the reason we were
    not involved in that matter at that time.
        In terms of the retaliation issues that you have raised, we
    have not received allegations like that.
        Senator Nickles. You have now. Can you help me on that or
    do I need to go through this IRS maze? I thought there was more
    of an independent investigation than evidently there is.
        Mr. Calahan. We can take your statement as an allegation.
        Senator Nickles. I will give you some information.
        Mr. Calahan. All right. That is fine.
        Senator Nickles. And again, I am not saying that everything
    that is on the allegations is correct.
        Mr. Calahan. I understand that.
        Senator Nickles. I just want to make sure that people are
    protected. I am not taking a position, but I want to make sure
    that people are not retaliated against for speaking before
    Congress. And we have some problems there.
        And I do not want them just investigated by the people who
    may be responsible for the problems. And that looks a little--I
    am sorry to use the word ``incestuous'', but a little self-
    serving.
        Mr. Calahan. Well, I would like to point out that that is
    one of the reasons for establishing independent inspectors
    general. I think the Chairman, as one of the fathers of the
    Inspector General Act, can share that, historically from
    department to department in this government, there was a debate
    about whether or not there should be an independent inspector
    general.
        One of the primary issues that came up is, do you want the
    IG to serve within the program function. And from one
    department to the next, the decision has been consistent and
    the answer has been no, we do not want the IG to serve within
    the program function.
        The consensus was we want the IG to serve at least a level
    above. In fact, for the IGs, at least all the larger ones, they
    report directly to the head of the agency. So I totally agree
    with your position.
        Senator Nickles. I appreciate your comments. And we will
    get you some information and maybe to Mr. Rossotti, as well. I
    am obviously concerned about it. Thank you very much.
        The Chairman. Let me point out on this exact point what
    concerns me is that basically as the system is now set up,
    there is no independent oversight of those who are under
    classification 15, 14s or less.
        Senator Nickles. Right.
        The Chairman. And that is one of the real problems.
        Senator Nickles. And that is exactly right. And in the
    Oklahoma city hearing, we heard names mentioned of people who
    really abuse the system who were telling people very directly,
    you are going to be evaluated on the cases that you close, you
    are going to be compensated on them, giving great incentive for
    seizing assets not in the most beneficial way for the taxpayer,
    but basically to close cases.
        If you close the cases and get some money out, we are going
    to give you compensation. That was the--it actually came from
    part of the IRS review itself. They mentioned it.
        Well, some of the people that were doing that, frankly, you
    are not looking at them. And they are still serving in those
    positions, although 1 or 2 people have been moved. And I do not
    know exactly what level GS. GS-15 is only the district manager?
    There is another person or two that I have heard.
        Ms. Willis. It is the branch chief level.
        Senator Nickles. Well, there is another person or two that
    evidently or at least some people were alleging had significant
    pushing towards seizing assets in violation of the law, Mr.
    Chairman.
        And I am not sure. Well, evidently, you are not--the IG is
    not looking at them. And I do not know what the IRS is doing.
    In their internal audit, if you remember, Mr. Chairman, they
    redacted a lot.
        The Chairman. That is true.
        Senator Nickles. And some should be redacted. I am not
    trying to get into personal investigations. We are not the jury
    here, but I want to make sure that, one, people are not
    retaliated on. And, two, we have enough of an independent
    investigation to stop a bunch of the nonsense that is not
    compliant with existing law.
        Mr. Calahan. I would just like to point out that, on a
    nationwide basis, the number of high-level people that are
    involved in this at the IRS and being investigated are so large
    that it was just not possible for the Inspector General's
    office to do all of those.
        Senator Nickles. Thank you very much. Thank you, Mr.
    Chairman.
        The Chairman. Well, we have another panel, but I just want
    to make one observation and ask one question perhaps of both of
    you.
        It does seem to me important that within the IRS that there
    be audit. I think the Commissioner and those responsible for
    management need some auditors within the organization to judge
    how successful their management policies are being implemented.
        But having said that, I think it is critically important
    that there be an independent oversight outside of the
    organization.
        Now, as I understand it, and I asked you this, Ms. Willis,
    we have something like 1,200 in the IRS inspection group and
    300 in the Treasury's IG.
        Do you have any thoughts? One of the proposals I think you
    covered in your testimony is that you could reallocate the
    employees so that the Treasury IG had more personnel available.
    Is that a legitimate approach here? Can we reallocate and
    assure that there will be independent oversight, as well as
    internal oversight effectively?
        Ms. Willis. Mr. Chairman, there is some precedent for doing
    that. Inspection resources have been transferred to the IG in
    the past I believe in one case in 1990 on a more permanent
    basis and for special projects.
        Mr. Calahan. That is true.
        Ms. Willis. So Congress could certainly move resources from
    the Inspection Service to the IG's office. The amount of
    resources and how you would want to do that I think would
    depend upon how ultimately the Congress comes out on the roles
    and the structure of the two offices together.
        The Chairman. Well, I would appreciate if the General
    Accounting Office would give some consideration and thought to
    this matter because I think how we structure is going to be
    critically important.
        And I agree with the Commissioner who I understand has said
    that he needs auditors available to him to effectively manage.
    And I think that is a reasonable requirement. I do not see it
    in conflict with what we are trying to do here.
        Ms. Willis. No, Senator, I think both mandates are very
    important, that the Commissioner needs his resources, but you
    also need to be comfortable that the oversight capability that
    you have is independent.
        The Chairman. Mr. Calahan, I would like to ask you one
    final question. You testified that the IG office has
    experienced certain problems in accessing information in the
    hands of the IRS and certain bureaucratic impediments have been
    raised.
        Now, do I correctly infer that IG oversight is viewed with
    some hostility by IRS personnel? I want a frank answer.
        Mr. Calahan. I do not know if I would use the word
    ``hostility.'' I would say that in spite of the difficulties
    that we face in law and in other ways, a cooperative spirit
    would probably get us past all of those.
        The Chairman. To me, you are failing to answer the
    question. Are they cooperating or are they not cooperating? Are
    they creating problems for you to effectively do the job or are
    they not?
        Mr. Calahan. Well, that is how I was going to end my
    answer. An uncooperative spirit can in effect make these legal
    impediments and other difficulties a road block or a brick
    wall, or they can verge on harassment in terms of how we go
    about trying to get our work done. And that is the kind of
    difficulty that we have.
        If I could provide an example it may help. There was one
    situation where we performing an oversight review of one of the
    regional offices. We pulled the sample of cases to look at. But
    when we provided management with the list of cases that were
    drawn in that sample, they then told us that we had to obtain a
    waiver. That is, we had to provide an intent to access the data
    under section 6103.
        And then, we provided over a period of several days this
    waiver, I mean, this intent to access. After that went through,
    we had a problem with the credibility of the sample that we had
    selected because prior notice of our test had been given.
        Accordingly, we had to draw another sample. And, of course,
    that entailed a lengthening of the assignment, which was an
    ineffective or rather inefficient and time consuming approach
    to doing the job.
        The Chairman. Well, just let me conclude that I am
    convinced we do not have independent oversight. And we are
    never going to have independent oversight until people are
    willing to call a spade a spade.
        If you are in oversight, if you are an IG, you are not
    going to be liked by a lot of people because you have to call
    the shots as they are. And frankly, I do not see that situation
    existing in this organization.
        Well, thank you very much. I appreciate you being here. We
    wanted to discuss this matters further with you, particularly
    you, Ms. Willis.
        I would appreciate very much any suggestions or
    recommendations you and the General Accounting Office would
    care to make as to how we can effectively develop independent
    oversight. And we cannot wait 10 years for that. We have to
    have that now. Thank you very much.
        Now, it is my pleasure to call our second panel which
    consists of tax practitioners from around the Nation who will
    discuss their experience with the IRS collection function.
        Our panelists include Ms. Nina E. Olson who is the
    Executive Director of the Community Tax Law Project in
    Richmond, Virginia; Mr. Michael Saltzman of White and Case in
    New York; and Mr. Robert Schriebman who is a sole-practitioner
    from Rolling Hills Estates, California. Mr. Schriebman
    testified at our September hearings. And Mr. Bruce Strauss who
    is an enrolled agent from Jacksonville. Mr. Strauss also
    testified before the committee in September.
        Gentleman, thank you, and ladies, thank you for being here
    today. And I look forward to your testimony.
        Why do we not start with you, Ms. Olson, if we may?

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

        Ms. Olson. Mr. Chairman and members of the committee, thank
    you for inviting me to testify today about taxpayer rights. I
    am the Executive Director and staff attorney of the Community
    Tax Law Project, a nonprofit, providing low-income Virginians
    with pro bono professional representation in tax disputes.
        Because I screen cases for referral to volunteer attorneys
    and accountants, as well as handle the more complex or
    emergency cases, I hear directly from low-income taxpayers
    about their attempts to resolve their tax problems.
        Low-income taxpayers are vulnerable because, first, like so
    many taxpayers, they do not understand the tax laws or their
    rights and responsibilities within the system.
        Second, unlike more affluent persons, low-income taxpayers
    do not have representatives who can advocate on their behalf.
    This vulnerability is most evident in the collections arena.
        For whatever reasons, collection employees do not view
    taxpayers as individuals who are asking their help in working
    out a tax debt. Instead, from managers on down to ACS phone
    technicians, they adopt an adversarial attitude toward the
    taxpayer.
        It is not enough to provide taxpayers with a written
    explanation of the collections process. Revenue officers must
    orally describe the process and tell taxpayers about the full
    scope of payment schedules available to them, including
    describing offers and compromise, problem resolution offices,
    and the running of penalties and interest.
        Before assessing the trust fund recovery penalty, revenue
    officers must explain the penalties elements and the taxpayer's
    right to protest the penalty both before and after assessment.
        IRS collection cases are never just about collections. They
    are also opportunities to ensure that taxpayers remain within
    the tax system and feel justly treated by their government.
        Thus, failure to advise a taxpayer of his rights within the
    system should lead to a negative employee performance review,
    as well as constitute grounds for awarding a taxpayer
    assistance order.
        In the offer and compromise program and installment plans,
    the service must develop more realistic living expense
    standards and be willing to deviate from these standards where
    the circumstances warrant.
        That the taxpayer has already paid the underlying tax and
    is seeking to compromise penalties and interest should be a
    significant factor in granting an offer.
        There should be no minimum amount for an offer and
    compromise based as to doubt as to collectability. If one of my
    clients offers $500 and under the formulas that is the proper
    amount, then the service should process that offer regardless
    of the cost to the government. Any other policy allows certain
    taxpayers to buy piece of mind while others cannot.
        The service should process offers based on doubt as to
    liability first before processing the collectability component.
    The taxpayer may actually be able to pay the correct tax due or
    already has paid it.
        Pure liability offers should not require a payment or a
    financial statement, since the taxpayer is saying she does not
    owe the tax. Here, as in so many cases, no new rules or
    statutes are required. The service needs just to follow the IRM
    provisions already in place.
        Earned income credit exams are a major growth area in our
    case load. We find that taxpayers often supply revenue agents
    with completely adequate information only to be denied the
    credit. Invariably, when we take these cases to tax court, we
    win.
        With welfare reform creating thousands of new taxpayers,
    the service must develop an examination process designed to
    assist these taxpayers, keep them in the system, avoid errors
    in the future, and enable them to keep working.
        Shifting the burden of proof in tax court proceedings will
    unfairly hurt low-income taxpayers. The unrepresented low-
    income taxpayer will be a vulnerable target for aggressive
    examination procedures. He will not understand the legal nicety
    that the burden shift only applies to issues of fact and not to
    substantiation requirements.
        With all the publicity about the burden shift last fall,
    the project was inundated with phone calls from taxpayers
    asking if they could throw their records away. This confusion
    is sure to cause future problems.
        The new innocent spouse provision should explicitly state
    that relief under this section is available at all levels of
    tax administration and that this new tax court procedure is
    just an additional avenue of relief.
        Further, the deadline for filing a post-assessment petition
    in tax court under this new provision should track section 6532
    time limits, that is a permissive filing within 90 days of the
    6-month anniversary for making an IRS claim and a mandatory
    filing within 90 days of the IRS notice of disallowance. The
    section's current time limits constitute a trap for the unwary.
        Finally, the punitive innocent spouse should not be
    required to remove her case from the tax court where the non-
    innocent spouse files a refund suit.
        The tax court form is specifically designed to be user
    friendly. And its judges are tax experts. To remove the
    innocent spouse from that form simply by the act of the other
    spouse is to perpetuate the situation that brought her to the
    tax court in the first place.
        All the problems I have discussed today would be less
    frequent for low-income taxpayers if they had access to
    representation. There should be at least one clinic in every
    state and in some states two or more, given their diverse
    populations and size.
        In light of this, I ask that you increase the funding for
    these programs to $5 million--no, $10 million. Let us make a
    real commitment to this population. No matter how warm and
    fuzzy we make the IRS, there will always be a need for
    representation.
        I thank you for inviting me here today. I am grateful for
    your committee's concern and leadership in the area of taxpayer
    rights. And I hope my comments have been helpful.
        The Chairman. Thank you very much, Ms. Olson.
        [The prepared statement of Ms. Olson appears in the
    appendix.]
        The Chairman. Mr. Saltzman.

       STATEMENT OF MICHAEL SALTZMAN, WHITE & CASE, NEW YORK, NY

        Mr. Saltzman. Thank you, Mr. Chairman and members of the
    committee. I am a practicing tax lawyer. And I have been
    practicing for 33 years part of the time in the Department of
    Justice in the U.S. attorney's office and in private practice
    as a sole-practitioner and with a large law firm.
        I am an author of a treatise on IRS practice and procedure
    and a professor teaching procedure courses. I speak here today
    on behalf of myself and not on behalf of my firm or on behalf
    of a client.
        I would like to address first an area of concern to the
    committee. And that is offers and compromise. One way to look
    at an offer and compromise is that it is quite similar to a
    bankruptcy proceeding.
        One of the hallmarks of bankruptcy proceedings is that the
    debtor gets a fresh start. I believe that the tax system will
    gain more if taxpayers get a fresh start rather than the IRS
    spending resources on getting the last dollar from a taxpayer
    already in difficulties financially.
        The problem that the delinquent taxpayer faces is enormous.
    Consider the fact that there is not only the unpaid tax, but
    interest on that tax. That interest runs, is daily compounded.
    It is quarterly adjusted. And it is usually accompanied by a
    penalty, the failure to pay penalty which also draws interest
    that is compounded daily and is adjusted quarterly and
    therefore is market sensitive.
        In addition to those, that debt, the taxpayer must remain
    current on his taxes. So that is a task that would require a
    major feat of financial planning.
        On the other side of the table, you have revenue officers
    who I may say have suffered most from changes in the service's
    management philosophy. And I think that to some extent, they
    get a bad rap with criticism.
        However, their job is at the core, the collection of taxes,
    the collection of the maximum amount due. And therefore, their
    job is not one that is likely to be endearing.
        It is unreasonable to expect, I think, that the two sides,
    the taxpayer in financial difficulty and the revenue officers
    are going to easily work out an agreement. And I do not think
    that the interchange between them will be particularly helped
    by national and local standards of expenses.
        What I suggest be done is that there be a third party
    introduced into the proceedings between the revenue officer and
    the taxpayer. Perhaps, that party can come from the appeals
    office of the service. Perhaps, if the taxpayer's advocate's
    office, the problem resolution staff is increased to the point
    where there is additional staffing for that. The third party
    can come from that source.
        And finally, the possibility that someone outside the
    service, a volunteer with a financial planning background or
    business background can be of assistance to break the----
        The Chairman. How many people would that require if we
    followed your recommendation, how many additional people?
        Mr. Saltzman. I cannot give you that number. I think in
    terms of the first recommendation, in terms of having appeals
    officers, many offers and compromise are actually worked out in
    appeals.
        So I do not think that that would require any appreciable
    dedication of staff. There already are appeals officers who
    deal with offers and compromise. But I have no doubt that this
    may require additional staffing.
        Secondly, and this is related, is the failure to pay
    penalty. The failure to pay penalty was a penalty that was
    introduced at a time when the interest rates were 6 percent
    simple interest and deductible by individual taxpayers.
        And now, of course, as I said, that the interest rate is
    market sensitive and is adjusted quarterly and is compounded
    daily. Those are two different situations.
        What has happened today is that the failure to pay penalty
    caps out at 25 percent. The penalty for misconduct under the
    accuracy related penalty, such as negligence and intentional
    disregards is only 20 percent.
        So a taxpayer who is unable to pay a tax bill is punished
    more heavily than a taxpayer who has actually been negligent in
    understating his or her tax. And that does not seem to be fair.
        And therefore, I would take a look at the failure to pay
    penalty to see whether it still is serving a purpose rather
    than having interest serve the purpose of the payment of
    additional taxes delinquently.
        Seizures of property, I know that this is an area of
    particular interest. I agree that high-level review of seizures
    will prevent abuse. I think any time you move up in the
    collection division, for example, that the level of abuse will
    decrease.
        But I also recommend another procedure for review of
    seizures. The Supreme Court has ruled that taxpayers are
    entitled to a pre-deprivation hearing or a prompt post-
    deprivation hearing as a matter of due process.
        This led in 1976 to the enactment of section 7429 of the
    code where jeopardy assessments are in fact reviewed in a
    probable cause type hearing. I recommend that that be done also
    for seizures.
        There are other matters, Mr. Chairman, but I hope that we
    will have an opportunity to explore them fully later.
        The Chairman. Thank you, Mr. Saltzman.
        [The prepared statement of Mr. Saltzman appears in the
    appendix.]
        The Chairman. Mr. Schriebman.

      STATEMENT OF ROBERT SCHRIEBMAN, TAX ATTORNEY, ROLLING HILLS
                              ESTATES, CA

        Mr. Schriebman. Mr. Chairman and Senator Graham, thank you
    for the opportunity to appear before you today and to offer my
    views on restructuring the Internal Revenue Service. I am a
    practicing tax attorney in the city of Rolling Hills Estates
    which is a suburb of Los Angeles. I am a full-time practicing
    tax attorney. I specialize in representing taxpayers before the
    IRS Collection Division and the Examination Division.
        I am the author of several books on IRS practice and
    procedure. I have taught IRS practice and procedure as an
    adjunct professor at USC's Graduate School of Accounting, but I
    am by no means an academic. I am a full-time practicing tax
    lawyer, dealing daily with both the IRS audit and collection
    divisions.
        Mr. Chairman, I come to you today with four proposals. My
    first proposal is the recommendation of an outside, independent
    forum to hear taxpayer complaints of IRS field level audit and
    collection abuses before the taxpayer is required to first pay
    what the IRS alleges is owed.
        It is my recommendation that a system of administrative law
    judges be created with the chief administrative law judge
    located here in Washington, DC.
        I believe that this will provide a low cost, fast, and
    informal forum where lawyers and highly paid professionals are
    not required as they would be required in the Tax Court or
    other Federal courts.
        My second proposal is the guarantee of due process when it
    comes to matters of IRS seizures, levy, liens, and wage
    garnishment and also due process in something called the trust
    fund recovery penalty which used to be known as the 100 percent
    penalty. This is actually an assessment of a tax, not really a
    penalty against an individual when a corporation fails to pay
    over corporate level employment and withholding taxes.
        The IRS currently uses a shotgun approach in assessing this
    type of a tax. It kind of reminds me of the old Army joke where
    the drill sergeant says I need volunteers, you and you.
        The cases are not properly or thoroughly developed. The
    targeted taxpayer many times is innocent. But the taxpayer
    really has no place to plead his or her case initially instead
    of the IRS. They usually go there first.
        And the IRS knows that most of these people cannot afford
    an attorney and cannot afford to go to court. So the IRS sticks
    them with this penalty, guilty or not. The bottom line is in
    effect an economic life sentence.
        My third proposal is to adopt realistic acceptance
    procedures for the offer in compromise process. I believe, as
    Mr. Saltzman said, that it is a very workable process to give
    taxpayers a head start to get them back in the system.
        However, the IRS changes the rules every few months,
    effectively making it much more difficult to obtain these
    offers in compromises. This is a very old part of American
    taxation. I believe that there should be adopted liberal
    acceptance procedures.
        In 1996, Mr. Chairman, the GAO estimated that approximately
    $200 billion was owed by taxpayers having delinquent accounts.
    It is called the ``tax gap.'' If the truth were known, it would
    probably be more like $400 billion.
        Mr. Chairman, I believe that the Treasury is losing
    thousands of dollars per second in uncollectible accounts due
    to the expiration of the statute of limitations for collection.
        The IRS is willing to force an otherwise productive
    taxpayer into bankruptcy rather than to accept a fair offer in
    compromise. I believe, Mr. Chairman, that this is the biggest
    scandal in American taxation today.
        My final proposal is the award of civil damages for
    unauthorized collection activities. Historically, taxpayers
    have been allowed to go to court to recover attorney's fees and
    costs for violations of the Internal Revenue Code and the
    regulations, but this is quite limited.
        My proposal would expand the award for not only intentional
    action, but negligent action for violations of the code and the
    Internal Revenue Manual which is the internal bible of the IRS
    and also violations of IRS national policies which are also set
    forth in the Manual.
        The IRS has I believe an unofficial no-pay policy where the
    IRS attempts to wear down a taxpayer who has received an award.
    The IRS keeps appealing because it has free use of the
    Department of Justice.
        I believe, Mr. Chairman, that once a judge awards these
    damages, the IRS should not be allowed to appeal and the
    Treasury must pay in full within 90 days after a judgment.
        In summary, Mr. Chairman, what I am proposing is the
    legislation of basic fairness and respect into a system where
    it does not exist today and into a code where it does not exist
    today.
        You are not going to get this by just trusting naively
    promises made by high-level Internal Revenue officials, no
    matter how sincere those promises might be.
        Mr. Chairman, there are those in the IRS who right now are
    laughing at what this Committee stands for and its lofty aims.
    They are not taking you seriously. Strong legislation is
    absolutely necessary. Thank you for this opportunity to be of
    service.
        The Chairman. Thank you.
        [The prepared statement of Mr. Schriebman appears in the
    appendix.]
        The Chairman. Mr. Strauss.

    STATEMENT OF BRUCE A. STRAUSS, ENROLLED AGENT, JACKSONVILLE, FL

        Mr. Strauss. Thank you, Senator Roth and Senator Graham. My
    name is Bruce A. Strauss. And I am currently an enrolled agent
    in Jacksonville, Florida. I have been practicing for the last 4
    years. Prior to that, I spent 31 years in the IRS, the last 18
    years as a division chief for the collection function. I was
    well recognized, performance awards, etcetera.
        I sincerely appreciate the opportunity to reappear before
    this esteemed committee and talk about ways that we can deal
    with the issues of restructuring the IRS to remove the fear of
    the public from the IRS and to stop the abuses.
        I would urge the members of this committee to conduct a
    comprehensive and in-depth analysis of the issues which need to
    be addressed before writing proposed corrective legislation.
        It was less than 2 years ago when the Taxpayer Bill of
    Rights 2 was passed. Obviously, it did not address the core
    problem. The core problem as I see it is that the IRS writes
    the regulations which in effect is the law, determines the
    rules which in effect is the Internal Revenue Manual, and makes
    all the decisions.
        Clearly, a problem or dispute system must be established
    independent of the IRS which has the authority to decide the
    appropriate resolution for taxpayers. This system must also be
    provided at a very minimal or no cost situation.
        The purpose of my testimony today is to recommend
    legislative and IRS organizational changes which should provide
    the citizens of this great Nation: One, a system which
    taxpayers can be readily compensated for economic damages and
    reimbursed for expenses when the IRS exceeds its authority;
    two, a system which guarantees an independent, timely, low
    cost, and highly skilled binding decisions when problems or
    disputes with the IRS require resolution; three, a system which
    will provide continuous oversight of the Internal Revenue
    Service; and four, a system which encourages taxpayers to
    voluntarily comply with the Federal tax laws.
        These systems should restore the IRS to a user-friendly,
    customer service drive which seeks only the tax which is
    legally due. Major changes need to be accomplished in our
    current Federal tax system in order to achieve these
    objectives.
        Now, Senator, I list out 15 different recommendations. Let
    me just address a few of them. Number one, I do believe we need
    to establish an entirely new system outside of the IRS
    organizational structure that any taxpayer with a dispute or a
    problem with the IRS would utilize.
        This system will replace the current Taxpayer Advocate
    Program. This system would have the authority to resolve all
    IRS issues and should be provided at a minimal cost to the
    taxpayer.
        This system should also have the ability and authority to
    economically compensate the taxpayers when the IRS exceeds
    their authority. And in addition, it will make these awards to
    the taxpayer from the IRS district budget. And there is a
    rationale for that.
        The staffing and administration cost of the system will be
    offset by the reduction of the IRS budget currently used to
    fund the Taxpayer Advocate Program. The system's management
    must be outside the IRS, clearly must be outside the IRS.
        The second recommendation, Congress must create a central
    clearinghouse staff where all taxpayer complaints regarding the
    IRS are received and worked. This staff must be highly
    competent, having the ability to analyze the issues involved in
    any taxpayer complaint and to hold the IRS responsible to
    resolve these complaints fairly and objectively.
        This clearinghouse staff would also advise Congress of
    potential legislative changes based on their analysis of the
    complaints and of the IRS ability to appropriately resolve
    these complaints. In essence, it would provide in part
    continuous oversight of the IRS.
        Third, Congress must restrict the authority of the IRS to
    write tax regulations. It must also insist on Congressional
    approval prior to the implementation of any tax-related
    regulations.
        The current ability of the IRS to write and implement
    regulations is one of the reasons why the complexity of the tax
    law exists. The more immediate concern is that Federal law is
    being created by non-elected Federal employees.
        Four, Congress should conduct a review of existing tax
    regulations and the Internal Revenue Code and eliminate all
    current regulations and sections of the IRC which have little
    or no impact on tax revenue production or citizen's rights.
        Just let me continue. I think we ought to conduct an
    amnesty program on compliance issues. Many folks are out there
    willing to file and pay. They just do not want to pay their
    dues, tremendous dues to come into the system now.
        The issue of income, Senator Roth, I see where the House
    proposes a slight issue of income. If in fact it gets it, the
    tax burden of proof may shift to the IRS. I believe that burden
    of proof needs to shift right now in all cases. That is a major
    abuse. I think obviously, some abuses are occurring from a
    collection function. Just as many abuses are occurring from the
    examination function.
        The Internal Revenue Code 7430-33 as far as rights of
    taxpayers to be reimbursed for damages, again, it has been
    addressed before today. It needs to get a heavy look at. Not
    only is it difficult, but it also is difficult to get into the
    process.
        Thank you, Senator Roth.
        [The prepared statement of Mr. Strauss appears in the
    appendix.]
        The Chairman. Thank you, Mr. Strauss.
        I have several questions I would like to ask the panel. I
    would ask those of you who want to make a comment, try to be
    brief.
        Mr. Strauss raised the question of burden of proof. As you
    know, taxpayers are pretty unhappy that the Internal Revenue
    Service can determine almost unilaterally that you have income.
    But there has been a lot of objection to changing the burden of
    proof on grounds that it will make the IRS even more intrusive.
        I would like to ask each of you what your opinion on this
    is. If you do not think the burden of proof should be modified,
    what can be done to protect the taxpayers' legitimate interest?
        Ms. Olson.
        Ms. Olson. Sir, I think that when most taxpayers get upset
    about the burden of proof what they are really thinking is that
    I have not kept my records and if I am called to the carpet, I
    will not be able to produce what I have written on the tax
    return. They do not make the distinction between the factual
    issues and the substantiation issues.
        I think that what could help that is very clear rules and
    descriptions about what kind of documentation is required, a
    clear statement of when people are able to throw out records in
    the normal cases and a clear statement of what would be trouble
    areas and what kind of records to keep. And it cannot be buried
    in IRS publications that most people do not read. I think that
    is the real issue that people are very much upset about.
        If I may say one more thing about the intrusive procedures,
    I spend a lot of time dealing with innocent spouse issues. So I
    try to think that there is this factual issue where it would
    affect the low-income taxpayer.
        And I have tried to think if a taxpayer raises theinnocent
    spouse issue, what kind of an investigation would the IRS have to do to
    make a case, you know, bearing the burden of proof to overcome the
    innocent spouse claim and the kind of questions that they would have to
    ask and who they would have to inquire into, perhaps the children of
    the couple, next door neighbors. It just sends shutters down my spine
    about what kind of investigation would go on.
        The Chairman. Thank you.
        Mr. Saltzman.
        Mr. Saltzman. Senator, I find myself in opposition to this
    shifting of the burden of proof from taxpayers to the IRS. And
    I think what it does, especially if I take a look at the House
    bill, is that it will create side issues in the tax court or
    the small claims division of the tax court.
        It will create issues about whether the IRS reasonably
    asked for information and whether the taxpayer reasonably
    refused to provide the information.
        And so these side issues will create basically a two-stage
    procedure. First, you will have a proceeding about who has done
    what during the examination. And the second one will be the
    actual trial.
        And I think these issues will impose a burden on the tax
    court that is really somewhat of an issue that should not be in
    the tax court because it has ruled and has for years stated
    that what happens in the tax court is a de novo proceeding and
    things start from scratch and what happened during the
    examination is not considered.
        On the other hand, I recognize and the law is that service
    may not simply assert a naked assessment. It cannot just send
    somebody a notice of tax deficiency without any basis in fact.
    And in that situation, it seems to me that the taxpayers are
    already protected by the law.
        I agree, however, with Ms. Olson that the service could do
    a better job in terms of elaborating the types of records that
    should be kept, the length of time that records should be kept,
    and assist taxpayers in doing so.
        So in that sense, I both disagree that the burden should be
    shifted, but agree that the service can do more to help
    taxpayers in this area.
        The Chairman. Mr. Schriebman.
        Mr. Schriebman. I find myself on Mr. Saltzman's side, Mr.
    Chairman. I think that if you shift the burden of proof, you
    are going to have a much more aggressive IRS as far as the
    issuance of summons. In my opinion, the summons process of the
    Examination Division is already grossly abused.
        There is a provision in the Bill, section 301 of the Bill
    the way it currently stands is that the only way you are going
    to get a shifting of the burden of proof is if you have been
    fully cooperative with the IRS. Frankly, I see poor tax court
    judges----
        The Chairman. Let us forget the question about fully
    cooperating because I think that muddies the water.
        Mr. Schriebman. Yes. Well, it is in the House bill.
        The Chairman. Yes, I know it is, but that is not my
    question.
        Mr. Schriebman. I feel the burden of proof should stay
    where it is. After all, there is an argument for the fact that
    the taxpayer is the one who has the possession of the
    information, the documentation, the points of view, the
    motivation.
        I agree with the point that Mr. Saltzman made about the IRS
    not being able to just issue a naked assessment. Apparently,
    now, they can do that. And you cannot look behind the
    deficiency notice because a Tax Court case called Greenberg's
    Express.
        So I am for leaving the issue where it is.
        The Chairman. Do you anything further, Mr. Strauss?
        Mr. Strauss. I do, Senator. In the last hearing, we heard
    quite a few examples of the IRS box car, blue sky assessments.
    I have absolutely no problem if the IRS has some basis to
    assess tax, legal basis that they ought to have that authority.
        I have a great problem, and I see this many times, where
    they simply pull a figure out of the air and say this is the
    income you have and dare the taxpayer to disprove it. Now, how
    is the taxpayer going to disprove it?
        That is my point on that issue. That practice in my mind
    has to be stopped. And it would appear to be wholly illegal.
        The Chairman. Let me turn to interest and penalty because
    to many people, they appear to be out of control and a source
    of a great deal of unhappiness.
        It takes too long for the IRS to notify taxpayers of
    mistakes and resolve issues. This is not fair to taxpayers who
    are making a good faith attempt to comply with the tax laws.
        For example, as I previously stated, we had an instance
    before the committee where a 10-cent error ballooned into a
    $500 cascading penalty. So on the face of it is absurd.
        Do you agree that there is a problem? What are your
    thoughts on how the committee ought to deal with it?
        Ms. Olson.
        Ms. Olson. I do think there is a problem. I get many phone
    calls from people who say this bill has become 2 times, 3
    times, 10 times what it was. And I have already paid the
    underlying tax through credit offsets, etcetera.
        I do not think, however, that people should be let off the
    hook because they are late in paying their tax. After all,
    those of us who are complying are footing the bill on that one.
    And I do not think there should be an amnesty.
        I do think that the existing offer and compromise program
    could add a separate category besides collectability and
    liability and look at whether in certain instances the
    underlying tax has been paid or the amount of the offer being
    made is to pay the underlying tax in full and maybe look at it
    also in light of collectability, as well and come up with some
    kind of amount that would both satisfy the need to make the
    compliant taxpayers feel that they are not getting a raw deal,
    but also putting some closure on these cases.
        The Chairman. Thank you.
        Mr. Saltzman.
        Mr. Saltzman. This penalty issue I think frequently
    revolves around the failure to pay penalty which is the reason
    why I suggested it before.
        It also involves the running of interest on penalties. The
    general rule used to be that interest did not run on a penalty
    until you got a notice and demand, but now, most penalties bear
    interest from the due date of the tax return.
        So the imposition of penalties, especially the failure to
    pay penalty, which as I say I think is outdated, increases
    geometrically the cost of a tax bill with the running of
    interest on the penalty from the due date of the return.
        One area that I think can be looked at is having interest
    run from the determination that the taxpayer is actually liable
    for the penalty before interest begins to run. And that was the
    general rule and now is more the exception than the rule.
        I think that as far as the penalty procedures are
    concerned, the service routinely and automatically imposes
    penalties, for example, for failure to pay at the service
    center. It is if payment does not accompany a return, the
    penalty is automatically assessed.
        So then, the burden falls on the taxpayer. And that is
    where you get these failures in communication, inability to
    communicate.
        How is that avoided? That has to be avoided by the
    expansion and use of either penalty appeals officers in the
    regions or the use of the taxpayer advocate system todeal with
    penalties and that kind of issue.
        The Chairman. Mr. Schriebman.
        Mr. Schriebman. Mr. Chairman, I have a philosophy. I
    practice it and I teach it, never take a penalty lying down.
    And I find especially, I have had a lot of penalty practice
    back in the last 12 months.
        I have found one thing to be true. It has worked actually
    100 percent of the time for me. These are service center level
    penalties, delinquency penalties.
        If you ask the service center to abate the penalty, you are
    going to be turned down automatically it seems. But as soon as
    you go above that and you start appealing the penalty rejection
    and you get higher up into the IRS into the appellate people,
    the appellate sphere, my experience has been that I have had
    100 percent success in getting these penalties abated.
        I think what the IRS should do that they are not doing is
    letting taxpayers know the steps to take to abate penalties
    once they are initially turned down.
        It is a labyrinth, but it is explainable. I have developed
    a multiple step procedure that I teach for abating penalties.
        But my original point that I have made here today is if we
    institute a system of administrative law judges, for example,
    they will be able to quickly hear issues of penalties and be
    able to resolve them without going through the IRS. Have it
    heard by an independent, outside source.
        In order to fight penalties in today's climate, Mr.
    Chairman, you have got to know where to go, what buttons to
    push. And if you are going to have a representative to do it
    for you, you have got to have the money in back of you to pay
    for it. I do not think that is right.
        The Chairman. Well, the administrative judge proposal seems
    to me something worth investigating, something I have been
    interested in. I would appreciate any further thoughts you have
    on how that might be.
        Mr. Schriebman. I believe, Mr. Chairman, that the
    institution of administrative law judges, and this would be a
    casual forum, no black robed person. You go in a room. The
    judge sits at one end of the table with a tape recorder. You
    sit on one side. The government sits on the other side. It is
    very informal.
        I believe that it will get rid of 95 percent of taxpayer
    abuses if you provide a broad jurisdiction for the
    administrative law judge.
        The Chairman. Any further thoughts you have on that, I
    would appreciate.
        Mr. Schriebman. Oh, yes, I have plenty, Mr. Chairman. Thank
    you.
        The Chairman. Mr. Strauss.
        Mr. Strauss. Well, the cause of the increased cost comes
    from two primary issues. One is section 6622 which is the
    compounding interest on interest. The second is moving the
    collection statute from 6 years to 10 years.
        Now, if we make the interest factor a realistic factor
    which it needs to be done, if we look at all of the penalties
    which have just grown totally out of proportion to what they
    were initially intended to do and we move the collection
    statute back to 6 years, this issue of the cost of exceeding
    the actual tax will be greatly reduced and brought back into
    the appropriate posture.
        Again, on the issue of the administrative judges, certainly
    I would support that process, Senator.
        The Chairman. All right. Thank you, Mr. Strauss.
        I would now like to turn to the question of liens, levies,
    and seizures. You know there has been a lot of concern
    expressed about their application.
        I am concerned that taxpayers who did not receive real
    notice wake up in the morning only to find that IRS has taken
    their bank account, business, other assets.
        Now, I think it was in our September hearing, Mr.
    Schriebman, you recommended that the taxpayer should have a
    right to have a judicial hearing before seizure. Do others of
    you agree? And what are your suggestions in this area?
        Ms. Olson.
        Ms. Olson. I think in general for large seizures for large
    seizures, yes, I do agree with that. As far as wage levies, one
    procedure I have never understood is we have been told that
    even if we can show the revenue agent or the revenue officer
    rather that either the tax is not owed or the person is
    currently not collectible, the first wage levy will go into
    effect. They will not reverse it. And I have never understood
    why that has happened.
        We have had no success in overriding that. By the time we
    get a TAO, the wage levy, because they happen so quickly, has
    already gone into place.
        I think that is my thoughts on the subject at that point.
    The levies affect my people the most.
        The Chairman. Thank you.
        Mr. Saltzman.
        Mr. Saltzman. Yes. I mentioned in my opening remarks that I
    thought that there should be, as apparently Mr. Schriebman
    does, a prompt post-deprivation hearing or a pre-deprivation
    hearing. And I also suggest that this hearing can be held by
    various types of people.
        It could be special trial judges of the tax court. The tax
    court if properly funded could have available special trial
    judges to hear cases.
        Secondly, I agree that the use of an administrative law
    judge or a commissioner could be used to hear these types of
    cases and that in large urban areas especially. This committee
    cannot expect that Federal district courts will be available to
    hear tax disputes.
        Federal district courts are overwhelmed with criminal cases
    and other judicial business. They cannot hear these cases. So
    the answer has to be outside the district court. The answer has
    to lie in the local community or as close to the local
    community as possible.
        And I believe that we should look to either expanding the
    tax court's jurisdiction or to administrative law judges or
    other subordinate or quasi-judicial officers to handle these
    types of cases and others.
        The Chairman. Do you have anything to add, Mr. Schriebman?
        Mr. Schriebman. I agree with myself completely, Mr.
    Chairman. [Laughter.]
        The Chairman. That is a surprise, Mr. Schriebman.
        Mr. Schriebman. Again, I think the answer is having
    aseparate organization, a separate function. You want to have these
    disputes resolved before they take place.
        The Chairman. IRS revenue officers have a great deal of
    discretion when they seize and sell a taxpayer's property. Some
    would argue that revenue officers have too much discretion.
    Property sales are not uniform. Should revenue officers
    maintain and sell taxpayer's property? If not, who should?
        Ms. Olson.
        Ms. Olson. I think there needs to be better oversight of
    revenue officers' discretion. Our experience has been that when
    we have a conversation with their managers and their
    supervisors that the revenue officer is always the person
    calling us back. It seems that the oversight is peremptory at
    best. It is just not effective.
        I do--I am sympathetic to the fact that revenue officers
    deal with people who are actively trying not to pay tax. And I
    think that the real problem is that that mindset carries over
    to dealing with a taxpayer who is just having a hard time
    paying the tax.
        I am not sure that creating a separate bureaucracy is going
    to be the solution, as doing--continuing along the line of
    reeducation and this committee's continuing oversight. I see
    since the September hearings major changes in my dealings with
    revenue officers.
        The Chairman. Thank you, Ms. Olson.
        Mr. Saltzman.
        Mr. Saltzman. Well, I would think that the revenue officers
    have enormous discretion in the sale of property. They are not
    professionals.
        But in my experience when they have sought out
    professionals, they simply have not gotten good representation.
    They have been charged more. And they could care less what the
    property is sold for or what condition it is maintained in
    before the sale which affects, of course, the sales price.
        I think that when, for example, in Manhattan, there used to
    be seizures of stock or securities, there was a brokerage
    account where the stock and securities could be sold on a
    public exchange. Well, that is a good idea. At least, you know
    you are getting the highest price for the stock and securities.
        It is a difficult problem. Professional assistance for
    revenue officers is not going to be the complete answer unless
    there is a method of ensuring that the person assisting the
    auctioneer assisting in the sale of property is taken perhaps
    from a list of authorized individuals to assist.
        The Chairman. Mr. Schriebman.
        Mr. Schriebman. My experience has been--actually my
    observation, Mr. Chairman, is that revenue officers have
    absolute discretion. If they are doing their job per the
    provisions of the Internal Revenue Code, nobody can stop them,
    not even the Chief Justice of the Supreme Court. That is a lot
    of power. And in some respects, it is more power than anyone in
    this room has.
        I have heard and you probably have, too, the horror stories
    about seizing property, letting it sit there until it
    deteriorates, until the market is gone. There is no redress.
        I think that if we install an administrative law judge
    system there would be some control there over the sales
    process, over the fact that it has to be sold quickly, the
    right to redeem it.
        It is a problem that I do not really feel I would be doing
    you justice in giving you a fast answer. It is a tough problem.
    I believe it is solvable, but I think it needs some checks and
    balances.
        And that is the whole thing that we are about here today,
    Mr. Chairman, is we have got to put some checks and balances in
    the system. I think the way we are going to have to do that is
    look at every activity and see where checks and balances are
    needed. I do not have a fast answer for you today. I am sorry.
        The Chairman. Thank you.
        Mr. Strauss.
        Mr. Strauss. I think the primary issue is twofold. One, of
    course, is again this issue of bringing in an independent
    source, an independent authority from outside to make a
    decision on any given case.
        Just as important is the environment within the
    organization, within the IRS. What is important? What drives?
    Is customer service important? Is getting down to the nitty
    gritty of a case and getting the facts and making an
    appropriate decision important? Or are you trying to do
    something which is not appropriate on the case?
        And I believe that the significant issue is getting the
    appropriate environment within the organization.
        The Chairman. We will submit questions in writing, but this
    will be my last question. And this is to Mr. Saltzman and Mr.
    Schriebman. In response to your answer opposing shifting the
    burden of proof, Mr. Strauss recalled testimony in our
    September hearings about blue sky assessments. How do we
    address that issue without shifting the burden of proof?
        Mr. Saltzman. Well, first of all, I think perhaps sometimes
    when we talk about burden of proof, we confuse the burden of
    coming forward with evidence with the burden of proof.
        I believe taxpayers should have the burden of proof in
    cases, but I also believe that when a service makes a
    determination of a deficiency or makes an assessment that
    absent some evidence that the assessment or the deficiency is
    suspect.
        So I would say that rather than shifting the burden of
    proof, it would be appropriate to have the service come forward
    with evidence, some evidence to establish that its
    determination was probably correct. And then, the taxpayer
    would have to proceed from there.
        The Chairman. What do you mean by some evidence?
        Mr. Saltzman. Evidence showing that the amount involved is
    probably owed.
        The Chairman. Is that based on labor statistics?
        Mr. Saltzman. The service has used the Bureau of Labor
    Standards statistics information. That is some evidence. It is
    not terribly strong evidence.
        But the point is that when a determination is completely
    unsupported by evidence, then the service's determination is
    suspect in and of itself.
        So I would recommend some production of evidence to support
    a determination. And some evidence might include Bureau of
    Labor Standards statistics, but that would bevery slight
    evidence indeed of an actual tax deficiency.
        The Chairman. Would it be enough?
        Mr. Saltzman. I could not answer that with all cases. I
    think, of course, that would shift the burden of coming forward
    with some other evidence to the taxpayer. And with that other
    evidence, then that would not--that may not be enough in the
    case.
        In other words, the taxpayer would be obliged to say why
    that evidence, that slight evidence is not sufficient to
    establish the deficiency.
        The Chairman. Mr. Schriebman.
        Mr. Schriebman. I do not like guesses. I do not like when
    somebody pulls something out of the air and then multiplies
    that by per quarter as they do in California sales tax or
    annually as they might do with the IRS.
        If a person is being audited, the best way to protect
    yourself is with paper. I do not care if we are living in an
    electronic age or where computers are going to take us. You
    need the paper. If you do not have the paper, you do not win.
        And I think we have got to do the same thing with the IRS.
    I have seen too many cases where assessments have been pulled
    out of the air. How the heck did they get this? And, of course,
    it never gets to the tax court because we manage to settle it.
        But if they are going to go into court, where is the paper?
    Where is the evidence? Where is the hard evidence, not BLS
    statistics, charts, not graphs?
        Paper, if you do not have the paper, there is no
    assessment. And I think it comes down to that, hard, tangible
    evidence.
        The Chairman. Why is that not burden of proof?
        Mr. Schriebman. Well, I think that that is burden of proof.
    I think burden of proof is an elusive term. It is like a ping-
    pong match the way I look at it. Somebody has it for a moment.
    And then, it bounces back to the other person.
        The government I think has to be able to show the tax court
    judge that they have documentary evidence of unreported income
    or the wrongdoing. If they do not have the paper, the
    documents, a mere allegation in a revenue agent's report that
    is not supported by the paper should not fly.
        The Chairman. I think your testimony today has been very
    helpful. And we will want to continue to discuss some of these
    problems with you as we proceed with the oversight hearings.
    Thank you very much for being here today.
        The committee is in recess.
        [Whereupon, at 12:00 p.m., the hearing was adjourned.]

                               IRS RESTRUCTURING

                         (INNOCENT SPOUSE TAX RULES)

                                  ----------

                          WEDNESDAY, FEBRUARY 11, 1998

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 9:09 a.m.,
    in room SD-215, Dirksen Senate Office Building, Hon. William V.
    Roth, Jr. (chairman of the committee) presiding.
        Also present: Senators Chafee, Grassley, D'Amato,
    Murkowski, Moynihan, Baucus, Breaux, and Graham.

    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.
        Let me begin by welcoming my colleagues and members of the
    committee to another in our series of hearings that are
    focusing on restructuring the Internal Revenue Service.
        We have heard disturbing testimony since we began our
    hearings on the IRS last September, and I am pleased to say
    that the agency is taking steps to improve its service and
    effectiveness.
        But we are also learning that much of what must be done
    remains with Congress. It depends on legislative solutions and
    ongoing oversight. One of the major issues that we have
    uncovered, one that concerns me greatly, relates to the
    treatment of innocent spouses who are caught in the cross-hairs
    of an IRS examination or collection effort who are often left
    to foot the bill alone once their marriages have come to an
    end.
        The IRS restructuring legislation that passed the House
    contains language addressing the innocent spouse issue. The
    Treasury Department, just 2 days ago, also announced some
    reforms. And while these efforts are good, I am afraid they do
    not go far enough to protect those who need protection the
    most. Today our panels will address this issue.
        Innocent spouses are unaware of their tax problems until
    they have divorced and tried to move on with their lives. The
    first time they hear of the problem is when the IRS tracks them
    down and tells them that their former spouse has filed a
    fraudulent return or underpaid their taxes.
        The innocent spouse is then informed that she, or in some
    cases he, must pay the entire assessment. Most often, the
    innocent spouse is a former wife, a woman who knew little, if
    anything, about her husband's financial dealings, his business
    concerns, let alone his tax debt with the IRS.
        The problem we are finding with the innocent spouse
    provision is three-fold. First, that the legal definition of an
    innocent spouse is so narrowly drawn that it fails to protect
    many individuals who would be considered innocent by any
    objective and reasonable analysis.
        Second, that even those who are covered under the narrow
    definition are not getting the information and support they
    need from the IRS.
        Finally, the agency is all too often electing to go after
    those who would be considered innocent spouses because they are
    easier to locate, as well as less inclined and able to fight.
        Part of these problems reside with the IRS, part of them
    are the fault of Congress. Though the agency officially
    acknowledges the status of innocent spouses under current law
    and has the ability to clear such an individual from his or her
    tax liability, it rarely does.
        At the same time, the criteria to qualify are so narrowly
    drawn that many spouses who reasonably should be considered
    innocent spouses under the law are not able to claim such an
    important protection.
        For example, for a wife to qualify for protection as an
    innocent spouse it has to be shown that the husband
    substantially understated the couple's income in filing the
    income tax. If he files an accurate return but does not pay the
    tax there is little, if any, protection.
        Likewise, if the tax penalty is associated with his
    business, even though his spouse may have known nothing of the
    company's finance. We found many cases where the IRS had gone
    after the former wife anyway. It does not take much imagination
    to see how destructive this can be for a woman who is trying to
    rebuild her life after separation or divorce.
        Financially insecure, many times struggling as a single
    parent to raise children, working for an income that is a
    fraction of what her ex-spouse earns, now she has to confront
    the often unrelenting Internal Revenue Service.
        In an effort to acquire revenues owed, the agency will
    pursue these women with a vengeance. It will garnish wages,
    place liens against homes, and often jeopardize future
    relationships because a new person in her life might well be
    held accountable for her former spouse's tax problems.
        Four long-suffering and courageous witnesses who will
    appear before us today will tell us of their experience with
    the IRS. While each of these stories may or may not qualify as
    an innocent spouse under the current Tax Code, they will
    illustrate the pain and frustration women across this country
    endure under similar circumstances.
        As I said, reason alone would suggest that any one of them
    is an innocent spouse. The tax law, however, may dictate
    otherwise. Our responsibility is to ensure that reason and law
    walk hand in hand.
        One of the witnesses we will hear has been wrestling with
    the IRS for almost 30 years. This is unconscionable. Her story,
    as well as the others, will expose the callous methods
    sometimes employed by the IRS in its efforts to collect the
    taxes. It will show that such efforts are often unjust,
    irrational, and undertaken despite the consequences they have
    on the future of these women and their ability to work.
        Perhaps most egregious of all, we will see that these
    efforts are often undertaken without regard to the impact that
    they will on the welfare of the innocent children involved,
    children who watch the IRS intrude into the lives of their
    struggling parents, take away precious financial resources, and
    penalize the family who subsists on a limit and often unlivable
    allowance.
        So today we will learn about the impact of our Tax Code on
    the innocent spouse and hear recommendations on how to
    restructure the IRS in order to protect taxpayers and to ensure
    fairness and equity.
        Senator Baucus.

       OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM
                                MONTANA

        Senator Baucus. Thank you, Mr. Chairman, for once again
    having a most important hearing on the restructuring of the
    Internal Revenue Service. I would like to thank all of our
    witnesses in advance for what we expect to be very powerful
    testimony.
        I know it is not easy to share such personal problems that
    you have had to deal with with the entire world and the
    Congress, and we appreciate you doing it because what you do
    today is going to have a very positive effect, hopefully, on
    other people around this country.
        We talked about the innocent spouse. It is kind of unusual,
    what we are finding out with the Internal Revenue Service, is
    they consider nobody innocent. They consider everybody guilty
    and you have to come in and prove yourself innocent.
        Some of the innocent spouses, kind of, there may be no such
    thing in the sense of the views of the IRS. It points to one of
    the problems that we are trying to fix which I think is very
    important, and that is, changing the burden of proof to have
    the IRS prove someone guilty, not having to have individuals
    prove themselves innocent when the IRS makes an accusation. I
    mean, it costs people hundreds of thousands of dollars, which
    most people do not have, in order to prove themselves innocent.
    That is not what this country is all about.
        I was thinking about the innocent spouse further. I mean, I
    guess I am an innocent spouse, which may be hard to believe, in
    the sense that my wife does all of our finances. She does all
    the tax stuff. I obviously trust her to do it and do it
    properly and do it correctly.
        The Chairman. Too complicated for you to do? [Laughter.]
        Senator Baucus. Mine are extremely simple. You have no idea
    how simple my tax returns are. But she does it all. We trust
    each other. But I can understand how these things happen, then
    years later you are called to the carpet to prove yourself
    innocent for something that you had no knowledge of whatsoever.
        So this is a very serious problem and we appreciate very
    much your being with us.
        The Chairman. Thank you, Senator Baucus.
        It is a pleasure to welcome our four witnesses today
    because they have firsthand experience with some of the results
    of involuntarily becoming the innocent spouse.
        Now, we are swearing all witnesses, so I would ask that
    each of you rise and raise your right hand.
        [Whereupon, the four witnesses were duly sworn.]
        The Chairman. Thank you. Please be seated.
        I will now call upon Ms. Cockrell for her testimony.
    Welcome, Ms. Cockrell.

             STATEMENT OF ELIZABETH COCKRELL, NEW YORK, NY

        Ms. Cockrell. Thank you very much, Mr. Chairman and members
    of the committee. My name is Elizabeth Cockrell. I am a single
    mother of two living in New York City. I moved there over 18
    years ago from Canada, when I married John Crowley. The
    marriage lasted less than 3 years.
        The tax problem that arose from it has continued for almost
    two decades. I have been hounded by the IRS to pay a $650,000
    tax bill, and I may yet have to file for bankruptcy.
        I was a young woman of 23, recently graduated from a
    Canadian college with a degree in English literature. When I
    married and moved to America in 1979, I had been selling life
    insurance in Canada. My husband was a commodities broker. He
    and his company invested in the most complicated of business
    deals, like extremely complex limited partnerships containing
    leveraged straddle positions.
        I worked a few part-time jobs, then took an entry-level job
    that provided the training and experience for my eventual
    career as a stock broker. Before my marriage I knew nothing
    about American tax laws. Especially foreign to me was the
    concept of a joint return. Canada does not have those.
        When my husband told me that married people in the United
    States filed joint returns and instructed me to sign them, I
    did as he asked. I trusted him. A Federal judge later told me I
    should not have.
        In 1982 we separated and I moved out of our apartment,
    taking only $2,000 for the security deposit on a one-room
    apartment and the pots and pans, literally, that I brought into
    the marriage. I was proud I took no alimony, even though I was
    entitled to it.
        Many years after our divorce, in 1987, John called me and
    told me that he had been receiving mail for years addressed to
    both of us at our old address. Since our separation, I had been
    filing unmarried and separate for many years from another
    address.
        He told me that he would take care of dealing with the IRS
    if I would just sign something he was mailing to me. He even
    gave me a letter saying that I knew nothing about the
    partnerships, that he was responsible for them, and that I in
    no way should incur any tax liability.
        Thinking I was protected by this letter, I signed the
    papers. After all, he had been investing in these extremely
    complex tax shelters before he had even met me. I found out
    later that he had been taking the deductions from these
    partnerships during the years that I had just signed the joint
    tax returns with him and that the paper I had just signed was
    for the IRS to waive the statute of limitations, which let them
    pursue me indefinitely.
        Nine years after my divorce, I learned that the IRS was
    after me for over half a million dollars in back taxes because
    of a brief marriage I had had over a decade ago. I had to hire
    a lawyer. He told me that the law sometimes makes an exception
    for cases like mine, it is called the Innocent Spouse Rule.
    When a joint return is audited and the changes apply to the
    income and deductions of one spouse, the other may be excused
    from paying the additional tax.
        I went to Tax Court convinced the judge would see I had
    nothing to do with these tax shelters. One of the four things I
    had to prove to win my case was to show that the tax shelters
    my ex-husband had invested in were shams, but the judge ruled
    against me because he said I did not give him any evidence that
    the tax shelters were shams.
        Subsequently, I found out that the IRS withheld evidence
    from the court. They knew all along that these tax shelters
    were shams because the very same two IRS attorneys who tried my
    case had helped send the men who had peddled the shelters to
    jail, a fact they kept from the judge and me.
        One of the men convicted of criminal tax fraud is now out
    of prison and the other is due to be released soon. Their
    sentences are completed. However, I do not know when my ordeal
    with the IRS will ever be over.
        Not only did the IRS withhold crucial evidence which any
    other lawyers would be disbarred for doing, they also produced
    an expert witness to testify against me. He said under oath
    that he had a law degree from Georgetown University. We later
    found out this was not true, and still suspect that the IRS
    knew all along that he was testifying falsely.
        After we found out he had lied to the court I had to
    request a new trial, at my own expense, because the witness had
    perjured himself. At no time did the judge ever once admonish
    the IRS attorneys for their outrageous misconduct.
        The judge agreed that I did not know anything about the tax
    shelters, but ruled against me because he said I should have
    known. This is what is called constructive knowledge. That is
    when you do not know something but the IRS thinks you should
    know.
        I was a young Canadian immigrant wife who trusted her
    experienced American commodity-broker husband. The judge told
    me, ``Trust alone does not eliminate a spouse's duty to inquire
    when a perusal of the return would indicate that further
    inquiry is necessary.'' What does that mean?
        When I appeared on Connie Chung's news program a few years
    ago, it took her producers, with a much smaller staff than the
    IRS, only a day to find seven-figure Swiss bank accounts
    belonging to my ex-husband. I have written the IRS with this
    information, but to my knowledge they have done nothing to
    collect the taxes from him.
        I appealed to the second Circuit Court of Appeals and lost
    there, too. I have currently appealed to the Supreme Court and
    am waiting to hear if they will review my case. In other cases,
    other judges have looked at the facts more favorably for the
    ex-wife who claims innocent spouse status.
        To pay the tremendous legal fees over the many years I have
    been fighting them I had to cash in my IRA, my 401(k), and all
    of my pensions, and, to add insult to injury, I had to pay
    taxes and penalties on the money I withdrew.
        Today the IRS wants to collect $650,000--it is actually up
    to $680,000 today--from me for my ex-husband's tax-avoidance
    schemes. I do not know when this will ever be resolved. If I
    filed bankruptcy, it will be on my credit report until I am 50
    years old, more than twice the age I was when I signed my first
    tax return at the age of 24.
        I am lucky. I have fought my way back and was able to earn
    the resources to fight the IRS. I would like to be a voice for
    those women who are not so fortunate. I appeared on several
    news shows during the hearings held by this committee in the
    fall, I spoke about my case, and I received letters from women
    who were going through similar experiences with the IRS because
    of a former marriage. These letters are painful to read. These
    women are truly forgotten Americans. No one speaks for them;
    they are voiceless.
        Most of them are struggling to raise children and are
    receiving no child support. They have lost their money, their
    hope, and their visibility. Because these women cannot be
    ignored, I have started an organization called W.I.F.E., Women
    for IRS Financial Equity.
        The Wall Street Journal's Mr. Tom Herman, in his tax
    column, printed our address and I have received numerous
    letters from women whose cases are heartbreaking. I have
    literally even cried when I have gotten some of these letters.
    These are women who have lost everything.
        One elderly woman wrote to me that she was afraid that she
    would soon resort to eating dog food; another, an accomplished
    pianist whose husband left her, was forced to sell her beloved
    piano and her house to pay back taxes from things she had no
    knowledge of. She is now in a poor folk's home in Florida.
        Many of these women were forced to sign tax returns at the
    hands of an abusive husband. Some of their signatures were even
    forged by their husbands or their husband's secretaries.
        A single mother of four small boys who gets no child
    support and whose meager earnings are being garnished. There
    are women whose husbands have bankrupted out of the whole tax
    liability, leaving their former wives stuck with the whole tax
    bill.
        There are women who are on welfare who are ashamed to be on
    public assistance who want to work, but are told by the IRS if
    they go to work their pay will be garnished. One woman had to
    beg for money for diapers for her baby after her husband was
    long gone. How can a single mother raise emotionally healthy
    children when she herself is suffering having had the IRS on
    her back for years, with no end in sight?
        These woman have the most important and critical job in the
    United States, raising the next generation. It is the children
    who are being hurt the most under this most inequitable law.
    Give these women their lives back. Give them their dignity.
        I personally can attest to the anger, the depression, the
    anxiety, and weight of helplessness that accompany being at the
    mercy of the IRS. It is an overwhelming impediment to a happy
    and normal life.
        Every New Year's Eve I pray that the coming year will be
    the one in which my IRS problem finally gets resolved. Many of
    these cases are so old that they stem from a time when men were
    the primary breadwinners. These are women who raised children
    while their husband handled the finances.
        All they are guilty of is trusting their husbands and
    signing a joint tax return with him. Now, years later, they are
    suffering in great numbers. The General Accounting Office
    estimates that there are 75,000 to 80,000 instances per year of
    the IRS potentially pursuing the wrong spouse. Over 90 percent
    of these victims are women.
        After I read several letters I started to see patterns and
    problems emerging from this joint liability law. I would now
    like to share these with you.
        I noticed that the kind of man who would stick his ex-wife
    with a horrible tax burden also shirked his responsibility to
    his children and paid no child support whatsoever. Many
    desperate single mothers wrote to the IRS and gave the IRS
    their ex-husband's address after the IRS claimed they were
    unable to locate their ex-husband.
        These women begged the IRS to stop garnishing their own
    well-needed pay and to collect from their ex-spouses. Some
    women even asked the IRS for assistance to enforce their ex-
    husband to honor his child support payments. The IRS ignored
    these requests. They seemed to arbitrarily decide which spouse
    to go after. I found no consistent policy in these cases. The
    law should be changed so that the IRS collects the taxes from
    the person who rightfully owes them.
        One of the most common problems is that women feel falsely
    protected from any IRS liability if the judge in their divorce
    ruled that the husband is responsible for any back taxes owed.
        All of a sudden the woman gets a lien slapped on her home
    and her pay garnished. Stunned, she writes to the IRS, encloses
    a copy of her divorce decree, and says there must be a mistake
    because, after all, a judge ordered it.
        Here is what the IRS told one woman: ``Civil agreements,
    such as a divorce agreement, do not dictate tax law.'' In other
    words, a court order means nothing to the IRS. One woman asked
    me, why do we even need divorce agreements if the IRS does not
    honor them?
        Many women find that a well-needed tax refund she is
    expecting ends up getting applied to her husband's old taxes.
    Also, the IRS continues to send mail to the old marital address
    to both parties, even though these individuals have been filing
    separately and unmarried from different addresses for many
    years. As a consequence, penalties and interest accrue at an
    alarming rate without notice to the woman.
        Additionally, under the Taxpayer Bill of Rights II, the IRS
    is required to tell one spouse what actions they have taken to
    collect from their ex-spouse. However, the IRS has recently
    denied this privilege, citing that they are unable to do so
    because of the old Privacy Act.
        In my own case, I have inquired for over a year and a half
    about my ex-husband's payments to the IRS and yet have received
    no response.
        While I appreciate the opportunity to tell you my story,
    the message I want to leave you with today is that the American
    tax system mistreats divorced women. In some cases, woman have
    been living through these ordeals for decades.
        The IRS drags out many of these cases over the course of
    the years, filing brief after brief, executing liens,
    garnishing wages, ad nauseam, at your expense and that of all
    American taxpayers. I believe that if the taxpayers had their
    say, I am sure they would want these women back in the work
    force paying taxes and contributing to society.
        Should there not be some time limit placed on resolving the
    struggle for these honest citizens? There must certainly be
    many fair solutions. Fairness begs that such equitable
    solutions be enacted immediately and made retroactive.
        Mr. Chairman, we hope that you and your committee will seek
    out a resolution to this atrocious practice of the IRS.
        Senators, thank you for listening to all of us here today
    and for giving us this opportunity to address such a critical
    issue.
        The Chairman. Well, thank you very much, Mrs. Cockrell, for
    being here today. We appreciate it. We are seeking answers, as
    you know, to the problem.
        Ms. Cockrell. Thank you so much.
        [The prepared statement of Ms. Cockrell appears in the
    appendix.]
        The Chairman. I now am pleased to call on Ms. Pejanovic for
    her testimony. Please proceed.

             STATEMENT OF SVETLANA PEJANOVIC, NEW YORK, NY

        Ms. Pejanovic. Thank you, Chairman Roth, and the members of
    the committee for this opportunity to tell you my story. Please
    excuse my English. I will do best to be clear.
        My name is Svetlana Pejanovic. I came to the United States
    from the former Yugoslavia in 1980 on a student exchange
    program. I was only 23 and spoke no English. Now, 18 years
    after my arrival in this great country, I am on the verge of
    losing everything that I have ever worked for.
        My salary has been garnished and the Internal Revenue
    Service has placed a lien on my home. One evening just last
    month, an IRS collection officer came to my home unannounced,
    wanting to seize all of my personal belongings. I will now
    provide you with some of the background on me and how I arrived
    at this point.
        I married an American citizen in March of 1982. For the 4
    years I was married to him, my husband asked me to sign joint
    income tax returns. Because this type of tax did not exist in
    Yugoslavia, I relied on my husband to do the correct thing,
    since he was familiar with such requirements in the United
    States.
        Our marriage did not last, and we separated in 1986. I did
    not receive any financial help at all from him after the
    divorce. After that experience, I filed my own tax returns
    under the guidance of my former husband's accountant. I was
    able to purchase a modest apartment for myself and worked hard
    to pay my mortgage. At the end of 1993, I received a phone call
    from the IRS telling me I was in serious trouble, as I owed
    over $200,000 for back taxes from over a decade before when I
    was married to my husband. I was absolutely shocked.
        I was totally honest with the IRS officer during this
    telephone call and provided both my home and work address and
    stated to him that I owned the condominium in which I lived.
    Immediately after this phone call, a lien was placed on my
    home.
        I called my former husband about all that had taken place
    and he assured me that he would take care of the problem. I
    still trusted him, since he was the one who handled all our
    finances while we were married.
        Roughly 3 months after he assured me the problem would be
    resolved, I received an extremely embarrassing call from my
    company's payroll department informing me that my pay would be
    seized within 2 days unless I could make a deal with the IRS.
        It was only after I informed my ex-husband of this problem
    that he confessed that he had, in fact, been receiving mail
    from the IRS addressed to both of us for years. My former
    husband, the accountant we both had retained, even others at my
    former husband's company, all knew about this problem. They
    never told me.
        My former husband even admitted to me that he really did
    not think the IRS would ever go after me. He claimed he had no
    money for lawyers and that I was the stupid one for cooperating
    and being open and honest with the IRS. At this point, he had
    now gone back to his former wife and had placed all his assets
    in both her name and his children's names.
        Gentlemen, almost 16 years after my failed marriage my
    former husband is of no interest to the IRS for actions he
    alone is responsible for. Yet, as his former wife--not the
    current, but former--I continue to be the target of the IRS
    collection effort for the taxes he owes.
        In effect, as recently as three weeks ago this past Monday,
    the IRS seized my checking account as well as my personal
    retirement account. Is it my fault that my former husband was
    faster at disposing of his assets than the IRS was in
    collecting from him? Am I to continue to be the victim of IRS
    rage?
        Senators, my former husband is living in a home with his
    family and has an income. Why does the IRS not go after him for
    the taxes he owes? Are they coming after me because I cannot
    fight, or maybe I am just an easy target?
        I contacted a lawyer who advised me that I had three
    options to choose from given my situation: bankruptcy, an
    offering compromise, or filing an innocent spouse petition. He
    claimed bankruptcy was the easiest and the cheapest way to
    resolve my problem. I responded, ``But I am not guilty of
    anything.'' I told him I would never declare bankruptcy; to do
    so was against my principles. He then suggested that I should
    stop working altogether until I solved this problem.
        After the lawyer charged me thousands of dollars and
    provided no solution, I turned to an accountant who was a
    former IRS employee, and then for 2 years he argued with the
    IRS that I should be let off the hook since I had never
    received, seen, or known about any IRS notices that had been
    sent to my former husband. He insisted the statute of
    limitation had run out.
        Regrettably, this argument went nowhere. Friends and
    colleagues urged me not to fight the system. They told me not
    to fight the IRS, but simply declare bankruptcy and get on with
    my life.
        Just last year, a lawyer informed me that the facts of my
    case made me a classic innocent spouse, but in order to prove
    this in court I was told I would have to put up the entire
    amount of money the IRS claimed I owed based on my former
    husband's bungled finances.
        Senators, the amount by then was roughly $300,000. I doubt
    if any of you can tell me how I can defend myself against the
    IRS. Alone I am no match, emotionally or financially, against
    their power.
        Senators, I left a Communist country in Eastern Europe many
    years ago to study in the United States and to enjoy, even for
    a short time, the freedoms democracy bestows on its citizens.
    Today I am still thrilled to be able to live and work in this
    great Nation. However, I must tell you that the actions of the
    IRS against me were not unlike actions that took place in my
    former Communist homeland. To me, the IRS is too powerful and
    is responsible to no one. They do not care who they hurt or how
    they get their money.
        Do not be mistaken. I am willing to pay taxes, as I have
    been for all these years, to support this great Nation. But the
    way the IRS has gone after me for them is simply not fair.
        I am so grateful to be able to appear before the United
    States Senate to tell my story. My hope is that, by doing so,
    it will be in some small way helpful to you, as well as many
    women who may be watching this today themselves that have been
    overpowered by the IRS.
        Thank you.
        The Chairman. Well, thank you very much. Your being here
    today is extremely helpful to the committee, and we appreciate
    that.
        [The prepared statement of Ms. Pejanovic appears in the
    appendix.]
        The Chairman. Next, we will hear Ms. Andreasen.

               STATEMENT OF KAREN J. ANDREASEN, TAMPA, FL

        Ms. Andreasen. My name is Karen Andreasen and I reside in
    Tampa, Florida. I am currently teaching fourth graders at a
    small private school and taking classes to update my
    certification. Although I am presently divorced, I was married
    for 19 years and have 3 wonderful children, Christopher,
    Michael, and Brittany.
        My ex-husband is a former field auditor for the Internal
    Revenue Service. For approximately the last 10 years of our
    marriage he had a tax and IRS representation practice. During
    the course of his career, he had also been an expert witness in
    litigation cases. His intimate knowledge of the IRS and tax
    issues far exceeded any knowledge I had.
        During our marriage, my former husband kept all of our
    business and most personal information at his office. As a
    result, I was excluded from our financial dealings. I loved my
    husband, but mistakenly trusted him to handle the financial end
    of things while I was busy taking care of our children.
        At the time of our divorce the value of my husband's
    practice and earnings became an issue for alimony and child
    support purposes. Under the advice of my attorney I engaged a
    certified public accountant, Gayla Brey Russell, who has
    particular expertise in the areas of tax and litigation. Upon
    reviewing my former husband's business documents it became
    apparent to the CPA that there were clear discrepancies between
    my former husband's sworn statements and what the documents
    said.
        Two questions were becoming obvious, whether or not my
    former husband had actually filed the returns he said were
    filed and whether or not he had paid the estimated taxes as
    shown on the copies of documents we had in our possession. As
    neither had been done, the tax liabilities for these years
    would exceed $12,000, even before ongoing penalties and
    interest were added. This all started in the fall of 1995.
        In February of 1996, I received a notice from the IRS
    inquiring into the whereabouts of my former husband's and my
    1993 tax return. Although I knew I had not signed any such
    return, my former husband insisted that both the 1993 and 1994
    returns had been filed. I was led to believe by my husband that
    the IRS had lost them.
        That April, I submitted a request to the IRS for copies of
    both the 1993 and 1994 returns. However, they responded saying
    that no such returns could be found. It was now becoming very
    clear that no estimated taxes for those years had ever been
    paid. I realized at this point that one of two things should
    have occurred.
        If the tax returns had been filed, we should have received
    notices demanding payment of the taxes due. However, if the
    estimated payments had been made and no returns sent in, the
    IRS would have sent us a notice of credit and inquired where we
    wanted those credits applied. In my case, neither of these
    scenarios unfolded.
        My accountant advised me to file new separate tax returns
    for the 2 years in question. Upon learning of this, my former
    husband forged my signature and filed joint returns before my
    separate returns could even be prepared. Not knowing what had
    been done, I went ahead and filed my own forms.
        Of course, these were returned to me by the IRS with a
    cover letter saying that his joint returns had already been
    received. Copies of these joint returns were included with the
    IRS's notice. My former husband had not even tried to disguise
    his attempt to forge my signature. The signature, in fact, was
    an exact replica of his own.
        At this point, the battle lines were drawn. My CPA re-filed
    my separate returns with a cover letter stating that in the
    joint returns my former husband had reflected a forged
    signature. It informed the IRS that the IRS already had had a
    history of correspondence regarding these particular returns.
        The letter also included samples of my signature along with
    the forged signature appearing on the on the joint returns. The
    IRS's response to my correspondence was that they were very
    sorry, but my only recourse was to file suit in civil court.
        By this time I was deeply in debt and my mother sold her
    own home and moved in with me and my children to help us out.
    My husband remarried and was providing me with support payments
    only when he felt like it. My former husband has basically
    skated the IRS and the family courts. He has effectively
    accomplished exactly what he had set out to do.
        A formal protest, along with more proof of the forgery and
    case law that should have been in my favor were filed. At the
    same time, I also received a letter from the IRS saying the
    case law was not applicable to my case because I was not
    currently undergoing an audit. It seemed to me that case law is
    used only when the IRS deems it proper or convenient.
        In the meantime, I requested from the IRS an extension for
    filing my tax returns. I did this in an attempt to hold off on
    the actual filing, hoping the matter could be resolved during
    this period of time. I was, in fact, anticipating receiving a
    large refund and knew if the IRS did not reverse its decision
    that my refund could be applied to my former husband's back
    taxes.
        By October 1997, I had heard nothing from the IRS so I sent
    my 1996 returns in to them, not knowing what was going to
    happen. By now, tax liens had been placed on my home and the
    bank had threatened foreclosure.
        In December 1997, the dreaded IRS notice indeed arrived,
    stating that my refund was being applied to my former husband's
    back taxes. The $3,693 refund that I so desperately needed was
    to be used to benefit my former husband after all.
        However, about three weeks ago I received a letter from the
    IRS stating that it was reversing its decision and that I would
    receive my refund in approximately eight weeks.
        Mr. Chairman, it is now two and a half years since this
    roller coaster ride began. During this time my former husband
    was able to create a maze of papers that he thought no one
    could untangle. If it had not been for the devotion and
    persistence of my friends and family I would clearly not have
    made it here today.
        However, my story is not over, for I now wonder how long it
    will take to remove the IRS lien that still remains against my
    home. The lien was in place against our home even before my
    husband relinquished it in our divorce settlement. My only hope
    is that getting rid of this lien, yet another reminder of my
    former husband, will not take years more to settle and take an
    even greater toll on my children and me.
        Throughout this ordeal I was treated as if I were guilty
    until I could prove my innocence. I know now that I was naive
    in trusting. I can only hope my ordeal can help other women in
    similar situations and lessen their pain and frustration. My
    former husband knew and used the IRS system against me, a
    system that allowed itself to be manipulated in its quest to
    get the money, any money, right or wrong, just as long as they
    got it.
        I feel lucky to be receiving any refund at all. I also feel
    lucky to be able to appear before your committee today. But
    luck should have nothing to do with it. There should be a
    logical process for disputes like mine, one that does not
    require unlimited personal funds to file a lawsuit.
        I can only imagine the number of other innocent spouses
    that are out there now drowning in the same sea of red tape,
    fear, frustration, and a sense of helplessness that I did, a
    sea not calmed by the IRS and its effort to get anything it can
    from individuals who do not have the strength to fight back.
        Although my personal battle is not completely over, I no
    longer fear that I am just another fatality of the tax system,
    but I do fear for those still caught in it.
        Mr. Chairman and the members of this committee, thank you
    for your time, as it is a most precious gift. However, it is
    one that I cannot repay, just as you cannot repay me for the
    endless hours I have spent in vain so desperately trying to
    reason with an unreasonable and unrelenting system.
        Thank you so much.
        The Chairman. Thank you. I certainly agree with your
    statement that luck should have nothing to do with it.
    Hopefully we are all here to try to develop a logical process.
        Ms. Andreasen. Thank you.
        [The prepared statement of Ms. Andreasen appears in the
    appendix.]
        The Chairman. Ms. Berman.

            STATEMENT OF JOSEPHINE BERMAN, SOUTH ORANGE, NJ

        Ms. Berman. Good morning. My name is Josephine Berman. I am
    here today to help put a human face on the issue before this
    committee. I am an innocent spouse. I have existed under the
    black cloud of an immense tax debt for the last 28 years.
        The Chairman. Twenty-eight years.
        Ms. Berman. My indebtedness is solely the result of having
    signed my name to joint income tax returns in 1968, 1969, and
    1970.
        Since that time I have been continually harassed,
    threatened, intimidated into signing waivers of the statute of
    limitations, and had my entire retirement nest egg seized by
    the Internal Revenue Service.
        Due to circumstances beyond my knowledge and control, I
    stand before you today at the age of 68 unable to afford to
    retire, unable ever to repay a debt for which I am being
    unjustly held responsible, and without any means to reverse my
    fortune. This is my story.
        This is not a case of tax evasion or fraud. The debt for
    which I am being held responsible is the result of a disallowed
    deduction claimed by my husband for the years 1968 through
    1970.
        During that time, my husband was a 50 percent stockholder
    of a subchapter S corporation. The deductions he claimed were
    for legal expenses incurred during litigation with his partner.
    The disallowance of these deductions was the result of the
    IRS's interpretation of whether the expenses were incurred to
    protect income or stock. I am not entirely sure what this
    means, but it is what has been told to me.
        I have been held responsible for this tax liability as a
    result of signing joint tax returns during those years. The
    original debt of $65,000 is now approximately $400,000 with
    interest and penalties.
        I was never involved in any of my husband's business
    activities, nor was I ever included in any business or tax
    decisions. As was typical for those times, I was the homemaker
    and he was the breadwinner.
        During the years that my husband was in litigation, our
    marriage became troubled. In 1970, we were separated. Needless
    to say, communication between us became even more sparse than
    it had been before. I did not even become aware of any tax
    problems until 1972 or 1973, when an IRS agent--I will call him
    Mr. X--came to my home and threatened to post sheriff notices
    on the trees in the front of my house.
        At this point, my husband and I had been separated for 2
    years. My husband had not worked since 1970 and he would not
    work again for another several years. The entire responsibility
    of raising our 10-, 14-, and 16-year-old children was left to
    me. The family subsisted on money from insurance policies that
    my husband cashed in, on my $11,000 a year salary as a dental
    assistant, and welfare.
        Mr. X was the first of many IRS agents that I would deal
    with over the years. He was brutal. He repeatedly harassed me
    and bullied me in front of my children. Under the threat of
    eviction, I signed the first of several waivers and a lien was
    put on my house. These conditions allowed us to keep the roof
    over our heads.
        I cannot overstate the desperateness of our situation. My
    husband was in a state of deep depression, and the only thing
    that kept me going was my responsibilities to my children. I
    did not understand the intricacies of the tax laws or why I was
    being held responsible for the debts of my husband's business.
        I was left to my own devices to deal with the situation. I
    was completely overwhelmed and racked with worry. I was also
    very often overcome by rage and tears. I had tremendous guilt
    because of the strife our situation clearly caused my children.
        Eventually my husband abandoned us completely, leaving me
    to deal with the IRS on my own and a lien on our jointly owned
    home.
        Over the years I have been harassed by agents from
    Holtsville, New York City, Pennsylvania, and New Jersey. Agents
    have come to my place of work, as well as called my employers,
    looking for information about my former husband and threatening
    to levy my wages.
        My personal affairs have been exposed to my employers and
    co-workers. Not only is such conduct humiliating, it also
    serves to strain my relationship with my employers.
        Agents have come to my home threatening to post sheriff
    notices for my neighbors to see or place foreclosure notices in
    the local newspapers. My credit rating has been destroyed.
        I frequently receive solicitations from companies claiming
    that they can help me solve the debt with the IRS. My private
    life has become totally public. This conduct has been
    consistent and relentless over the past 28 years.
        The utter impossibility of my situation was punctuated in
    late 1995 when, notwithstanding the lien on my home, the IRS
    seized my IRA account of approximately $40,000. Over the years
    I had to struggle, but by penny pinching and doing without I
    was able to set some money aside each year for my retirement.
    As I stated earlier, with interest and penalties the tax debt
    now stands at approximately $400,000. The assessed value of my
    home is about $180,000.
        Clearly, short of winning the lottery I will never be able
    to pay this debt in full. The IRA was the only asset I could
    hope to use for my impending retirement. When that money was
    seized, I was devastated. It was as if my government was
    stepping in and saying, ``We know you're poor, now we're going
    to make sure you'll be destitute for the rest of your life.''
        What was even more upsetting was that this action was being
    taken by an agent in Pennsylvania, which is where my husband
    resides. I live in New Jersey. Ironically, to my knowledge my
    husband has never been subjected to the same oppressive
    treatment by the IRS as me.
        In an effort to stop the seizure I contacted the Internal
    Revenue Service's Dispute Resolution Office in New Jersey.
    Agents in that office expressed surprise to learn of the
    seizure of my account. They advised me that this should not
    have occurred, and it was done so in error.
        Unfortunately, nothing was done to stop this arbitrary act
    of the Pennsylvania agent and the money was, indeed, seized. I
    now live from paycheck to paycheck with nothing standing
    between me and abject poverty. I cannot adequately describe the
    horror of theposition I am in, and knowing that it is my
    government that put me there.
        I have lived nearly half my life under the weight of this
    crushing debt. Now, after slaving for all this time, all I will
    have to retire on is Social Security. Twenty-five years ago, I
    worked my way off welfare. With the indignity of stealing my
    retirement money, the IRS ensured that that is where I will end
    up, back on welfare.
        Since being charged with this debt I have raised three
    children, I have worked my way off welfare, I helped put my
    children through college and paid off a mortgage, and I have
    paid my taxes all along the way. I have done all of this on a
    high school education and by my wits and guile.
        Now at the end of my life I live in a home that I paid for,
    but I do not own. What little I was able to save has been
    seized, and I do not know how much longer I will be able to
    work to support myself. I have done nothing wrong. I am guilty
    only of contributing to society, as every hardworking American
    is supposed to do.
        Senators, not long ago I heard a story about a man who had
    been sentenced to 15 years to life for manslaughter. He was
    released on parole for good behavior after serving just under 8
    years in prison. A killer gets released from prison after 8
    years, and I am serving a life sentence.
        The laws as they exist are unjust and immoral. You have the
    power and the responsibility to change this. I urge you all to
    do so. Thank you for this opportunity to be heard.
        The Chairman. Well, thank you very much, Ms. Berman, for
    being here.
        [The prepared statement of Ms. Berman appears in the
    appendix.]
        The Chairman. Let me say to each and every one of you how
    much I appreciate your being here, but how concerned I am that
    it is necessary to have this kind of hearing. The reason we are
    all here today is to try to seek the kind of solution that will
    prevent this from happening again. Not one American housewife
    should have to go through this kind of ordeal and I just want
    you to know how much I appreciate the contribution you are
    making by your testimony today.
        Now, let me ask you, if you would, to say in your own
    language why you believe you should be viewed as an innocent
    spouse.
        Ms. Cockrell.
        Ms. Cockrell. I merely signed joint tax returns when I
    moved from a foreign country and my husband was involved in
    partnerships before he even met me. I never saw the
    partnerships, I never signed them, I knew nothing about them. I
    left with nothing from the marriage. I have got my own pension
    on my own. I worked my way up on my own and left him with
    nothing. Eighteen years later they are not after him, they are
    after me for things he did.
        The Chairman. Ms. Pejanovic, would you please answer.
        Ms. Pejanovic. First, I believe that innocent spouse should
    not exist. People get married. I mean, the law should be
    changed. But on the other hand, because it exists, it is law, I
    believe I should be innocent spouse because I just signed a tax
    return. I did not know what I was signing.
        I was working every single year from the day I came to this
    country. The taxes were withheld from my payroll and I slowly
    earned what is the Federal tax, Medicaid, IRS. But I did not
    know afterwards, even for some years. They would not tell me
    what I am signing. Therefore, I just was not aware of any
    businesses of my ex-husband or anything and I did not benefit
    from anything.
        The Chairman. Ms. Andreasen.
        Ms. Andreasen. Through the divorce, my husband admitted my
    innocence and that I was not privilege to our financial
    dealings because he kept everything in his office. So I did not
    even know we were in debt until the divorce.
        He admitted that he had forged my name on the 1993 and 1994
    taxes. I found out also too that he had done this on others as
    well, claiming to have power of attorney. He admitted to not
    having the power of attorney.
        I asked him, why is it that I am not signing income tax any
    longer, because at one point I was. Then all of a sudden, it
    stopped. He said, well, it is the way that he is filing now,
    and led me to believe that it had something to do with joint
    marriage and his business.
        So I trusted him. He always flaunted the fact of how much
    he made after he had completed the income tax, so I just
    assumed that he filed it as well. So if the family court found
    me innocent, why do I have to prove my innocence to the IRS?
        The Chairman. Ms. Berman.
        Ms. Berman. I was an innocent spouse because all I did was
    sign the income tax returns, because it was expected of me to
    do so. I maintained the household, he was the breadwinner. I
    did not know how he earned his money. I knew he had a business,
    but I was never involved in any of his business activities.
        I want to remind you that his situation was not one of
    fraud or of trying to skirt responsibility to the Internal
    Revenue, it was a question of interpretation of a law as to
    whether he could deduct his legal expenses or not.
        The Chairman. Well, as I listen to you there is a common
    theme. Each of you had nothing to do with what happened, it was
    acts of your ex-spouse.
        Let me ask you this, and one or two of you did touch on it.
    Did the IRS pursue both you and your former husband equally, or
    do you believe you were singled out? Have you been made aware
    of any amounts paid by your former spouse?
        Ms. Cockrell. Well, as I testified, Senator Roth, I have
    inquired for over a year and a half now. I have sent letters to
    the IRS because this Taxpayer Bill of Rights II was passed, and
    I am entitled to find out what actions the IRS has taken to
    collect from him. I have heard nothing at all. They have not
    written back. Or they have written back, actually, once, but
    told me to write to a different address, and just kept
    stonewalling me.
        So from what I have heard though, my ex has claimed that he
    is poor, has nothing. But we do know he has these Swiss bank
    accounts, and I have told the IRS about those as well.
        The Chairman. Thank you. Ms. Pejanovic.
        Ms. Pejanovic. I really do not know if they got any money
    from my ex. I know he told me that he was aware of the problem
    from 1987. I was aware from 1993, like 6, 7 years later. I do
    not know if they collected anything. When I receive the notices
    I try to see, do they put CC, do they put both of our names,
    but it is just my address. I do not know if they are doing the
    same thing.
        The Chairman. Ms. Andreasen.
        Ms. Andreasen. As far as I know, the IRS has not pursued my
    ex-husband. There has been no communication proving that.
    Everything has come to my address because that was what was on
    the income tax itself, so as far as I know they have only
    pursued me.
        The Chairman. They have not pursued your husband at all.
        Ms. Andreasen. As far as I know.
        The Chairman. Ms. Berman.
        Ms. Berman. I really do not know to what extent they have
    contacted my husband. I only know that I have been harassed
    constantly.
        The Chairman. Let me ask you this question. How would you
    have been affected if there had been a rule of proportionate
    liability at the time you were determinedliable for the joint
    tax bill? In other words, you would only be liable for those taxes
    based on your income, not that of your spouse. What difference would
    that have made?
        Ms. Cockrell. Well, I did pay my taxes. As Svetlana just
    said, she did as well. I did start working eventually when I
    came to the States and I paid my taxes. They were taken out of
    my paycheck, withholding. I feel I paid my taxes. I left him, I
    took nothing, and I am the one stuck with the debt. He did not
    pay his taxes and I am stuck with his taxes, and I paid mine. I
    have continued to pay my taxes over the years.
        The Chairman. So if we would have had proportionate, you--
    --
        Ms. Cockrell. I paid my share.
        The Chairman [continuing]. You paid your share and you
    would have had no problems.
        Ms. Cockrell. Yes. I did not leave with any diamonds, furs,
    cars, property, nothing.
        The Chairman. You so testified, I think, that you left with
    the pots and pans.
        Ms. Cockrell. Yes. I still have them.
        The Chairman. Ms. Pejanovic.
        Ms. Pejanovic. I think it would be great for me. I believe
    even, because I requested and I have every single return. I
    looked at them from the first year, and I started with, like,
    $14,000 as my part of my work and my taxes. Therefore, I would
    not owe anything to IRS. I would probably even get some money
    back. It would be great for me.
        The Chairman. Thank you.
        Ms. Andreasen.
        Ms. Andreasen. That would be an answer to my prayers
    because the years in question I was a housewife, so I was
    unemployed. However, when I did file for 1993 and 1994 I paid
    $19 for those 2 years, and that was interest. So that would
    have been wonderful.
        The Chairman. Thank you.
        Ms. Berman.
        Ms. Berman. I would not have been responsible for anything
    because I was unemployed. I was a homemaker. Therefore, he
    was----
        The Chairman. You were not unemployed, you were working
    busy in the house.
        Ms. Berman. You are right. I probably worked many more
    hours than I needed to. However, I did not earn any money at my
    job.
        The Chairman. I would point out to the panel that we have a
    vote going on now. Senator Chafee has gone down to vote and
    will come back.
        Senator Graham, you are next, please.
        Senator Graham. Thank you, Mr. Chairman. Again, I
    appreciate your tenacity in continuing to pursue these issues.
        As was said in the opening statement, I think what we have
    here is a combination of both a problem that Congress is going
    to have to fix in terms of the law itself and continued review
    of how the IRS goes about its responsibilities of collecting
    the revenue for the Federal Government.
        I am very distressed at what you have each said in your
    personal experience as to the way in which the law has operated
    and the mistreatment to which you were subjected.
        Ms. Andreasen, you mentioned that in part of your odyssey
    in this case was when you determined that your signature had
    been forged on joint statements for two years and you pointed
    that out to the Internal Revenue Service.
        Could you elaborate on what response you got when you
    indicated that the joint returns upon which your liability was,
    in part, predicated were, in fact, forged?
        Ms. Andreasen. They were basically sorry that that had been
    done, but I would just have to take it through civil court.
    What family court stated would not hold up for them. It was not
    enough, even though my ex admitted to it.
        Senator Graham. So they indicated that they could not
    administratively reverse that.
        Ms. Andreasen. Right.
        Senator Graham. Did they agree that it was a forged
    document but said they were without the ability to reject the
    legal significance and the tax liability of a forged document?
        Ms. Andreasen. No. It was just, sorry, I would have to
    pursue it through civil court. They did not offer any
    particular help.
        Senator Graham. In reading the law which is called the
    Innocent Spouse Law that provides that an innocent spouse can
    be relieved of responsibility, there are four criteria that
    have to be met.
        The first, is that a joint return was made. In most of your
    cases that was the case, although in Ms. Andreasen's case it
    was a fraudulent joint return.
        That the understatement of tax exceeded $500, which I guess
    was the case in all of your instances. And that the innocent
    spouse did not know, and had no reason to know, that there was
    an understatement of tax. Finally, taking into all the facts
    and circumstances, it would be inequitable to hold the innocent
    spouse liable for the deficiency in this case. It sounds as if
    in each of your testimonies that all four of those points were,
    in fact, the case.
        For instance, on the one about that you did not know or did
    not have any reason to know that there was an understatement of
    tax, when you presented your case to the IRS, what was their
    response to that aspect of your circumstance, that you did not
    know and did not have any reason to know? Yes, Ms. Cockrell.
        Ms. Cockrell. The judge said that, because I had a B.A.
    degree in English literature from a Canadian university, that I
    was educated and because I was educated I should have known
    that something looked funny on the tax returns. I have talked
    to tax lawyers who have looked at the returns that said they
    would never have known, and here I was from Canada.
        The judge in the Tax Court said that I should have known.
    He believed I did not know, but that I should have known. I do
    not know how they can judge what someone should know, how you
    can possibly determine what someone should know.
        Senator Graham. So in your case, the Tax Court determined
    that you did not meet that standard of not having reason to be
    ignorant of the understatement of tax.
        Ms. Cockrell. Yes, they did, in the second trial that I had
    to get at my own expense after the IRS witness perjured himself
    and the IRS had also withheld evidence before that. They will
    do anything to win. The judge ruled against me the first time
    when they withheld evidence because I could not prove these
    were shams. Then we got another trial and he did not admonish
    the IRS attorneys for withholding this evidence that they had
    used to help put the men in jail who had done the partnerships.
        The judges merely ruled, well, we agree that you probably
    did not know. He said, I agree that you did not know about the
    tax shelters, but you should have known, so therefore you are
    not an innocent spouse. But, clearly, it would be very
    inequitable to hold any of us liable for this. So I think we
    definitely meet that standard.
        Senator Graham. Would any other of the members of this
    panel like to comment on how the IRS responded to whether you
    met those tests of not having reason to know that there had
    been under-filing and the inequitability of holding you
    responsible for it?
        Ms. Andreasen. My CPA, in corresponding with the IRS,
    showed case law similar to mine to prove that I was innocent.
    Their response to that was, again, that I wasnot under audit at
    the time so it did not apply to me. Yet, they requested it as well,
    too.
        Senator Graham. I would like to take this opportunity to
    recognize the accountant who has served as your pro bono
    advisor throughout this long ordeal, Ms. Gayla Russell, and
    commend her for her service to you and to helping us to
    understand and reform this system.
        I know she is representative of many professionals who
    have, on a pro bono basis, been of assistance to taxpayers who
    were caught in this cobweb of complexity that has fallen on
    each of you.
        I have got to apologize. We are almost at the end of this
    time period for a vote. Chairman Roth has asked that we not go
    into a recess, but just a temporary pause. Senator Chafee, who
    left earlier, should be returning and it will be his round of
    questioning next.
        So if you would please excuse me, I will return as soon as
    I have voted. Senator Chafee should be here shortly. Thank you
    very much.
        [Pause].
        Senator Chafee. All right. We will continue with this panel
    for a few minutes. The Chairman will be back directly and then
    we will go to the next panel. But I had a couple of questions
    for you ladies.
        First, this has been very compelling testimony. I know it
    is difficult and embarrassing to reveal all of the things you
    have had to reveal, and we appreciate a great deal your coming
    here and presenting us with this testimony.
        It seems to me one of the problems is, and this is not
    going to solve the situation, that you do not have a person to
    deal with in the IRS. It is a game of shuffle. I forgot who the
    lady was that said she was going to get a refund. Was it you,
    Ms. Andreasen?
        Ms. Andreasen. Yes.
        Senator Chafee. Have you gotten the refund?
        Ms. Andreasen. Not yet. It was three weeks ago that they
    told me to be expecting it, and that it would take eight weeks.
    So maybe in five weeks.
        Senator Chafee. Are you willing to bet the farm you get the
    refund?
        Ms. Andreasen. No. In fact, my mother sold her farm.
        Senator Chafee. Then I believe it was you, Ms. Andreasen,
    or maybe Ms. Berman, that talked about dealing in New Jersey
    and Pennsylvania. Frankly, as far as the Federal Government
    goes, whether somebody is in Pennsylvania or New Jersey should
    not make any difference. But you got the shuffle there too in
    trying to get your situation resolved.
        So do you agree that if you had one person you could talk
    to, whether it is an ombudsman or whether it is just somebody
    who is assigned to your case, it would be a better situation?
    Would that make any improvements, do you think? What we are
    trying to do here is to improve this whole situation. What do
    you say to that?
        Ms. Berman. In my case, I tried to have the situation
    brought to New Jersey and I was not able to accomplish that.
    That is what made me be in contact to these other agencies. I
    felt that it would be better if the situation were brought to
    New Jersey so that I could deal with a division of the Internal
    Revenue in New Jersey.
        Senator Chafee. The thing I find so unusual and disturbing,
    in your cases is that the IRS did not seem to have gone after
    your spouses with the enthusiasm they went after you. Could you
    just touch on that, Ms. Andreasen? And some of your former
    spouses have remarried. But do you get the impression that they
    do not seem to go after them?
        I think it was Ms. Cockrell that said the television
    lawyers were able to dig up a ton of information on Swiss bank
    accounts?
        Ms. Cockrell. Yes. They were not even lawyers, they were
    journalists. They found the actual account numbers that my ex
    had had in Switzerland from the early 1980's. It was over $1.2
    million. So if the interest went like the IRS interest, it
    could be worth millions now.
        Senator Chafee. But the IRS did not show much interest in
    all that.
        Ms. Cockrell. No, no. I did talk to a lawyer who said that
    they will not go after offshore bank accounts unless there is a
    felony involved. Because these tax shelters, I think, were
    later disallowed, it was not considered a felony.
        In the letters I have received from many, many women who
    wrote to our organization it seems to be, they have always been
    the ones who were targeted, even when the women have written to
    them giving the address of their former spouse. Even child
    support agencies are not even enforcing that either.
        Senator Chafee. Now, let me present you with a quandary
    here. Let us make a few assumptions. One, that your former
    spouse was completely responsible for the income tax return,
    did not do it correctly, did not report what should have been
    reported. In one case I think it was an argument over whether
    something was deductible or not deductible. Was that your case,
    Ms. Berman?
        Ms. Berman. Yes.
        Senator Chafee. That would not necessarily be a criminal
    offense. But, nevertheless, let us have the situation where the
    husband clearly was in charge of the tax return and failed to
    do it accurately, and you signed. You are the innocent spouse.
        Now the IRS comes and seizes your home which is in joint
    names. That is very painful. However, the husband is the person
    who, by being the family earner, is the one who paid for the
    house.
        Now, what do we do in a situation like that; is the IRS
    justified in going after a house that may be in joint names
    even though the wife and children are still in the house? That
    presents, it would seem to me, a quandary.
        Ms. Andreasen. In my case, in the divorce there are a lot
    of debts. The judge--and I do not recall what the terminology
    is--said that that is my homestead and, therefore, the banks
    that are coming after us cannot place a lien on the home.
        My quandary is, why can the IRS do it and no one else can?
    My judge specifically said no one can place a lien on the home
    because this is our homestead, this is for our children, we
    need a place.
        Senator Chafee. Ms. Cockrell.
        Ms. Cockrell. Yes. Also, which was common in many, many of
    the letters we have been receiving at the organization too,
    that after the divorce the house is generally awarded to the
    wife so it is not in a joint name. It is probably the only
    asset she received. Generally, that is because she got custody
    of the children. So he got a similar amount of money, if they
    split the assets. He got the cash, she got the house. He can
    spend the cash and they can put a lien on the house.
        Senator Chafee. Well, I hope we can do something to
    straighten this out. Your testimony has been very, very
    powerful.
        I guess, was it you, Ms. Berman, who testified that your
    $40,000 IRA was seized?
        Ms. Berman. Yes, it was.
        The Chairman. You are left with nothing, practically.
        Ms. Berman. That was taken away from me.
        Senator Chafee. Thank you very much, Mr. Chairman.
        Ms. Andreasen. Senator Chafee, you were beginning to ask a
    question to me about, do I feel like the IRS pursued me rather
    than my ex-husband. I felt like that I was an easier target for
    them because I was an employee and it was easier to have my
    wages garnished versus himbecause he is self-employed.
        Plus, I cannot remember a time when we have ever gotten a
    refund. We have always had to pay, is my assumption. Now I am
    in the position where I could receive a refund and then I have
    the home. So I believe that they came after me for those, at
    least, three reasons.
        Senator Chafee. Just in thinking, Mr. Chairman, I just
    wonder, if you listen to these cases, clearly the thought is,
    stop harassing these women and let us move on to something
    else.
        Ms. Cockrell. Hear! Hear!
        Senator Chafee. I wonder if, in the IRS, anybody can take
    responsibility for saying, look, this is not the way to
    proceed. We are going to forget these cases. We are not going
    to chase Ms. Berman, Ms. Andreasen, Ms. Cockrell, Ms.
    Pejanovic, or whoever it might be. You just wonder if that is
    possible in the IRS, and you are not permitted to do that. The
    only person that can give you permission to do that is the
    commissioner.
        The Chairman. Let me make two observations, as I listen to
    the testimony of these four ladies. First of all, there is
    nothing in the Code that prevents IRS from resolving these in
    an amicable matter. Nothing in the Code. I think that is
    important to understand.
        But, second, having said that, in dealing with the American
    taxpayer one of the purposes of these hearings is to help
    ensure that they are taxpayer oriented. The IRS should be
    helping these people rather than badgering them, trying to find
    means of solving these problems rather than abusing them.
        There is just something wrong when these cases drag on for
    years, and years, and years, or decades, according to you, Ms.
    Berman. There is just something wrong when innocent people find
    their lives being destroyed. Part of the responsibility is with
    the IRS, but I assure you we are going to try to build into law
    something that will help ensure fair and equitable treatment.
        Senator Moynihan, did you want to comment?
        Senator Moynihan. I would just like to agree with you, Mr.
    Chairman, and say that the IRS seems curiously, at times,
    uninterested in the experience of other countries.
        Canada does not have a joint filing and so does not have
    this problem. It is just across the river from Buffalo where
    the IRS has an office. They could go over and say, how do you
    handle it? They do not seem to do so, and they ought.
        It is an agency that has stopped being interested in its
    subject and is just carrying out its routine. We are very much
    in your debt, all of you, for bringing this to us. It is not
    every day that you get to be the subject of a lead editorial in
    The Wall Street Journal
        The Chairman. Senator Baucus.
        Senator Baucus. Thank you, Mr. Chairman. Mr. Chairman,
    first, I want to thank you for holding these hearings. I must
    tell you that this is a problem that is nationwide. In my State
    of Montana we have a lot of complaints along these same lines,
    and clearly something must be done.
        I am curious, though, with each of you, what you think the
    solution should be. One solution was alluded to by Senator
    Moynihan from New York. That is, require each spouse to file
    separate returns. That would solve some of this, but it gets
    into the other problem. That is, with joint returns we have one
    high income earner and one low income earner, and their joint
    tax liability is lower, which is something desirable. So one
    potential solution is that everyone files separate returns.
        Another potential solution, it seems to me, for those who
    file separation agreements and who get divorced is to follow
    the tax payments provisions provided for in the separation
    agreement.
        We would have to find some way, though, to prevent
    collusion somehow, because it is possible that separating
    couples, in their separation agreement, might make some
    provisions which are outside of the law. We do not want that to
    control, necessarily. But those are two possible solutions that
    come to my mind.
        Then another has been suggested and that is the
    proportional liability. That is, even though there are joint
    returns filed, that each spouse is essentially liable for his
    or her proportionate share.
        I am sure some of you have given a lot of thought to this
    question and maybe have a solution that would make sense to
    you, so I would be curious as to what you think the nature of
    the solution should be because it is obviously a big problem.
    It is a huge problem. Whoever wants to can jump in here and
    start first. If somebody has an idea, we would appreciate it.
        Ms. Andreasen. Well, my name starts with A so I will start
    first. In talking with my accountant, one thing that would have
    helped her is if she could have gone to the same person or same
    department each time because every time she has talked to
    someone she had to start from ground zero up. That was
    difficult. One person interpreted something this way, another
    person interpreted it another way.
        Another thing, too. I believe Chairman Roth, in his opening
    statement, said that we are innocent. The IRS needs to come up
    with evidence to prove that we are guilty and then come after
    us if you feel that we are guilty. But as long as we are
    innocent, I think that it should be up to them to find that
    instead of us spending all the money and energy in proving our
    innocence. They need to prove our guilt.
        Senator Baucus. So your suggestion would be the burden of
    proof would be on the IRS to prove that you are a guilty party
    and also responsible for the underpayment of your spouse's tax
    liability.
        Ms. Andreasen. Yes.
        Senator Baucus. All right. Anybody else?
        Ms. Cockrell. I think the money could be spent in a much
    better way as well. The amount of taxpayer dollars spent
    pursuing all of us over the years would have been much better
    spent trying to track down these deadbeat dads, or given to
    cancer research. I lost a brother to cancer.
        The amount of money they have spent going in and garnishing
    some woman's pay for a lousy 10 bucks a month, the amount of
    energy required to do that just seems to be a bad business
    decision. These women who are on welfare who want to work are
    told, you work, we are going to garnish your pay.
        Now, if you ran the country like it was a business, that is
    a really stupid business decision. Let them work. Let them pay
    and have them contribute and put money in the IRS coffers
    instead of us supporting these women who want to work. We are
    paying for them.
        Senator Baucus. All right.
        Do you have a suggestion, Ms. Pejanovic?
        Ms. Pejanovic. Yes. I would say that we are only talking
    here about IRS. I never had a chance to speak to anyone in all
    these 6 years at IRS, because I believe the legal system--the
    law should be changed because lawyers, friends, colleagues,
    everybody tells me, you do not fight IRS. It is so difficult. I
    never had anyone talking me, to IRS, like to have one person
    and make everything so simple. Maybe on a joint tax return, on
    every page, put you are liable for everything. Make everything
    so simple so people understand.
        Senator Baucus. I do not understand. You said you never
    talked to the IRS?
        Ms. Pejanovic. No.
        Senator Baucus. What do you mean?
        Ms. Pejanovic. I never had a chance all these years, never,
    ever, to defend myself. First they contacted me, like, 7 years
    later after my ex-husband knew about the problem, then they
    started just putting the lien on my apartment, a lien on my
    salary. But Inever had a chance to defend myself.
        Senator Baucus. So you were never approached by IRS until
    about 7 years after you separated.
        Ms. Pejanovic. Plus, they were just putting the liens and
    taking the actions without giving me the opportunity to prove
    that I am not guilty.
        Senator Baucus. All right. Well, there is clearly a major
    problem here that has to be addressed. Your testimony is
    certainly helping us a lot.
        Mr. Chairman, I thank you for holding the hearing.
        The Chairman. Well, I want to thank each and every one of
    you for being here. I know it is not the easiest thing to come
    here and testify in this environment. But your testimony has
    not only been very eloquent, but I think most helpful to the
    panel as we address this problem.
        Thank you for being here. We hope that we can get this
    resolved in such a fashion that others will not have to endure
    what you have had to endure.
        Ms. Cockrell. Thank you.
        Ms. Pejanovic. Thank you.
        Ms. Andreasen. Thank you so much.
        Ms. Berman. Thank you.
        The Chairman. Thank you again.
        I would now call the second panel, which consists of three
    individuals who bring to the committee an in-depth knowledge
    and understanding of the innocent spouse issue, along with
    their thoughts and recommendations on how the IRS should revamp
    its approach in collecting revenue from such individuals who
    find themselves as innocent spouses.
        Allow me to introduce the panelists. They include Mr.
    Richard C. Beck, a law professor at the New York Law School,
    New York City, New York; Ms. Marjorie A. O'Connell, a member of
    the O'Connell & Associates law firm; and David Keating, who is
    senior counsel and director of the National Taxpayers Union.
        We are swearing in the witnesses. We would ask you to
    please rise and raise your right hand.
        [Whereupon, the three witnesses were duly sworn.]
        The Chairman. Thank you. Please be seated.
        We appreciate your being here today. We look forward very
    much to your testimony. We will start with you, Mr. Beck.

     STATEMENT OF RICHARD C. BECK, PROFESSOR OF LAW, NEW YORK LAW
                          SCHOOL, NEW YORK, NY

        Professor Beck. Mr. Chairman and distinguished members, my
    name is Richard Beck. I am a professor of law at New York Law
    School. I have been studying the problems of joint liability
    for over 10 years now and I have published 5 articles on the
    subject. I am very grateful for the opportunity to be here.
        The shocking stories you have just heard are,
    unfortunately, very similar to thousands of other women's
    stories, women who are forced to pay their ex-husband's taxes
    every year.
        Nobody knows just how many because the IRS keeps no records
    of collection attempts. To the IRS, it is apparently of so
    little importance which ex-spouse it pursues that it does not
    know, and it could not tell the General Accounting Office how
    often it collects from the wrong spouse or how much money is
    involved.
        A good rough estimate is that the IRS makes about 50,000
    collection attempts a year from the wrong spouse after
    separation or divorce.
        Joint liability applies to nearly all married couples
    because nearly all married couples file jointly. That is
    because there is a slight tax savings.
        I estimate that over 90 percent of the victims of joint
    liability collections are women. The IRS usually attempts
    collection from whichever spouse it finds first. After divorce,
    the wife often remains at the marital address on the joint
    return and the IRS will usually look no further, even if the
    victim tells the IRS where to find her ex-husband. We have
    heard several accounts of this.
        There is a very simple solution to all of these problems:
    joint liability should simply be repealed outright and
    retroactively. Repeal would cost very little, it would not open
    up any new avenues or opportunities for taxpayer abuse, and you
    would need to make no other changes in the tax system. You do
    not have to go to separate returns, do not have to change the
    rates. Desirable as some of these things may be on their own,
    nothing else need be done.
        No other developed country in the world imposes joint and
    several liability for income taxes in the way we do, including
    countries which also offer income splitting on joint returns.
        In many countries that once imposed some spousal liability,
    it has been repealed as archaic, unfair, and inconsistent with
    modern conceptions of women's rights to economic independence.
    It should be repealed here as well.
        How do we get here today? Joint and several liability was
    first enacted in the United States in 1938. The story begins
    with an IRS error, which led to a 1935 decision in the Ninth
    Circuit by the name of Cole. In Cole, the IRS negligently
    allowed the statute of limitations to run as to the spouse who
    actually owed the tax.
        When it discovered its error, the IRS then continued trying
    to collect from the wrong spouse anyway on a completely
    invented theory that filing jointly entailed joint and several
    liability.
        In court, the IRS argued it needed joint liability because
    joint returns do not exhibit each spouse's separate income and
    deductions and so, the IRS claimed, it could not figure out
    which spouse to tax and for how much.
        One may wonder whether the IRS made this argument in good
    faith because at that very same time in 1935 the Treasury was
    promulgating new regulations which would limit charitable
    deductions on joint returns to 15 percent of the donor spouse's
    separate net income, which necessarily involved the very same
    calculation of separate incomes which the government was
    arguing in Cole it could not make.
        In any event, the Ninth Circuit rejected the IRS argument
    of administrative necessity because in Cole the separate
    liabilities of the spouses were stipulated. The court then
    noted that if a case should ever arise in which some doubt
    actually existed as to which spouse earned what, the IRS
    remained free to assess both spouses and let them prove their
    respective incomes.
        The court then rejected joint liability on the ground that
    it would violate the cardinal principle of the income tax,
    which is that it is levied in accordance with ability to pay,
    which means in proportion to each taxpayer's own income and no
    one else's. The Ninth Circuit got it right in Cole.
        After its 1935 defeat in Cole, the IRS urged Congress to
    enact joint and several liability, which Congress did in 1938.
    Congress got it wrong in 1938. The only explanation put forth
    in the committee reports in 1938 was the very same
    administrative necessity which had been rejected in Cole.
        The new Treasury report which just came out yesterday and
    which I spent last night reading repeats the same red herring,
    that we need joint liability because the IRS cannot tell who
    earned what. The IRS could tell in 1935 and the IRS could tell
    much more easily now in an age of information reporting on W-
    2s, 1099s, and so forth.
        Joint liability was far too broad a solution in 1938 to the
    perceived problem, if indeed there ever was a problem at all.
    Congress improvidently handed the IRS a blank check in 1938
    which it gradually emboldened itself to employ and abuse in
    situations very far removed from any administrative necessity.
        The current application of joint liability to separated and
    divorced women seems entirely unintended. There were half a
    dozen cases decided before 1938 in which the IRS pressed its
    theory of joint liability, but not one had involved divorce,
    including Cole. Nor could Congress have foreseen in 1938 the
    post-war explosion in divorce rates.
        To pursue divorced women for their husband's taxes without
    even attempting to collect from the husband first is certainly
    not an administrative necessity. Just the reverse, it is on its
    face a gratuitous and intolerable abuse of power.
        Adequate reasons for imposing joint and several liability
    have never been provided. Contrary to widely held belief, joint
    return liability was not enacted as the price must pay, or quid
    pro quo, for lower tax rates on joint returns.
        Joint returns were first introduced in 1918, apparently for
    the sole purpose of convenience and provided no special tax
    rates or privileges for married persons. For 20 years
    afterwards, we had joint returns but no joint liability.
        The favorable tax rates for joint returns computed by
    income splitting were not introduced until 1948, some 10 years
    after enactment of joint liability.
        The quid pro quo justification for joint liability is as
    weak logically as it is historically. The tax advantage of
    joint filing is usually quite modest, but even this advantage
    exists only when compared with the punitive rates applicable to
    married persons filing separately.
        For nearly half of all couples, joint returns require
    higher taxes than the couple would pay if they were not married
    at all. This is the marriage penalty.
        Also, the size of the alleged benefits of joint filing, if
    any, bears no relation to the joint return liability assumed,
    which can be unlimited in amount.
        Finally, the alleged benefits of joint filing usually inure
    to the husband alone, while the liability is almost always
    borne by the wife. Joint return liability is not only unfair in
    principle, as applied it is highly discriminatory against
    women.
        A second rationalization for joint liability which is no
    better than the first, is that the married couple is an
    economic unit and, as it shares its income and assets, it
    should share its tax burden. However, there was no evidence
    that couples who filed jointly share assets any more than
    couples who file separately. In any case, to apply the one
    pocketbook theory of marriage to couples who have already
    divorced and divided their assets is simply ludicrous.
        To sum up, joint liability never had any legitimate purpose
    when it was first enacted and it is now a huge national
    problem. It permits the persecution of women through the tax
    system and it is perfectly legal.
        The Chairman. Thank you, Professor Beck.
        [The prepared statement of Professor Beck appears in the
    appendix.]
        The Chairman. Now we will call on Ms. O'Connell.

       STATEMENT OF MARJORIE O'CONNELL, O'CONNELL & ASSOCIATES,
                             WASHINGTON, DC

        Ms. O'Connell. Thank you, Senator. Senator Roth, members of
    the Senate Committee on Finance, I have been a practicing
    attorney for 25 years. In those years I have specialized in
    taxation, especially as it affects the family. I have written
    numerous articles about this issue, and a couple of books.
        Ten years ago I was involved in a project to bring relief
    to innocent spouses from that difficulty which had arisen under
    the current provisions then that only relieved people who had a
    problem with an omission, not deductions or credits.
        In the decade since, I have watched what we believe was the
    rounder wheel really get battered into a misshapen block that
    does not any more in my judgment pull the wagon of equity at
    all.
        I urge on you that the current innocent spouse law is
    unworkable. That which has been proposed in Taxpayer Bill of
    Rights III as a remedial legislation is better than what we
    have got, but it does not work either. It leaves us with two
    extraordinarily difficult burdens for people who would allege
    that they were innocent.
        To be an innocent spouse a person, under both of these
    rules, the current rule even as it would be amended in TBR III,
    has to prove that she did not know, or have reason to know, of
    the item on the return that caused the understatement.
        He or she has to prove also that it would be inequitable to
    hold him or her liable for the tax and the courts and the
    Congress have defined inequitable to mean that the party
    alleging innocent status must prove that he or she had no
    benefit. These two negative burdens of proof would be
    extraordinary in a commercial context in a well-funded
    litigation.
        For the kinds of witnesses you heard this morning and the
    many, many more who try to tell their story on audit but can
    get no one to listen in the administrative quarter before they
    ever get to a court, it is an impossible mountain to crawl.
        Notwithstanding that, even when you, in my opinion, in
    cases where I have had established precedent that you had no
    reason to know and that you had no benefit, which is, by case
    law, defined to be extraordinary benefit, not maintenance of
    the same standard of living but some extraordinary benefit,
    from the error on the return there are some decision makers,
    administratively and on the courts, who are going to find that
    if you are ``smart enough to be in the marketplace,'' you ``had
    reason to know,'' and you will never change their minds about
    that.
        Similarly, there are decision makers in the Service and on
    the courts who believe that there is, indeed, a case that if,
    after a long-term marriage, you got any portion of the marital
    estate in a divorce, well, then you benefitted from that estate
    having been conserved by not paying taxes, therefore you are
    not innocent.
        There can be a system designed that is fair to taxpayers,
    easy to administer for the Service, and simpler for all of us.
        What troubles us about this problem? We have heard it
    articulated several times. It is people having to be held
    liable for income for which they are not responsible, in the
    case of reporting it incorrectly, when they made no mistake.
        How did they get into that situation? It is not that they
    did anything wrong. They did what there might have been a lot
    of social pressure in their family to do, not to mention the
    economic pressures in the statute. They signed a joint return.
        What we must do, is disassociate joint return signing from
    liability on the joint return. It is this solution to the
    problem that is that which was adopted a couple of years ago by
    the American Bar Association in a project in which I
    participated at great length.
        In addition, we must provide relief to those residents in
    community property States who do not sign joint returns but,
    nonetheless, are liable because of community property laws for
    the income of a spouse of theirs when they have no economic
    involvement or benefit from accumulation of that income or
    reporting it.
        Therefore, I recommend that married persons be taxed only
    on their own individual incomes without liability for tax on
    the income of their spouses, even when they file joint returns
    or are residents of a community property State.
        I smiled this morning to hear how easy that is to
    understand. Four people, none of them trained in the law or
    trained in taxation, could explain to you the right result: I
    should only have to pay taxes on my income. If only I had to
    pay taxes on my own income, I would not be sitting here today
    because I always pay taxes on my own income.
        There really is no difficulty in figuring out what should
    be an individual's gross income on a tax return. If there is
    any difficulty it might be in making allocations and
    apportionments of deductions, but this is done routinely in
    other sections throughout the Internal Revenue Code.
        The audit process almost necessarily reveals sources of
    income and, as my colleagues have alluded to, information
    reporting overwhelmingly solves the problem for the bottom 90
    percent of the taxpaying public with W-2s, 1099s, K-1s, and the
    like.
        I would like to emphasize that separating liability from
    signing a joint return does not require getting rid of the
    joint return. It does not require huge tax structure changes.
    It does not require our having to solve, for this problem, that
    incredible debate of what to do about the marriage penalty and
    all of the social and emotional issues that can be raised in
    that. You can fix this problem for these people and all of my
    clients without having to have that debate, and I urge you to
    do so.
        We have devised a formula in the proposal which is attached
    to my written testimony to determine the amount of tax that
    would be owed by an individual under our proposal. Each
    spouse's tax would be calculated as if he or she filed a
    separate return as a married individual.
        Then the ratio of a spouse's separate tax to the sum of the
    separate taxes of each spouse would be applied to the total
    joint tax due. That way we do not up-end the tax structure, we
    do not ever change the document we are signing, the sacred 1040
    will not have another column, it will not have a special box.
        As a matter of fact, under our proposal the whole system of
    separating liability will only come to the fore in those cases
    when, on audit, a deficiency is assessed and one taxpayer says,
    I can prove what is my income and that I paid taxes on my
    income. For all of the other people who signed joint returns,
    they are never even going to know you disassociated liability
    from signing the joint return.
        We have got a Supreme Court case called Poe v. Seaborn that
    was decided in 1930 that causes community property residents to
    have to pay taxes on the income of a spouse. Poe needs to be
    legislatively repealed to solve this problem. After its repeal,
    it is our recommendation that the provisions of Internal
    Revenue Code Section 879(a), which already repeal Poe in
    certain circumstances, be applied to the income of community
    property State residents to determine who has which income.
    879(a) says, for example, you earned it, it is your income. If
    you managed the business, that is your business income, et
    cetera.
        So, in conclusion, I strongly recommend that the Senate
    pass a bill that eliminates joint and several liability and
    that, in substituting for joint and several liability, in those
    other kinds of policies we are recommending that you send a
    very strong message by making your proposal available to
    everyone who is being harmed now.
        Gentlemen, I know how strongly you feel about
    retroactivity, but I urge you not to leave those four women you
    heard about this morning out in the cold and only save the
    people who the Service finds in 1999.
        Thank you very much.
        The Chairman. Well, thank you for your very helpful
    testimony. We particularly appreciate your coming forward with
    a specific recommendation. Just let me say, I am very
    sympathetic to the problem of, what do we do with people like
    the four that were before us today. They have already suffered
    tremendously and we are very sympathetic to what you are
    saying.
        [The prepared statement of Ms. O'Connell appears in the
    appendix.]
        The Chairman. Mr. Keating.

         STATEMENT OF DAVID KEATING, NATIONAL TAXPAYERS UNION,
                             WASHINGTON, DC

        Mr. Keating. Mr Chairman and members of the committee, I
    thank you for the opportunity to appear today on possible
    reforms of the innocent spouse rules. I represent the members
    of the National Taxpayers Union this morning.
        Mr. Chairman, we commend you for the excellent series of
    hearings you have already held on how the IRS works, and does
    not work, and your decision to take a little bit of extra time
    to see that the IRS is reformed and restructured properly. We
    sincerely appreciate that decision, which we know may have been
    a difficult one politically.
        Now, everyone makes mistakes. We are all human. That is why
    pencils have erasers. Even the IRS has Form 1040X for amending
    a tax return. But there is one mistake Federal tax law will not
    forgive. That is the decision to file a joint return.
        Now, strangely enough this is not something that is in the
    law itself. This is an IRS regulation. You cannot go back and
    amend and file separately once you have filed jointly.
        Married couples do not have to file a joint return. They
    can choose to pay more tax, sometimes thousands of dollars more
    tax, for the privilege of filing separately and getting that
    legal protection.
        I want to point out that this is in addition to the much
    criticized marriage penalty many couples pay for getting, or
    staying, married.
        We have heard about the so-called innocent spouse rules.
    For many years my colleagues and I at the National Taxpayers
    Union actually have called these the ``lucky spouse rules''
    because there are a few people who can meet all the tests
    involved.
        This policy and this rule has simply not worked in the real
    world. In many marriages, wives are reluctant to tell their
    husbands, or vice versa, I am sorry, dear, I promised to stay
    with you for better or worse, but not through IRS collections
    and audits. So I think we should file separately, even though
    it means a few thousand dollars each year less to spend on our
    children.
        But that is exactly the decision we are forcing people to
    make today. The lower the income, the less likely they can
    afford to file separately. They cannot afford to do it. The tax
    law changes of the 1990's are making it financially much more
    difficult, if not impossible, for low income and middle class
    spouses to file separately and get that legal protection.
        One major factor is the growing importance of the Earned
    Income Credit during the 1990's, but it is not available to
    married couples filing separately. If you are a low income
    taxpayer you usually cannot afford to give up the Earned Income
    Credit. You just cannot afford do it.
        The new 1997 Taxpayer Relief Act also barred couples filing
    separately from claiming the new educational credits, deducting
    education interest loans--which is an above the line deduction,
    I might add--or even converting to the new Roth IRA. Couples
    filing separately also cannot claim the child care expense
    credit.
        I want to say a few things about this ``reason to know''
    standard and joint liability requirement that some people think
    are necessary. We think this is a ridiculous position in
    today's day and age.
        First, about half of all tax returns are prepared by
    professionals, yet the fact the return is prepared by a
    professional does not help to meet the ``reason to know'' test.
        Second, filing separately often increases the marriage tax
    penalty on those who can least afford the penalty to begin
    with. So even though they may suspect their spouse is doing
    something wrong, practically speaking there is nothing they can
    do about it by filing separately, other than getting a divorce.
        Third, how many spouses grill the other spouse, and how
    many members of this committee grill their spouses, with a
    range of due diligence questions concerning your tax return,
    and what questions should be asked? I do not know. I am not
    sure anyone could tell you.
        Senator Moynihan. Could you give us a list? [Laughter.]
        Mr. Keating. But that is what is involved.
        Fourth, I do not even like this terminology of innocent and
    guilt. Even if a wife suspects her husband is cheating on his
    taxes and gets some of the money, what is she guilty of? Filing
    a joint tax return. If she had filed separately, she would not
    have done anything wrong. This is crazy.
        The house-passed legislation will not adequately protect
    innocent spouses and it is up to you in the Senate to fix it.
    There is a way out of this mess. I will not discuss it further.
    But the ABA--the American Bar Association, not the Bakers or
    the Bankers--have proposed a measure that simply divides the
    tax liability according to who earned the money or who was
    responsible for the mistake on the tax return.
        Now, this may be a radical idea by IRS standards, but the
    rest of the world does not think so. I do not think Congress
    should enact legislation that denies to American married
    couples the taxpayer rights that Canadians, Europeans, and the
    Japanese taxpayers take for granted. We should have more rights
    in this country, not fewer.
        There is another thing I want to add here. That is, we have
    to focus on taxpayer remedies, just not on legal rights. Too
    often the taxpayer right provisions of the Internal Revenue
    Code remind me of the civil rights provisions of the former
    Soviet Union constitution. On paper they look great, but in
    practice there is often no effective protection.
        We often get a question from taxpayers, can the IRS
    actually do this? Well, we say, no, not really. What can we do
    about it? The fact is, many taxpayers cannot do anything about
    it because they cannot afford to fight for their rights. As you
    consider ways to reform the innocent spouse rules, I want to
    ask you to keep one very important thing in mind.
        Please ensure these reforms will work for the many divorced
    working mothers who cannot afford an attorney to fight for
    their rights. Relief must be structured so that it can, and
    will, be granted through the administrative measures that are
    easily accessible to taxpayers. The ABA's proposal sets up the
    structure to do exactly that through the audit process that the
    IRS itself has.
        I will leave you with one other suggestion in terms of
    tackling this problem, which we believe is a second-best
    solution compared to the ABA's recommendation, and only if you
    are unwilling to adopt the ABA recommendation would I suggest
    you look at this. That is, let divorced spouses file an amended
    return as married filing separately.
        Why should taxpayers who are jointly filing not be able to
    amend their returns, especially for a divorced person who may
    realize after filing jointly that their ex-spouse was a liar or
    cheat, and not just on their taxes?
        The first question that many widows and divorced women who
    are still making payments on their husband's taxes might ask
    the Congress is, why can I not amend my filing status from
    joint to separate?
        In fact, a few days ago the IRS Taxpayer Advocate endorsed
    this approach even though the Advocate's suggestion was, in my
    opinion, flawed in the method of implementation. Our written
    statement has a suggested statute for filing an amended return
    separately, but again, I would encourage you to choose the ABA
    approach.
        In conclusion, I would like to add just one last thing
    here. If I could choose just one taxpayer right to add to the
    IRS Reform and Restructuring Act it would be solving this
    problem of innocent spouses and adopting the ABA
    recommendation. The job of protecting taxpayers' rights will
    never end as long as we have a tax system.
        We sincerely appreciate the time that you have spent,
    Senator Roth, and all of the members of the committee, over the
    last several months holding these extensive hearings and
    seriously considering how to formulate legislation to finally
    protect divorced spouses.
        Thank you very much.
        [The prepared statement of Mr. Keating appears in the
    appendix.]
        The Chairman. Well, I want to thank each and every one of
    you for your excellent testimony today. I think it is extremely
    helpful. Frankly, certainly it is my intent at this stage to
    press ahead with the American Bar proposal.
        Professor Beck, you heard the four cases we had before us.
    You testified that you would estimate there is something like
    50,000 cases a year. I think the GAO has guesstimated that it
    could be as high as 75,000 to 80,000. But either figure is
    shocking, outrageous.
        I would like to ask the other two, do you have any estimate
    of how widespread this problem is? Ms. O'Connell.
        Ms. O'Connell. Senator, I would like to speak from my
    anecdotal experience in 25 years of practice. Virtually every
    time I start examining the financial records of a family I find
    some problem on a tax return. You have to remember that the
    Service only audits a little over 1 percent of the tax returns.
        I think we have to realize that we have a Nation exposed to
    being pursued by the Internal Revenue Service. In a sense,
    there is something to be said for being on the lucky side of
    the audit if you are in the 98.5 percent that are not audited.
    So when I look at exposure, I have to say there is a very high
    exposure.
        When we looked at how the Service actually handled innocent
    spouse cases that it got, we had the same problem trying to get
    information from them from administrative sources as the
    General Accounting Office did. They do not know. They really do
    not know.
        Many times the people who mention innocent spouse to them
    do not mention it in writing, so even if it gets discussion it
    never gets appropriate or adequate attention.
        The GAO numbers, as far as I can tell based on the sampling
    they did, are good to rely on for the amount of times the
    Service may document that it handled an issue. I would venture
    to say it handles the issue much, much more than it documents
    but it summarily rejects it as a defense. Beyond that, the
    issue is rampant throughout our Nation.
        For people like Mrs. Berman, where there is no fraud, there
    is no tax shelter, there is a legitimate difference of opinion,
    at least at the time that the family filed the return, about
    whether a deduction was appropriate or there should have been
    an addition to basis for capital account. So in the most simple
    of situations, people can find themselves on the wrong side of
    this issue in a widespread way.
        Mr. Keating. We do not have any statistics at the National
    Taxpayers Union about how many people fall into this problem,
    but based on the comments and calls we have gotten over the
    years I would say it is certainly one area that causes the
    greatest series of difficulties for taxpayers who are trying to
    comply with the law and honestly pay their taxes.
        The Chairman. Ms. O'Connell, I think you urged and
    recommended that whatever correction we take apply to people
    like those that were before us today, current cases. Mr.
    Keating, would you agree with that?
        Mr. Keating. Absolutely. Absolutely.
        The Chairman. Professor Beck.
        Professor Beck. Absolutely. Joint and several liability was
    a mistake when it was enacted and it shouldbe repealed
    retroactively as a mistake.
        Ms. O'Connell. Senator, may I offer something with respect
    to that?
        The Chairman. Yes, please.
        Ms. O'Connell. I would like to note for the record that
    when, in 1984, the last major remedial legislation for innocent
    spouses was enacted it was made retroactive to 1939, the first
    year that joint and several liability applied. So there is good
    precedent when one works in this field. The Congress and the
    President have already chosen to deal with everyone who is
    afflicted, not just work prospectively.
        Mr. Keating. The idea also that taxpayers are waiting
    literally decades to try to resolve these problems and would
    not be helped by a change today, I think, would be a crushing
    blow for many of them, that we have acted but not solved the
    problems that are outstanding for years and years.
        The Chairman. Well, one of the things that shocked me at
    the testimony this morning was the time span of several of the
    cases, not just years, but at least in one case, decades. Is
    there a lesson here regarding the abuse of the way the statute
    of limitations is being enforced?
        Ms. O'Connell.
        Ms. O'Connell. Yes, Senator. I would suggest to you that if
    I were representing a client and a revenue agent suggested to
    me that he or she were going to start sticking signs on the
    trees in front of my client's home, I would suggest that they
    issue a deficiency letter so that I could see them in Tax
    Court. But these people did not know how to say that. All they
    knew was, they did not want some bad things to happen.
        They were told if they would sign this piece of paper, we
    will just keep talking to you about the problem and we will
    give you some time to work out the problem. And maybe they even
    held out a hope that the really guilty person during the period
    of time would be held responsible and pay the tax, but none of
    that ever happened.
        So I do think it is the case that the Service, in
    negotiating extensions of statute of limitations, deals from a
    position of extraordinary power and intimidation when it gets
    that statute extended.
        The Chairman. Any further comment?
        Mr. Keating. Well, it is a difficult problem and I greatly
    regret the fact that the statute for collecting a tax was
    extended not long ago. Not only was it extended in legal terms,
    but the taxpayers can waive the statute, so you get these cases
    that can drag on for decades and decades. I am not sure how to
    solve the problem either, other than I certainly would not want
    Congress to extend the statute for collection any further than
    already exists, which I believe is already too long to start
    with.
        The Chairman. Professor Beck.
        Professor Beck. Well, of course, if women are not liable
    for their ex-husband's taxes to begin with, which is all of our
    proposals here, we have all been saying the same thing, that
    the ABA proposal should be adopted, if there is no liability,
    then the problem of extending the statute of limitations,
    interest, and penalties, and so forth in these cases is just
    mooted, it is no longer important.
        The Chairman. One final question. Can the American Bar
    Association proposal be administered by the IRS? I know, Ms.
    O'Connell, you touched on that. I would like to ask the panel,
    what are your views regarding the concerns raised in the
    Treasury report regarding the ABA proposal that equitable
    relief would still be required, married taxpayers and community
    property States would not be helped much by the proposal, and
    taxpayers would have to maintain records to establish the
    proper allocation of tax liability. Do you want to add to your
    comments?
        Ms. O'Connell. Yes, Senator. My opinion is wrong, wrong,
    right. It is wrong that under our proposal we ever sought to
    achieve 100 percent proportional responsibility for taxes.
        We understand in designing a system that there would be
    circumstances where it would be too difficult to give a refund
    or there would be a circumstance where a party's deduction
    actually had benefitted a spouse otherwise innocent of the
    problem on the return and we do not seek to readjust those
    historic developments.
        So impugning the American Bar Association proposal because
    it is not 100 percent perfect in granting relief, I think, is
    kind of a smile considering the system that the Treasury
    Department would suggest you retain. We never said it was 100
    percent perfect.
        The second thing with respect to community property, I take
    issue with. I think that is wrong also. I have read the
    Treasury report in the 24 hours it has been made available, and
    I thank you very much for scheduling this hearing because I do
    not think its release yesterday was at all coincidental; we
    have only been waiting a little over a year.
        The report, when it talks about the Poe v. Seaborn case,
    posits an example of a person who can bring a premarital tax
    liability to a new marriage in the community State, and then
    the new spouse's earnings would be responsible for old taxes
    from a prior marriage, even if Poe were repealed. I disagree
    with that interpretation of Poe.
        Just to be sure that my disagreement was correct, I called
    my colleague Professor Susan Kalinka at Louisiana State
    University who has done an excellent paper on community
    property and the repeal of Poe in this issue which I will be
    happy to provide to the committee, and she concurs with me that
    that is not the result of the repeal of Poe and that, as a
    matter of fact, Poe succeeds in the needs we choose to meet.
        The second thing the Treasury says is, well, if you repeal
    Poe, you are going to have to institute some other system.
    Senator, we already proposed what system to institute. It is
    already in the Internal Revenue Code under Section 879(a). We
    are just extending that application from couples where there is
    a nonresident spouse to all couples who have an issue about how
    to attribute community income. So those were the two wrongs.
        The right was, you are going to have to keep records. Yes,
    you are. Yes, you do now, yes, you should, and yes, you will. I
    think every one of those women who are up on this panel today
    said something that amounted to saying, I only had W-2 wages
    and I could prove it. I knew exactly what I reported on the
    return. I had my pay stubs. If only I had the chance to prove
    it. They have their records.
        The one new citizen, or I am not certain if the lady is a
    citizen, but the one woman new to the United States, I was
    interested to hear, has every single return since she has been
    here. So I do not think Americans have trouble keeping records,
    they do now. There is nothing more burdensome about what we
    propose.
        The Chairman. Thank you.
        Mr. Keating.
        Mr. Keating. As far as administration of the system, first
    of all, the IRS should be thankful that many taxpayers file
    joint returns. The computer systems would be swamped if
    everyone filed separately. After hearing some of these horror
    stories, maybe more people will. But there is an exception
    allowing a taxpayer to file an amended, separate return after
    filing a joint return. Unfortunately, you have to be dead to do
    that.
        The IRS officials, as far as we know, have not reported any
    problems with the current rule which permits this as an
    alternative for personal representatives of deceased taxpayers,
    and this exception has been in the law for decades.
        Indeed, the report that came out yesterday did notraise, as
    far as I could tell, any significant administrative concerns. Certainly
    some reprogramming of computers would be required, but the
    administration could easily be handled.
        Certainly when you compare all of the nonsensical efforts
    to squeeze, as Professor Beck said in his written statement,
    blood out of turnips, perhaps the IRS could even save some
    administrative efforts by going after the taxpayers who morally
    really do owe the taxes and may have the capability to pay
    them.
        The Chairman. Professor Beck.
        Mr. Beck. I think the Treasury report greatly exaggerates
    the difficulties there would be in implementing the ABA
    proposals, largely with quibbles. We have rules to separate
    income and deductions of the spouses. They work.
        I would point out to you that there is a huge amount of
    litigation reported in the innocent spouse area. I think there
    is around 700 reported decisions now. One of the elements that
    the claimant has to show is that the tax item in question is an
    item of the other spouse. To my knowledge, there is not a
    single decision in which that was a problem. It is simply not a
    problem.
        As to the Treasury's analysis that our ABA proposal would
    still leave some nonproportional or unfair situations, I think
    that is based on a misunderstanding between the situation
    between past taxes already paid and future taxes that are being
    demanded.
        In the case of taxes already paid, of course you cannot
    have a system where, if a husband overpaid the family taxes and
    gets a divorce, then 2 years later decides it was a bad thing
    to do and he wished he had not paid, he cannot ask the
    government to have taxes refunded to him and charged to his ex-
    wife.
        We are talking about future taxes. If taxes are demanded
    that are in excess of what has been paid, at any time either
    spouse can say, no, I want to be assessed only on my separate
    income; I will pay that and no more.
        The Chairman. Thank you, Professor.
        Senator Moynihan.
        Senator Moynihan. Mr. Chairman, thank our panels, both.
    Many groups of citizens come before us and tell us about a
    problem, but you seem to have come with some answers, which is
    rare and welcome. Obviously there has been work at this for
    some time now, the Bar Association and all.
        I guess I have two questions. One, is I congratulate Ms.
    O'Connell for having read this overnight. It would have taken
    me a week. I think, Mr. Chairman, we could ask Secretary Lubick
    to come in and talk with us about how to handle this.
        I have the impression that the proposals from the Bar
    Association and from the American Institute of Certified Public
    Accountants are straightforward and do not require a large
    amount of new calculations within the IRS. Is that not right,
    Professor Beck?
        Mr. Beck. That is correct. We have rules under current law
    for separating income and deductions of spouses. For example,
    in the case of a refund from a year in which a joint return was
    filed to a year in which the spouses are divorced, there are
    very specific rules for untangling, unscrambling the income and
    deductions and deciding what part of a refund belongs to which
    spouse. All we need to do is use those precise rules now in
    effect for the situation of untangling liability for unpaid
    taxes.
        Senator Moynihan. It is not every day we have someone come
    along with a problem and what seems to be a solution. I mean,
    this is clearly an untoward, unhappy situation. It evolves from
    a changed condition in our national life. The number of
    divorced couples is so very much greater than it was in 1935
    when Cole was decided. It is a different social situation.
        Could I add one comment. The IRS has a huge problem with
    the year 2000 matter and its computers. You are all aware of
    that in the audience. I got knowing smiles from everyone
    involved. The year 2000 comes first, because if it all closes
    down we close down. The lights go off. This could be handled
    without making the other impossible; would that be your
    judgment?
        Ms. O'Connell. Yes, Senator, if I may address that. The
    Treasury Department, in its report, which I know you have not
    had an opportunity to read every bit of----
        Senator Moynihan. I have had an opportunity, just not the
    ability, will or----
        [Laughter.]
        Ms. O'Connell. Well, it shows you what I think good reading
    is. By my last evening's reading from the Treasury report on
    page 37, the Treasury says the IRS could handle the separation
    of liability questions under the proposal we have advanced as
    it currently does for joint tax assessments that are separated
    in the event that innocent spouse relief is granted.
        This is currently accomplished on a separate computer
    system used primarily for collection actions on a former joint
    account. They already do it. They know how to do it, they could
    continue to do it. They introduced that remark by saying, well,
    you know we might have to make some changes in the master file
    programming, so I would say, make them. But they know what to
    make. The program already exists in another system. It is not
    rocket science.
        Senator Moynihan. Yes. Well, thank you very much, indeed,
    for that. My God, I read one paragraph of it. [Laughter.].
        Could I ask just one last question. Before this hearing I
    think the matter that most pressed the committee with regard to
    this particular subject was the marriage penalty. But it is
    your view that we do not have to interfere with that whatever,
    just by providing the alternative, you can choose one or the
    other. Mr. Keating, I see you want to respond.
        Mr. Keating. This problem, I think, is a separate problem
    from the actual marriage penalty, the penalty two people pay in
    extra taxes for either getting or staying married. That is, I
    think, a severe tax and social problem. But this is a separate
    issue.
        This is a question of liability, of just trying to ensure
    tax justice, in a way. We have, with this issue of joint and
    several liability, a situation where people are paying taxes
    that, on any moral basis, they do not owe.
        The decision to file a joint return is, for many people, a
    much more risky situation than investing in short sales,
    options, or derivatives. Yet we require all kinds of signatures
    on special forms telling people they understand the risks of
    those kinds of risky investment strategies, but signing a joint
    return can cause massive bankrupting losses just as easily as
    these other investment decisions, with less knowledge.
        Senator Moynihan. Nicely said. Thank you very much.
        Thank you, Mr. Chairman.
        The Chairman. Thank you.
        Senator Grassley.
        Senator Grassley. Well, thank you all very much for your
    testimony, and particularly if it has not been acknowledged
    already.
        Mr. Keating, I want to thank you for your service on the
    Commission for Restructuring the IRS. You worked hard on that
    issue with a couple of us from this body, and we appreciate
    very much your contribution to that as well.
        In the United States Senate, most of us have people on our
    staff that we call case workers that handle most of the
    problems we have with various government agencies, including
    the IRS. Our constituents come to us and we have people that
    are very well trained to wind their way through the bureaucracy
    to help, hopefully, solve problems and solve them successfully.
    We do not always bat 1,000, obviously.
        But I became aware of this innocent spouse problem myself
    one time. I guess I have my name listed in the phone book in
    Iowa. I found out Christmas 1995 that that was not a very smart
    thing to do when an elderly lady, who was being hit as an
    innocent spouse and had had months and months, and maybe it has
    gone on for years, of problems.
        She did not bother me for hours, but she bothered me for a
    long time. Well, I should not say she bothered me. I get paid
    for helping people like that. But it was on Christmas day and
    it was not exactly the time you want to receive a call.
        Senator Chafee. I referred her to you. [Laughter.].
        Senator Grassley. I used to call you friend.
        Anyway, she called about the problem she was having with
    the IRS. It was exactly this obligation she had. As cheerful as
    it was, the worst thing about it was, here was a woman that
    just feared the IRS. Total fear. Did not even want to even sit
    across the table from an IRS person. That was my first
    acquaintance with probably problems that my staff had been
    working on for years about innocent spouses.
        But it brings home not only the problem that this hearing
    brings out, but it also brings home the fact, why do we have to
    have a government agency that people are afraid to deal with?
    As much as we do not want to have problems that have to be
    solved, you should not actually fear sitting across the table
    from somebody who is working for you. That is the situation
    that we have presented here so often.
        I want to get on the record an entire statement that I am
    going to put in the record, but I want to make sure that there
    is a personal understanding of another constituent problem I
    have. This is from a letter. ``I am writing to you at the 11th
    hour in the last desperate effort to avoid emotional and
    financial ruin at the hands of my ex-husband and the Internal
    Revenue Service.'' This kind of describes her problem. She owes
    $142,000 to the IRS for tax ramifications of an investment her
    then-husband made 17 years ago.
        She had nothing to do with this investment, never read
    anything associated with this investment, never understood the
    particulars of the investment, never filled out a tax return
    claiming the deduction for an investment.
        In addition, she never chose to spend the years her husband
    spent in Tax Court while penalties and interest accrued. As you
    can imagine, after 17 years much of the $142,000 is not the
    original tax owed, but rather the cost of spending nearly 20
    years fighting the IRS.
        Now, years after divorce after leaving an unfaithful
    husband, she is on her feet. Although she entered the workplace
    only a couple of years before her divorce, she is now a
    successful real estate who supports herself and prides herself
    on her work and her reputation in the community.
        As she said, ``At 58, I paid off the majority of my debts,
    a large portion of which was overhang from my failed marriage.
    I have managed to put away a small amount of money for
    retirement, but will have to spend a significant portion of my
    normal retirement years working full-time because I am told
    that the IRS will take my retirement funds and maybe even my
    home.'' So it looks like the IRS might even take her IRA, put a
    lien on her house.
        She would consider filing for bankruptcy to escape all of
    it, but values her professional reputation too much to take
    this time-out. So she is left alone, hardworking, with no
    prospect for retirement or an end to her harassment.
        Now, an editorial comment on my part. It seems to me that
    there are many things about this story that ought to disturb
    us, but first is the fact that there is a marriage based on
    trust. The current system holds spouses, usually former
    spouses, liable for trusting their spouses.
        In the case of my constituent, she learned the hard way
    that she could not trust her husband who had a long-term affair
    that caused the divorce. Frankly, this affair should be the
    worst breach of trust that she suffers. Instead, our tax laws
    and the IRS are assuring that a 1981 tax deduction is an
    ongoing wrong that she has to suffer as she moves on in her
    life.
        One of you said something about getting blood out of a
    turnip. I think the case that I had on September 25, 1995 is an
    example of where it should have been obvious to the IRS, why
    harass this woman, you are not going to get anything out of her
    anyway. She did not have it.
        I want to ask just a question of all of you. That is in
    regard to not just the cases that are before us, but in
    particular, Professor Beck and Ms. O'Connell, to use your
    experience.
        How could we reform collection procedures so they do not
    hurt people trying to get back on their feet, whether they are
    innocent spouses or whether they are other people that are
    being harassed by collection agencies when they do not have the
    resources to pay?
        Mr. Beck. I think a good step has already been taken in
    that direction with offers and compromise. I think it is a good
    idea for the IRS to clear bad debts and give people a new start
    by letting them pay whatever they can on their tax debts and
    ending it.
        If it is five cents on the dollar, take it. Give the person
    a new life, let him work and keep his earnings. We have a
    program like that which works now better than it did before,
    but we should probably do a lot more.
        Senator Grassley. Ms. O'Connell.
        Ms. O'Connell. Senator, I would recommend with respect to
    the offer in compromise program that the Internal Revenue
    Service be instructed to modify the ratios it uses to determine
    whether it should accept an offer. The people who administer
    that law right now believe that they have to liquidate
    everything you have or they should not accept the offer.
        So they are not operating in the way that a good business
    collection agency would, realizing that if your choice is all
    or nothing at all, maybe it would be a better choice to take
    bankruptcy and start fresh as opposed to spending 5 years
    paying the Internal Revenue Service and then having to start
    fresh.
        The second thing that I would mention, is there is wide
    divergence among the offices of the Internal Revenue Service as
    to how they will structure an installment agreement to pay
    whatever you may have compromised your liability down to.
        So you can be in one office where a collection officer will
    give you 5 years with lower payments the first year because you
    had other economic problems and then step up the installments,
    a taxpayer in a different community would be told, we never go
    more than 18 months and we demand 10 percent down.
        So I would suggest that instruction to the Service that
    they have, on the one hand, some discretion to use, with, on
    the other hand, some rules as to how the discretion is supposed
    to be used to encourage the taxpayer to solve their financial
    problem and pay their taxes over a reasonable period of time,
    would be helpful.
        Senator Grassley. Thank you all. If you want to respond,
    Mr. Keating, I would be glad to listen.
        Mr. Keating. All right. If that is all right with the
    Chairman. Easing access to installment agreements, I think, is
    important. We have made some strides, and the IRS has made some
    strides, in recent years in that area. I also think the IRS
    should take a more holistic approach to taxpayers.
        In some districts there is still a case-closed mentality;
    let us just close that case, get it finished, without any real
    evaluation of the total return. A business that is completely
    viable may be closed simply to close that case, and that business could
    pay off that tax in the space of months or a few years.
        But if the business is closed, you do not collect the tax
    and those employees are out of work and may be collecting
    unemployment. So I think the IRS should look at that.
        The other thing that I think should be done that we have
    not done lately, is the Tax Code does not recognize the right
    to be self-supporting, which I think is astonishing. If you are
    self-employed, the IRS can come and take essentially
    everything, except, I think, $1,650 of tools and equipment.
        Now, how many people can run a small business or self-
    employment on that much in the way of assets? You cannot. If
    you are a self-employed plumber, just the truck, much less the
    tools, would cost far more than that.
        I think we should not give the IRS the ability to come and
    take someone's livelihood away from them and leave them with no
    tools to earn income, yet the Tax Code does do that.
        The Chairman. Senator Chafee.
        Senator Chafee. Thank you, Mr. Chairman. I want to join in
    the thanks to each one of you for your testimony here today.
        When you were talking about the ABA proposal, I think you
    used the word proportional, is that correct?
        Ms. O'Connell. Yes, Senator.
        Senator Chafee. The liabilities would be proportional. How
    about the deductions, would they be proportioned too? Let us
    say the husband earned X dollars and the wife earned half X,
    and they had $1,000 charitable deduction. Under the ABA, would
    that be proportioned likewise?
        Ms. O'Connell. Senator, it would depend on who really made
    the deduction. We are not advocating strict proportionality, we
    actually advocate what we call an item approach. Your example
    shows what I mean by that very well.
        Suppose that the husband could clearly show that the
    deduction was made on a checking account that he alone
    maintains. So when it came time, first, under the proposal,
    there would never be a question of looking behind the items on
    the joint return as reported for attributing an item or doing a
    proportionality test.
        But let us say an assessment came up and the husband said,
    that is not a tax which I owe because I can show you that this
    is my income, and when I took this appropriate charitable
    deduction from my sole account and I get credit for that
    deduction, I do not owe any more tax. At that juncture we only
    would use the item approach.
        Suppose instead that the same deduction was made from a
    joint account. At that point we say, husband and wife, joint
    owners of the account, each own half of the deduction. Suppose
    instead that the nature of the item was one where it was not
    easy to track exactly the ownership.
        That is when proportionality would come into play, so that
    if we had a husband who earned 50 and a wife who earned 150, we
    would say that 50 over 200, or one-quarter of the item, would
    be the proportional entitlement of the husband. So there are
    several steps in the process.
        We believe that at virtually every juncture parties will,
    under a titling sort of system, be able to track whose is what,
    or provide for a split since they are married people if they
    are filing a joint return. Failing that, we go to
    proportionality according to income.
        Senator Chafee. So that would apply likewise to, say,
    mortgage interest deductions.
        Ms. O'Connell. Yes, sir.
        Senator Chafee. Now, let me give you a situation. I am
    curious what your answer will be. Let us say the husband earns
    a half a million dollars, $500,000, and the wife earns $10,000.
    They file a joint return. She signs it, he does not pay the
    tax. Now, they have a $400,000 house which she has been awarded
    through a divorce proceeding. She is not totally protected, as
    it were, because I presume, under the ABA proposal.
        Furthermore, I believe the law is that, whereas the divorce
    decree is a State decree, that does not take precedence over
    the power of the Federal Government, or the Federal Government
    would not necessarily recognize that she received the house in
    a divorce settlement. Am I correct in that?
        In other words, is there not still a danger here that in
    going after him they would get his share of that house, which
    would probably require the house to be sold? Am I correct in
    that?
        Ms. O'Connell. Senator, I think we stopped that problem.
    Let me walk through your example. I am going to assume in that
    circumstance, first of all, that this wife can prove that the
    problem is not her problem. She had $10,000 worth of income and
    she paid her taxes on it. Therefore, she has no responsibility
    for the tax in respect to that return. That should be the end
    of the focus on her. With respect to the fact that she was
    awarded a home in a divorce----
        Senator Chafee. The home that he principally paid for.
        Ms. O'Connell. Yes, sir. That is right. But the issue I am
    going to is how she got that asset. By virtue of it having been
    awarded in the divorce, I am going to assume now that it is
    solely titled in her name by the time collection time comes
    around for the Internal Revenue Service, with respect to a tax
    that is clearly his.
        Senator Chafee. Right.
        Ms. O'Connell. Because there was no intent to defraud the
    Service in the transfer of the home and because we are not
    talking about a community property environment where she may be
    carrying a community debt if we do not reverse Poe v. Seaborn,
    under common law rules, that home would not be at risk for his
    tax. That is really the problem we are trying to solve here.
    Whatever assets he may have would be at risk for his tax.
        If he had a brother, and he also got the large vacation
    home in the divorce and he said to his brother, Jack, here
    comes the IRS, I am going to transfer my house to you for a few
    years until it is over, I expect you to give it back to me,
    then Jack has got a problem because that can be transferee
    liability and a fraudulent transfer to defeat the IRS's
    interests.
        Senator Chafee. Well, that is a very interesting
    explanation. It does give me a little bit of trouble in that
    the wife is living in a very expensive house, let us say a
    $400,000 here, that came about partially, I assume, because he
    did not pay his income taxes.
        Ms. O'Connell. Well, Senator, let us go back to the part of
    the example where she got that house in the divorce proceeding.
    In every State in the United States, whether through an
    allocation of community property or a distribution equitably of
    marital property, a State court judge is going to have weighed
    what is a fair allocation of property.
        In my 25 years of practice I have never seen a judge say,
    100 percent to wife, who I am assuming maintained during the
    course of the marriage a ratio of income $10,000 to $500,000.
    That judge is going to say, you know, Mr. Smith took care of
    her for all these years, they lived in that house for 20 years.
    She could never live in a comparable way without being awarded
    the house and some support.
        So Mrs. Smith, that is what I am going to give you. Now,
    Mr. Smith, you keep your business which does $15 million a
    year, which is why you make $500,000 a year, and you go on and
    enjoy the rest of your life. In a real-world situation,
    Senator, there is plenty of Mr. Smith left for Internal Revenue
    Service to collect its taxes.
        Senator Chafee. All right. Fine. Well, that is very helpful
    and I appreciate it.
        Again, thank you, Mr. Chairman. These are very fruitful.
        Mr. Keating. Senator, might I add one other thing to this
    whole discussion.
        The Chairman. Yes, sir.
        Mr. Keating. To re-emphasize a point earlier, which is, if
    that woman had filed separately to begin with, even
    theoretically you would not have a question or claim that the
    IRS might discuss. That is why I get to the point of, what are
    these people guilty of? They are guilty of filing a joint
    return and usually saving the husband money.
        In this case, clearly, there is a marriage bonus for filing
    jointly. So he has gotten a tax savings for her filing jointly.
    She has only made the error of filing a joint return instead of
    a separate one.
        The Chairman. I want to thank all three of you for the
    outstanding testimony. I think the matter you brought to our
    attention will be extremely helpful in addressing the problem.
    Frankly, we will be calling on you for further assistance.
        Thank you very much for being here today.
        Senator Moynihan. Thank you, indeed.
        The Chairman. The committee is in recess.
        [Whereupon, at 11:42 a.m., the hearing was concluded.]

                               IRS RESTRUCTURING

                                  ----------

                          WEDNESDAY, FEBRUARY 25, 1998

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 10:05
    a.m., in room SD-215, Dirksen Senate Office Building, Hon.
    William V. Roth, Jr. (chairman of the committee) presiding.
        Also present: Senators Grassley, 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.
        I know that Senator Moynihan is attending the funeral of
    Senator Ribekoff, so he will not be here. Because the hour is
    growing late, we will proceed.
        First of all, let me welcome the panel. It is a pleasure to
    have each and every one of you here again.
        Today, we are, of course, beginning our fifth hearing on
    restructuring the Internal Revenue Service. During our first
    four hearings we heard from Secretary Rubin, Commissioner
    Rossotti, several former IRS Commissioners, tax practitioners,
    the General Accounting Office, the Deputy Inspector General of
    Treasury, and perhaps most importantly of all, the taxpayers.
    This will be our last hearing in preparation to draft IRS
    restructuring legislation. We will, however, continue with
    oversight hearings in the future.
        Our focus today will be on management of the IRS. We will
    hear from management experts and representatives of IRS front-
    line employees, professional managers, and senior executives.
    In light of many of the concerns that have been expressed in
    past hearings, I look forward to the testimony of these
    witnesses.
        I recall one agency employee putting the importance of
    management in very simple terms. She said, ``Upper management
    determines the climate and policies for applying tactics and
    tax laws. Therefore, it is at this level that the greatest
    impact on the taxpaying public is affected.''
        Given this employee's logic, logic that I agree with, it
    could be said that, from a practical standpoint, today's
    hearing will be our most important yet. When it comes to
    management, the buck stops there.
        Good managers yield good employees. If they are
    knowledgeable, service-oriented, and motivated by the correct
    principles, their employees will be knowledgeable, service-
    orientated, and motivated by the same. On the other hand, bad
    managers will yield bad employees, and that concerns me.
        I was concerned to hear the testimony of an 18-year revenue
    officer, an officer in compromise specialist, who said, ``The
    pressure is coming from management. We are told to ignore the
    law and do what we are told to do. We are encouraged to ignore
    any issues that might slow down the collection process. The
    hostility in the workplace is becoming unbearable.''
        Well, this is troubling and it is our intention today to
    look at restructuring proposals that will address these issues.
    Many remedies are already gaining broad support. For example, I
    agree with the members of the National Commission on
    Restructuring the IRS that there must be accountability and
    continuity of management at the IRS.
        The concept of a staggered oversight board and fixed term
    for the IRS Commissioner was intended to provide continuity of
    management, a fresh outsider's view by private sector experts,
    and accountability.
        If a board concept is ultimately implemented, one of the
    most important functions will be to ensure that taxpayers are
    treated fairly, honorably, and with efficient and effective
    service.
        It is anticipated that an oversight board would be able to
    expose many of the abuses and misuses of power that we have
    listened to in our oversight hearings. To do this, however, the
    board should have oversight authority. Oversight does not mean
    intervening in particular tax cases, but it does mean having
    enough information to prevent some of the ills that have
    plagued this most important agency.
        Certainly there are many issues that need to be addressed
    concerning the board. For example, who should and who should
    not be on the board; what are its benefits, pitfalls; would a
    board really foster accountability or merely distract those
    responsible for managing the agency? Likewise, there are many
    questions regarding what IRS management needs to turn the
    agency around.
        There are questions related to what kind of flexibilities a
    Commissioner needs to manage the agency. For example, do the
    flexibilities included in the bill introduced by Senators
    Grassley and Kerrey, Senator Moynihan's Administration bill, or
    the House-passed bill, provide Commissioner Rossotti with the
    tools he needs? These are important questions, and today I look
    forward to finding some answers.
        If there is no further comment, we will proceed. Again, it
    is a pleasure to welcome our distinguished panel. They include
    Paul Light, who is director of the Public Policy Program for
    the Pew Charitable Trusts. It is good to see you again, Mr.
    Light.
        Dr. Ronald Sanders, associate professor of Public
    Administration at the George Washington University. Pleased to
    have you.
        And, of course, Thomas Stanton, vice president of the
    Standing Panel on Executive Organization and Management of the
    National Academy of Public Administration.
        We are pleased to not only welcome you, Mr. Stanton, but
    Mr. Jasper, who is an academy fellow at the National Academy of
    Public Administration.
        Mr. Light, we will begin with you, please.

     STATEMENT OF PAUL C. LIGHT, DIRECTOR, PUBLIC POLICY PROGRAM,
              THE PEW CHARITABLE TRUSTS, PHILADELPHIA, PA

        Mr. Light. It is a pleasure to be here, Senator. I am
    speaking here, of course, as a private citizen and scholar and
    not as a representative of the Pew Charitable Trusts.
        It is a delight to be back in front of you, having served
    for some years behind you on Senator Glenn's Governmental
    Affairs Committee staff. It is a joy, actually, to know that
    this bill is under the leadership of someone who has a
    longstanding commitment to improving government management and
    has paid the dues on Governmental Affairs to prove it.
        I am also delighted to be before two Senators from Iowa and
    Nebraska, States that are contiguous to my home State of South
    Dakota. We are delighted that those States produced such
    talented individuals, and we will claim the Minority Leader as
    our own.
        I am here basically to talk briefly, and I will submit my
    statement for the record, regarding IRS taxpayer abuse as an
    issue of accountability. I think the committee has defined it
    thus.
        I define accountability here as the clear expectation that
    individuals on the front line or elsewhere inside the agency
    can have a clear expectation that they will be rewarded,
    punished, or at least noticed, for their acts, whether for good
    or ill.
        I believe the sources of accountability in any agency are
    clear signals from the top, and that includes the United States
    Congress as well as the President of the United States, a
    strong vision of where the agency is to go, committed
    professionals, which I most certainly believe occupy the IRS,
    and a clean organizational structure in which the top of the
    agency can see the bottom.
        It is no surprise to you, given my past writing on the
    thickening of government, that I would suggest that it is
    impossible to see the bottom of IRS from the top. The bottom of
    the agency is enveloped in a fog of constant pressure and
    conflict, we might even call it a fog of war.
        In my conversations with front-line revenue agents, now 3
    or 4 years ago, I got the sense that the district offices were
    rather like Fort Apache, cut off from the headquarters, poorly
    supplied, poorly led, and in a constant struggle to do their
    jobs.
        I believe that is the case at IRS and, whatever else this
    committee does by way of restructuring the agency, I think that
    we should talk about reducing the distance and removing the fog
    that currently limits our ability to see the top from the
    bottom and the bottom from the top. An oversight board, however
    well designed, will do little good if it cannot see what is
    happening down at the district offices.
        Now, I will just briefly note that the problem of structure
    at IRS, indeed, in all of government, is that we believe in
    leadership by layering. Over the years, through legitimate
    efforts by Presidents and Congress to improve accountability in
    agencies, we have added layer upon layer of management that
    eventually has come to compose an administrative sediment of
    staggering proportions that makes it virtually impossible for
    the front line to see the top and receive direction from the
    top.
        I challenged this committee, I challenge anybody in
    Washington. I have done a count of the titles inside IRS. I
    challenge anybody here to demonstrate to me how the Chief of
    Staff to the Assistant Commissioner for Support Services in the
    Management and Administration Division contributes to the
    overall ability of the agency to do the job.
        If you start ticking off the titles between the top of the
    agency and the bottom, you immediately confront just a
    staggering number of layers, managers who I am sure are well-
    intentioned, who handle paper going down and direction going
    down and ideas coming up. Frankly, after a while it is
    impossible to know who we would hold accountable for the
    taxpayer abuse. That, I think, is a fundamental flaw here
    facing us as we legislate.
        I would suggest by way of dealing with the layering
    problems in IRS that this committee take seriously its ability
    to eliminate the regional office structure. The regional office
    structure, to me, is an anachronism. It was created for the
    wrong reasons almost 30 years ago, and it serves the agency
    little good.
        I would also suggest that this committee establish targets
    for mid-level de-layering. It cannot be done by exhortation, it
    must be done through legislation, I am afraid. And that we all
    aim here to achieve a smaller organizational structure so that,
    at a maximum, we have really no more than eight layers between
    the revenue agent and the President of the United States,
    because ultimately it is the President, not the Commissioner,
    who is responsible for the front-line abuse. I have other
    comments on the bill that I would be glad to share with you
    that I summarize in testimony.
        I do want to suggest to the distinguished Chairman that he
    consider attaching to this bill, as we did with the Veteran's
    Department Elevation Act in 1988, a proposal that he has long
    held dear for creating a National Commission on Executive
    Organization and Structure.
        It has been quite some time since I have drafted
    legislation, but I took out my pen and drafted out some new
    language for restoring that commission and I would urge you to
    consider attaching it. I am sure the Governmental Affairs
    Committee would embrace that as a warm gesture, not a violation
    of their legislative territory.
        It has gotten to the point now in the Federal Government
    where we are just not going to get at these structural issues
    through exhortation, executive order, and constant pressure. We
    have got to really go through these agencies one by one and
    clean them out.
        I commend to the Senator a good look at his past efforts on
    this, and I have appended the legislative language to my
    testimony.
        The Chairman. Well, thank you, Mr. Light. As I said, it is
    good to see you again. I appreciate your plug for some
    legislation I think is important. I am not sure that this would
    be the time or place to offer it, but we will give it due
    consideration.
        [The prepared statement of Mr. Light appears in the
    appendix.]
        The Chairman. Dr. Sanders.

      STATEMENT OF DR. RONALD P. SANDERS, ASSOCIATE PROFESSOR OF
       PUBLIC ADMINISTRATION, THE GEORGE WASHINGTON UNIVERSITY,
                             WASHINGTON, DC

        Dr. Sanders. Thank you, Mr. Chairman, members of the
    committee. I appreciate the opportunity to be here. I, too,
    speak as a private citizen and scholar, and hope I can lend
    some insight into your deliberations.
        I would like to talk about four main points. First,
    inevitably, the oversight board, its mission and composition.
    Second, the personnel flexibilities that have been talked
    about, but principally focusing on their collective bargaining
    aspects. Third, buy-out authority, voluntary separation
    incentive pay, which has been proposed as an essential tool for
    the IRS's transformation. And, lastly, but perhaps most
    importantly, proposals to revitalize the IRS's senior executive
    corps.
        First, with respect to the oversight board. Mr. Chairman,
    you started by saying that management was important, that the
    buck stops there. I think the way these various proposals are
    constructed, the question is more, the buck stops where?
        I think the oversight board is problematic in a number of
    respects. It is, in my view at least, not true to its title. I
    like the idea of an oversight board if its mission is
    oversight, but the legislation that I have read interposes it
    between the Secretary and the Commissioner and gives it all
    sorts of operational responsibilities, up to and including
    actually submitting the Service's budget.
        The question I would have is, first, who is in charge? Who
    decides, if the Commissioner and the board disagree over budget
    matters? One could easily imagine this committee getting
    embroiled in that.
        Second, who is accountable? If the board, the Commission,
    the President, and the Congress all agree on a strategic plan
    for the IRS, as well as a set of performance measures, and the
    IRS does not meet them, who is held accountable, who is
    responsible for that? Is it the board, the Commissioner, the
    executives, the employees, or all of the above? I agree with
    Professor Light's comments here in terms of the ``fog of war''
    and adding another layer to an organization that is already
    quite layered, I would think, is problematic.
        An oversight board, in my view, is necessary and
    appropriate and that also governs the question of membership on
    that board. I have no problem with the National Treasury
    Employees Union being a member of an oversight board for the
    IRS.
        I think unions in the Federal Government have traditionally
    played that oversight role. NTEU, in particular, has been
    effective in that regard. But I have a great deal of difficulty
    with union representatives sitting on a board that has
    management and operational responsibilities.
        I think it is redundant in one sense, because the union
    already bargains with the IRS. Second, NTEU and IRS have one of
    the most effective labor/management partnerships in government,
    so there is a second bite of the apple. I do not know whether
    they need a third.
        As a former Federal executive, I wonder how it would be to
    sit across a table from the union and bargain one day, only to
    have them sit in judgment of my performance the next. But
    again, I want to make it clear, unions in an oversight role, I
    think, are appropriate and effective, and I would support that.
        The personnel flexibilities, Mr. Chairman. I have testified
    before Congress, in both Houses, on a number of occasions
    arguing for those flexibilities, so long as they fit within a
    framework that includes things like the merit principles,
    veterans preference, et cetera. I think all of that is at least
    implied in the legislation.
        The language that I have seen is flawed in one respect. The
    House would give union veto over demonstration projects. And,
    while I wish they had used different language, I think that
    generally reflects the state of the law today. Under 5 USC
    Chapter 47, labor and management cannot proceed with a
    demonstration project unless both parties agree. That is fine
    if the object of the demonstration project is research. I think
    the object of the demonstration authority proposed here is
    different. It is much more serious.
        In that respect, I would not leave this to a default option
    of the status quo. I would argue that either party should be
    able to submit a bargaining impasse to the Federal Service
    Impasses Panel, a body created by the Congress to resolve those
    sorts of disputes and let them deal with this, as opposed to
    just letting the status quo prevail if they cannot come to
    common ground.
        I will not say a lot about buy-out authority, except that
    it is an essential tool, not just as a blunt instrument to
    reduce numbers. It has certainly been used to that effect
    across government, but it can be used, I believe, more
    surgically to deal with surplus skills and redeployments. I
    would be happy to answer questions in that regard.
        Lastly and most importantly, let us talk about the IRS
    executive corps. They are among the most respected in
    government, but, like any organization, they need
    revitalization from time to time, and there are a number of
    proposals that would give the Commissioner authority to do
    that: special pay authority, critical pay authority, 40 new
    positions, et cetera.
        I favor all of those, but with some conditions. I have
    actually had some second thoughts as I have thought about those
    proposals. The IRS, I think, depends on being seen as impartial
    and objective. While I know that the intentions of this
    Commissioner are entirely honorable when he says, let me bring
    in new people, new professionals, new executives, new technical
    experts, I am more worried about the next Commissioner.
        So I would give him those flexibilities, but with some
    safeguards. Merit principles, for one, or perhaps even a sunset
    provision. If these positions are indeed, to help the IRS
    transform, then carry them through that transformation and then
    perhaps eliminate them. That would guard against politicizing
    the IRS and politicizing those positions.
        Mr. Chairman, I would be happy to answer any questions
    later from the committee. Thank you very much.
        The Chairman. Thank you, Dr. Sanders.
        [The prepared statement of Dr. Sanders appears in the
    appendix.]
        The Chairman. Mr. Stanton.

     STATEMENT OF THOMAS STANTON, ACADEMY FELLOW AND VICE-CHAIR OF
       STANDING PANEL ON EXECUTIVE ORGANIZATION AND MANAGEMENT,
    ACCOMPANIED BY HERBERT JASPER, ACADEMY FELLOW, NATIONAL ACADEMY
                OF PUBLIC ADMINISTRATION, WASHINGTON, DC

        Mr. Stanton. Mr. Chairman, members of the committee, thank
    you very much for the invitation to testify today.
        Governance is an important topic for the IRS. We will
    always need an IRS. Whether we have some form of today's tax
    system, or a flat tax, or a consumption tax, issues of
    implementation and sound management will always be essential to
    the American taxpayer.
        Our concern is that, while some provisions of H.R. 2676
    make welcome improvements, the provision for an oversight
    board, as presently drafted, could gravely damage the
    accountability of the IRS and the quality of the IRS as an
    institution.
        We urge this committee, as it did in legislation to create
    an independent Social Security Administration, to create an
    advisory board, and retain a single commissioner as head of an
    agency who can be held fully accountable to the Congress on
    behalf of the American taxpayer.
        In our testimony on the IRS we would like to make four
    major points. One, we support the recommendations of the
    National Commission and provisions of H.R. 2676 to strengthen
    Congressional oversight. Greater involvement of the Tax
    Committees in oversight can help to increase accountability of
    the agency and to offset some of the problems of an ingrown
    organizational culture.
        Mr. Chairman, you have played a major role in the enactment
    of the Government Performance and Results Act, and this
    committee could use that act to help create and ensure that IRS
    implements performance goals that balance the objective of
    collecting revenues efficiently against other objectives, such
    as consistent, fair treatment of taxpayers.
        Two. The oversight board that H.R. 2676 proposes for IRS
    will greatly limit the accountability of IRS to the Congress,
    the President, and the Treasury Secretary and will damage the
    professional integrity of the agency.
        The bill gives the oversight board authority to approve
    strategic plans, reorganizations, and budgets of the IRS. The
    bill thus allows private parties to determine the deployment of
    the Nation's tax collection apparatus, invites self-serving
    actions by the private board members, or invites the
    perceptions of such actions that could well lead to increased
    tax evasion.
        By giving the oversight board authority in these important
    IRS decisions, the bill will make it very difficult for the
    Congress to hold anyone accountable for IRS performance. The
    Commissioner, individual board members, and the Secretary all
    will be able to point to others who hold partial responsibility
    for any actions that engender criticism.
        Three. These problems can be overcome if this committee
    would turn the oversight board into an advisory board. That
    advisory board can help to infuse the IRS with the fresh points
    of view that you spoke about, Mr. Chairman, on behalf of the
    private individuals and companies who must pay taxes and deal
    with the IRS.
        To the extent that an advisory board gives sound advice and
    has the ear of the Congress and the Secretary as well, its
    recommendations will very likely have significant influence
    with the Commissioner.
        Four. Management improvements must enhance, rather than
    detract, from the professionalism of the IRS. We support the
    ideas of a fixed term and a performance contract for the
    Commissioner.
        H.R. 2676 makes welcome additions to the flexibility of IRS
    personnel rules and provides that these shall be exercised in a
    manner consistent with merit system principles.
        In our written statement, we suggest how this committee
    might strengthen provisions to assure that merit principles are
    applied to the hiring of all IRS employees below the level of
    Commissioner. Otherwise, over time the agency is likely to be
    offered a remarkable array of politically well-connected, but
    marginally qualified, people for special positions that were
    intended to be filled by experts.
        Mr. Chairman, we would like to close by pointing out that,
    for all of the shortcomings that this committee and others have
    identified, the IRS continues to do a remarkable job. Each
    year, the agency processes over 200 million returns, collects
    $1.5 trillion of revenue, and provides information and tax
    advice 100 million times.
        This committee needs to scrutinize the provisions of H.R.
    2676, especially with respect to IRS governance, to assure that
    new legislation does not endanger that track record.
        We urge that any IRS restructuring legislation include
    provision for prompt evaluation of particular features of the
    new law upon the ability of this country to collect the
    revenues that we need.
        A 5-year sunset provision, especially upon any changes to
    the IRS governance structure, would provide this committee with
    an opportunity to refine its approach to these important
    matters in light of experience.
        Mr. Chairman, thank you. We would be pleased to answer any
    questions.
        The Chairman. Thank you very much, Mr. Stanton.
        [The prepared statement of Mr. Stanton appears in the
    appendix.]
        The Chairman. I would like to have my first question
    directed at what the House bill gives the board authority to
    do. As has been pointed out, under the House legislation the
    board can review and approve IRS strategic plans, it can review
    IRS operational functions including tax system modernization,
    outsourcing, managed competition and training; it can review
    the Commissioner's selection, evaluation, and compensation of
    senior managers; review and approve the Commissioner's plan for
    major IRS reorganization. It also has the authority to review
    and approve the IRS budget request, moving it forward to the
    Treasury.
        I would like to have each of your comments on this
    authority. Would this specific authority provided to the board
    enhance protection of taxpayers and accountability? If so, how,
    if not, why? Mr. Light.
        Mr. Light. Well, the trouble I think my colleagues and I
    have with this particular proposal, or at least my problem with
    it, is the addition of the approvementresponsibility. I think
    it is perfectly reasonable for an oversight board, whether it is called
    an oversight board or reconfigured as an advisory board, to review the
    ongoing activities of the agency.
        It is when the board interposes itself into an approval
    function that I think traditional organizational theory gets
    troubled. It tends to diffuse then the ultimate accountability
    that belongs with the Commissioner, on up to the President.
        As I recommend in my testimony, actually, I think an
    oversight board, properly constructed, could be quite helpful
    to the agency. I recommend that this committee consider moving
    oversight of the Taxpayer Advocate's Office to the oversight
    board, and also, should this committee decide to create a
    separate Office of Inspector General for the agency, that you
    lash the OIG up to the oversight board in some fashion.
        But it is when the oversight board gets into the business
    of, for example, recommending a budget directly that you
    diffuse and weaken the Commissioner's authority, and that is
    problematic for those of us study chain-of-command problems and
    the accountability problem, as we have described it today.
        The Chairman. Dr. Sanders.
        Dr. Sanders. Mr. Chairman, I think the list of
    responsibilities you enumerated all say operations, not
    oversight. I agree with Professor Light and Professor Stanton,
    it attenuates accountability, it does not strengthen it.
        You all know how powerful oversight and advice can be. An
    independent body that could look at IRS its management
    practices from a detached perspective, I think, could be very
    helpful.
        On the other hand, you all have heard the expression
    ``going native.'' I wonder how independent an oversight board
    would be if it actually is involved in making those decisions.
    It will become an advocate of those decisions, of the
    management strategies that it becomes involved in. That, I
    think, harms its ability to be independent and impartial and
    provide you the kind of input that I think you seek to oversee
    the IRS.
        Mr. Stanton. Mr. Chairman.
        The Chairman. Yes. Let me add a question for you, Mr.
    Stanton. You talked about making it over into an advisory
    board. Now, is there not already an advisory board to the
    Commissioner, and how would this differ?
        Mr. Stanton. Mr. Chairman, there is an advisory board to
    the Commissioner. That advisory board has been weakened in
    recent years by the law of unintended consequences. There are
    various provisions, like Government in the Sunshine Act and the
    Federal Advisory Committee Act, that require openness in
    government and, of course, we support such principles.
        But for an advisory board, it is very hard for the IRS to
    come forward, in the bright light of publicity, and confess
    weaknesses in the tax collection apparatus, because you know
    that every tax evader in that sector will promptly feed into
    that weakness.
        So one important addition that we would recommend in
    creating a new advisory board would be to remove that kind of
    provision so that, in fact, you could have a group of outsiders
    talking in some detail with IRS and having some fairly candid
    conversations about shortcomings and needs for improvement.
    That would be the first issue.
        The second issue, sir, again relates to the law of
    unintended consequences. By putting a board between the
    Congress and the Commissioner, the bill basically will make it
    a lot harder for this committee to hold the Commissioner
    accountable.
        Once that advisory board approves its first budget and its
    recommendations are accepted to redeploy, not, for example, to
    have one computer system, but to do something else instead,
    make all the trade-offs that are inherent in budget decisions,
    they become part of the problem rather than part of the
    solution. All of a sudden, it is their idea and they become the
    people that you are going to have to call up here and ask a
    whole bunch of questions of.
        The Chairman. Senator Grassley.
        Senator Grassley. Not part of the legislation that has
    passed the House, but we have had some concern recently about
    the Treasury Department's Office of Inspector General. I
    believe very much in the Inspector General system, except for
    the fact that, from time to time, one department or the other
    might have trouble with the Office of Inspector General.
        I very much support this system and I also think it is
    important for us to consider Treasury IG at the same time we
    are thinking about changing the IRS to be a better
    organization.
        Do any of you have thoughts about how to make the IG's
    office more effective regarding oversight of the IRS, so we
    would be talking then just about the Treasury Department IG.
        Mr. Light. Well, let me comment on it. I have studied the
    IGs off and on over the years. I am not exactly sure why; it is
    a dense subject. Nobody can be particularly pleased with how
    the appointment of the most recent Treasury Inspector General
    turned out. It is a serious problem, which the Senator has
    clearly noted in his floor statements and other venues.
        I would argue here that the Inspector General, the OIG, and
    Treasury should be strengthened. The appointments process
    should be changed so that we ensure that the highest caliber of
    individual is selected to serve as Inspector General in that
    agency, in fact, government-wide.
        We might consider two options for strengthening the OIG
    vis-a-vis IRS. One, is to create a specific Deputy Inspector
    General in the Treasury Office of Inspector General for
    responsibility of overseeing IRS and really create that as a
    standing subunit within the OIG, or we should create a separate
    Office of Inspector General within IRS to assure attention to
    the kinds of problems that this committee has examined.
        I make some recommendations in my testimony regarding how
    we might deal with the appointments process of Treasury. We are
    about to come up to the 20th anniversary of the 1978 Inspector
    General Act. I think we have got some issues that we can
    confront through that particular anniversary as we think about
    how to revise the Act for the next 20 years.
        Mr. Jasper. Could I add a word to that, Senator?
        Senator Grassley. Yes, you may. Any of you can respond.
        Mr. Jasper. Thank you. Paul Light touched on one aspect of
    the IG problem that is really endemic in government. That is,
    more recently the Congress has put in statute the experience
    requirements to be met by the person to be appointed.
        The White House is under enormous pressure to try to fill
    jobs with recommendations coming from all over town, all over
    the country, and oft times they do not pay as much attention to
    those qualifications you write into the statute as one would
    like. We touch upon this in our testimony and prepared
    statement with respect to the appointees to the oversight
    board.
        If the Senate, as part of its confirmation process, would
    hold the executive branch's feet to the fire on occasion, then
    the White House Personnel Office would quickly learn that they
    had better pay attention to the statutory criteria.
        So I would endorse Paul's comments about making sure that
    you get qualified people into these jobs because, as the
    Chairman's opening remarks, I think, indicated, if you have
    good people in management jobs, then you have good management.
        Dr. Sanders. Senator, I would defer to Paul and his
    comments on restructuring the IG. I would offer this note of
    caution in terms of any attempt to connect the IG with the
    oversight board. That may be appropriate for investigating
    patterns and practices of abuse, et cetera, which is part of
    oversight, but I would caution against creating another
    appellate body for employees or taxpayers to appeal if the IG
    is part of the oversight board.
        Senator Grassley. All right. On another subject, and I ask
    this question, existing personnel laws notwithstanding, and in
    regard to our recommendations from the commission about the
    Commissioner's ability to recruit experts not only on an
    occasional basis, but for full-time staff help for his being
    able to do his job.
        Do any of you find any fault with that effort? You do not
    have to give a long answer. If there is any problem with that,
    voice it, otherwise I will assume your silence is acquiescence
    to the principle.
        Mr. Light. Are you talking, Senator, about the salary, the
    reward system, all of those?
        Senator Grassley. No. I am talking just about the ability
    of the Commissioner to have close to him at the highest levels,
    both administrative and staff, the ability to hire people from
    outside the usual way that they have been staffed in the IRS.
        Mr. Light. I think that you will hear in the next panel
    some objections to the proposed changes in the way the senior
    executive service would operate. My recommendation to you is
    not to tinker with the senior executive service, nor should you
    give the Commissioner the authority to appoint a new set of
    political lieutenants.
        I would urge the committee to consider the possibility of
    creating a new type of senior position where the occupants
    would operate under 5-year performance-based contracts,
    selected on the basis of merit but on a short-term leash, which
    is a model that we have seen work in other countries as part of
    the overall reform efforts over the last 15 years.
        So there is something in between what is recommended in the
    House bill which tinkers with the existing system, and trying
    something entirely different, perhaps a corps of no more than
    20 senior revenue officials who would be appointed on short-
    term contracts and paid at a much higher level than we would
    ordinarily expect in the senior executive service.
        Dr. Sanders. I agree with that. I agree with the concept of
    giving the commissioner that sort of authority, but with
    sufficient safeguards to ensure that those positions do not
    become political positions.
        I think what Paul has described is something in between our
    traditional structure, political employees on one hand and
    career senior executives on the other. It could be 5-year
    employment contracts, or the authority itself could be
    sunsetted.
        But, frankly, the ability to bring in these kinds of
    experts at higher salaries may be essential to the IRS's
    transformation. We need to find a way to do it so that it does
    not become yet another part of the political plum book on one
    hand, and threaten the senior executive corps on the other.
        Mr. Jasper. I would like to add just a couple of quick
    comments. We detail in our prepared statement the scandals that
    beset the Internal Revenue Service in the early 1950's, which
    the Congress rectified by requiring that all appointees below
    the Commissioner be hired strictly on merit. As long as these
    new appointees are hired strictly on merit, I think that that
    is a constructive step that we could endorse wholeheartedly.
        In that connection, however, we notice that the House bill
    would eliminate the 120-day get-acquainted period for Senior
    Executive Service persons, and we think that would be a mistake
    because it has worked so well that we think that it should be
    continued.
        However, we suggested the possibility, if there is a
    feeling that the Commissioner needs a little bit more leeway,
    that perhaps you could exempt the Deputy Commissioner from the
    120-day get-acquainted period, but only the Deputy
    Commissioner.
        Senator Grassley. I am done. I would only say that there is
    a difference between a concept of hiring a bunch of political
    hacks to back up a Commissioner of Internal Revenue to make
    sure that his ability to get the job is not curtailed by the
    professional service and bringing in people who are responsible
    to him to make sure that we get the job done that would be
    professional people.
        Mr. Jasper. Right.
        The Chairman. I guess the question is, how do you
    accomplish that; how do you make certain these people are
    appointed on the basis of ability and not politics? Should
    there be some kind of political limitation or assurance that
    you have people of both parties?
        Dr. Sanders. Senator, you could specifically ban it. That
    may be a gesture. But if it is in law that these folks are
    going to be professionally and technically qualified rather
    than traditional political appointees, that may have some moral
    suasion.
        I think you could also interpose some procedural
    requirement so that, as with the case of a senior executive
    appointment, somebody independently reviews the appointment to
    make sure that the individual is qualified.
        Mr. Light. I think we have dozens of statutes, take the
    Veterans' Administration, where we require that the head of the
    Veterans' Health Administration be appointed without regard to
    political affiliation, et cetera, et cetera, we see in the case
    of the Inspector General at Treasury that an appointment was
    made that clearly contravened the statutory urgings for
    selecting somebody without regard to political affiliation and
    with regard to their ability to do the job. It happens all the
    time.
        The only option available to the committee, if you want to
    go that direction, is to have, for example, some sort of
    appointing body, as we use with the Comptroller General of the
    United States, that recommends a list of carefully vetted names
    to the President for appointment. You would only do that if the
    President and the President personnel process had failed you in
    following the letter of the law.
        I think, in the case of the Treasury IG, that White House
    personnel did not pay attention to the quality of the
    appointments and has, therefore, lost a significant claim to
    discretion. So you can do this through exhortation, but it has
    a history of not working very well.
        Mr. Jasper. We do address this specifically in our prepared
    statement. The invocation of the merit principles in H.R. 2676
    is in connection with the exercise of the personnel
    flexibilities. We suggest that the requirement to follow merit
    principles be put further forward in the Act so it would be
    relevant to all appointments. That would be your statutory
    trigger for requiring it.
        Dr. Sanders. Mr. Chairman, this would be a perfect
    responsibility for an oversight board.
        The Chairman. All right. With that, we will turn to Senator
    Kerrey, who is one of our experts on restructuring IRS.

    OPENING STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR FROM
                                NEBRASKA

        Senator Kerrey. Which makes me dangerous.
        Well, first let me assert that I do not think just because
    something is political it is necessarily bad. Indeed, one of
    the objections and concerns that you have raised, that I think
    is very legitimate, with the board is that you want to make
    sure it increases accountability, not decreases accountability.
    By its nature sometimes, political decisions are in response to
    concerns that people have. I mean, fundamentally, the IRS has
    535 members of its board of directors, members of Congress, who
    are elected by the people who respond to concerns that the
    people have.
        This whole exercise began with the people's auditor, the
    General Accounting Office, saying that we squandered billions
    of dollars in tax system modernization, as well as other
    complaints raised by taxpayers who are saying that the status
    quo is, IRS is not accountable. It is not accountable to what
    we want. We call it, we do not get our question answered. We
    are not getting the kind of service that we are getting from
    comparable organizations in the private sector. So we want to
    improve the operational efficiency.
        It is not just any executive branch organization. I would
    argue that the IRS, because it touches almost every single
    American, is critical in our capacity to maintain the citizens'
    confidence that government of, by, and for the people works.
    Difficult to do.
        In fact, I find one of the most constructive suggestions
    that you make in this question of how to construct this board,
    is to put a 5-year sunset on it so we can evaluate it.
        Indeed, our vision with the Restructuring Commission was
    that we wanted to have two companion organizations, a
    restructured oversight on the legislative side and restructured
    on the executive side, so that you could get shared consensus
    about what the mission of the IRS is going to be, so you would
    have support back and forth to one another.
        I believe, Mr. Stanton, it was you that was saying that the
    advisory board has to have the ear of Congress. Most advisory
    boards do not have the ear of Congress because they do not have
    any authority. If you do not have any authority, you are
    probably not going to get a meeting scheduled. You are probably
    not going to have the opportunity to have much influence about
    what Congress does, if all you are doing is providing advice. I
    mean, that is all we need, is more advice. Executive branch and
    legislative people say the same thing.
        Typically, if you are trying to respond to a problem by not
    really stirring up the pot very much, you create an advisory
    board that you know is not going to do anything other than just
    file reports.
        So I think we have got to somehow take a step and give this
    board more authority if it is going to be able to do the kind
    of restructuring that is obviously needed and if we are going
    to be able to sustain all the other requirements that we impose
    on the IRS, privacy, lack of corruption.
        I mean, we found in our hearings, most commendably, that no
    citizen has ever come forward and said that bribes are taking
    place inside of the IRS, and most tax collection agencies
    worldwide have that charge being filed against them.
        But, in order to eliminate the bribes, we have also
    eliminated almost all flexibility on the part of revenue agents
    in being able to deal with taxpayers.
        So I am just saying that, with the vision of this piece of
    legislation, the vision that attaches to this legislation, we
    need a venue whereby the legislative and executive branch can
    reach agreement on what we are going to be doing, and the
    context for all of it is a crisis of confidence that exits
    right now and a lack of accountability that exists right now
    between the IRS and the citizens, and Congress' frustration
    every time we think we are doing something that is going to
    improve the IRS, it does not work.
        I mean, we provided the resources for tax system
    modernization. The promise was, that was going to radically
    change the environment. If you go back and look at the
    testimony that was offered at the time, man, taxpayers are
    going to love this thing. It is going to be easier, simpler,
    and the cost is going to go down, unit cost of collection, and
    life is going to be good.
        Well, it turned out to be a disaster, an unmitigated
    disaster. What we heard, both from the private and public
    sector, was the reason it was a disaster was, there was not
    shared consensus.
        There was not a shared vision between the legislative and
    the executive branch, between the Congress that writes the law,
    the ultimate board of directors, the 535 people that are
    elected to be a board of directors, and the executive branch
    agency.
        I have to insert, by the way, as far as conflicts of
    interest, we deal with conflicts of interest all the time. I
    mean, I was a private sector person before I got into Congress.
    One of the first meetings I had was with the Ethics Committee,
    telling me what I have to do inorder to deal with any potential
    conflict. It seems to me that any private sector person that comes in
    to government is going to go through the same thing.
        Secretary Rubin had to go through that. When he appears
    before our committees, there are procedures to be able to deal
    with conflicts. I do think it is an important issue. It is one
    that we need to pay attention to because, as I said, you do not
    want to create something that is going to make matters worse.
        But the vision of this board is to give it a sufficient
    amount of authority that Congress is going to meet with it and
    talk to it when it is making decisions about both how to
    authorize and to appropriate.
        As you say, the worst outcome is to end up with a two-
    headed monster with two lines of authority. I am more concerned
    about the board, frankly, than I am about a chairperson having
    so much authority that suddenly you have got two managers of
    the IRS.
        But it has got to have a sufficient amount of authority
    that people listen to it, otherwise it is not likely going to
    have any impact at all on restructuring.
        Mr. Stanton. Mr. Chairman, since my name was mentioned, may
    I respond for a moment?
        The Chairman. Yes, please.
        Mr. Stanton. We are on the same side of this issue in the
    sense that we are all concerned about the dramatic failure of
    taxpayer modernization.
        Senator Kerrey. And any comment on accountability has to be
    in the context of current accountability. How do taxpayers
    currently feel about the IRS, do they feel like it is
    accountable to their demands?
        Mr. Stanton. It is possible to use tools like the
    Government Performance and Results Act to get accountability
    out of single-headed agencies or agencies with commissions like
    the Federal Deposit Insurance Corporation. It is possible to
    get accountability, but it is really hard to legislate
    competence. A board is not going to add much to that issue. The
    IRS already knows that it failed with taxpayer modernization,
    and having a board to tell it so is not going to give us the
    straight chain of responsibility.
        Senator Kerrey. The purpose of the board, I will say it
    again. You have got this vision of the IRS organization outside
    the context of the current situation which is 535 Members of
    Congress as its board of directors very unhappy with the IRS,
    unwilling both to authorize and appropriate the resources
    needed to do the job. That is context one.
        Context two, is 270 million Americans who are also not very
    happy with the IRS. I mean, that is the context in which we
    operate. We are trying to design a solution to a very important
    and compelling problem. You are saying, by fiat, that you do
    not believe the board is going to add anything to solving that
    problem, and I do not find your argument very compelling in
    that regard.
        Mr. Stanton. Let us take a hypothetical. I am an attorney,
    I am a small business person. Say I am on the board.
        Senator Kerrey. Bad hypothetical, but go ahead.
        Mr. Stanton. It is not hypothetical, it is real. I am an
    attorney. Say I am on that board and I do not like the way the
    IRS has been dealing with small businesses like me. So the
    first time a budget comes up I say, I do not like that unit and
    I want them to be reallocated.
        Senator Kerrey. Say I am chairman of the Ways and Means
    Committee and I am a small business person and I do not like
    the way the IRS is dealing with small business people. Is that
    a conflict?
        Mr. Stanton. That is an elected official. It is really
    different from somebody operating a very low level who, in
    fact, will not have the stature--this board will not have the
    stature----
        Senator Kerrey. But you are suggesting that I have got to
    get people without any point of view on the board, otherwise I
    could have a conflict.
        Mr. Stanton. I did not say that, Senator. I am suggesting,
    with all due respect, that the board is not going to help
    improve the competence of the IRS and that this committee, as a
    group of elected officials, can help improve the accountability
    of the IRS to the taxpayer. This is where the buck stops.
        That board, which will be a number of people of greater or
    lesser quality who are appointed who will definitely have
    points of view, is simply going to become enmeshed in that
    whole process that we are worried about now.
        Senator Kerrey. But now you have gone much further than
    your testimony and you are describing hypothetical
    possibilities with dire consequences without having any basis
    for the prediction. I mean, you simply do not like the idea, it
    seems to me, Mr. Stanton.
        Mr. Stanton. No.
        Senator Kerrey. You have offered a rational reason to
    object to the idea in your testimony, but now you are just
    saying, by fiat, it is not going to add any value. Document
    that for me. Tell me how it is a given.
        Mr. Stanton. I would be delighted to.
        Senator Kerrey. Again, inside the context, this Congress is
    torn. This Congress has not done a good job of overseeing the
    IRS. We have not added a sufficient amount of value to the task
    of improving its performance. We have failure on our hands, Mr.
    Stanton. We do not have success. So the question is, how do you
    improve upon the current situation? You are suggesting modest
    modifications of the status quo.
        Mr. Stanton. In the area that I work, for example,
    financial institutions regulation, we have got an independent
    board, the FDIC, and we have got a comptroller of the currency,
    which is a single head.
        What you find, is that the single head is much more
    accountable that the board. When the government set up the
    Thrift Retirement Systems Board, they set up a board in order
    to insulate the function of investing Federal retirees' pension
    money from the Congress.
        Boards are a layer that, if you look at one sector of
    government activity after another, are a layer that interposes
    itself. It is a variant on Paul Light's thickening of
    government.
        Senator Kerrey. Like the Federal Reserve Board. Would you
    say that adds a layer of thickening that makes it difficult for
    us to engage in monetary policy?
        Mr. Stanton. I would say they are quite independent from
    the U.S. Congress.
        Senator Kerrey. Would you say the Social Security Advisory
    Board adds a thickening layer?
        Mr. Stanton. No, that is another----
        Senator Kerrey. Would you say the Postal Rate Commission
    adds a thickening layer?
        Mr. Stanton. Yes.
        Senator Kerrey. So you are against the----
        Mr. Stanton. We are not against the creation of boards in
    all cases. The purpose of our testimony here is merely----
        Senator Kerrey. But you just said that a board adds a
    thickening layer. You are now saying a board adds a thickening
    layer, except there are times when it does not.
        Mr. Stanton. No. There are times when it adds value and
    there are times when it does not. We are saying, please be
    careful here because there may be a significant down side.
        Senator Kerrey. I am prepared to be careful, Mr. Stanton. I
    am very much aware that we can do damage to this agency and
    make things worse. I am very much aware of that and have given
    a great deal of consideration to the question of, how do we get
    that done in this legislation, and want to make certain we
    strike a balance between having a board that has a sufficient
    amount of authority that Congress will listen to it, that
    Congress will listen to what it is saying ought to be done, and
    not having a board that has so much power and authority that it
    undercuts the capacity of the Commissioner to do his or her
    work.
        Mr. Light. May I add just a word. I think the committee has
    an extraordinary task, given the current levels of public
    dissatisfaction with the agency. We have some survey data
    coming out in the next two weeks that show that IRS continues
    to exist in free-fall in terms of public confidence and its
    ability to do its job. Therefore, the pressure on the committee
    and Congress and the President is to be bold, to send a signal
    to the American taxpayer that something is being done.
        I do not see the board as an extra layer of management, per
    se, if it is properly insulated from line operating
    responsibilities. But I think part of making the board
    successful is to consider a fairly radical flattening of that
    agency so that Americans can see the bottom from the top, and
    so on.
        I think my colleagues in the profession are concerned that
    boards tend to accrete responsibilities to themselves over time
    and that you may have a situation where, 5 or 10 years after
    the current crisis is over--although Lord knows, IRS has been
    in crisis, after crisis, after crisis--would that we could
    expect in 10 years that the board will fade and that this
    problem will no longer exist.
        I think the concern is, if you are going to create it, how
    do you insulate it? I think the sunset is one way to do so.
    Give it 5 years and put it out of business. Make an affirmative
    requirement by Congress to reauthorize it, and a more clear
    conversation about how to separate line operating
    responsibilities from oversight.
        Senator Kerrey. Another way is, in this legislation the law
    gives the President the authority to remove any Commissioner
    for cause. Any board member can be removed. By the way, there
    are lots of other protections out there as well. All of this
    concern about conflicts. Conflicts get dealt with on a regular
    basis around here, sometimes to the extreme, sometimes to the
    point of not being able to get anybody to serve in the public
    sector.
        The Chairman. Time is moving on.
        I would, on this matter, like to point out that the
    Commissioner has testified that he was quite positive about the
    prospects of an oversight board, suggesting that a good CEO
    profits from the direction and advice of a board of directors.
        So in opposing the creation of an IRS oversight board, Mr.
    Stanton, do you find fault with the way corporate America is
    set up, or is it that the corporate analogy is not applicable?
        Mr. Stanton. Thank you, sir. It is exactly the latter
    point. In other words, the corporate board of directors has a
    focus on a corporate bottom line. There is director and officer
    liability to assure that every member of the board of directors
    carries out a fiduciary responsibility to the shareholders to
    maximize value for the corporation.
        By contrast, when you get a government board, there are as
    many visions of proper public interest as there are individuals
    walking around in the United States today. It is a quite
    different institution and operates according to profoundly
    different dynamics.
        The Chairman. I would like to turn to another problem. I
    think everybody agrees, taxpayers have a right not to be abused
    by IRS employees. Do the current rules make it difficult for
    the IRS to discipline or terminate employees who abuse
    taxpayers; do IRS employees have more rights than taxpayers?
    Mr. Light?
        Mr. Light. Well, I think that the way that the appeal
    structure is currently designed creates a presumption in favor
    of not removing employees. We have been struggling with that
    for 20 years in one way or the other on both sides of the
    aisle. It is very difficult to remove an employee, and most of
    us would rather not do so. It is almost a lifetime task, in
    some ways.
        There are ways to streamline the appeals process so that
    you can move more quickly to resolution, and I think that the
    committee and the House have struggled a little bit with how to
    do that, and you have got a panel of experts following here
    that can comment more artfully on it.
        I think the presumption should be in favor of the employee
    to a point, but we ought not to be in sort of an endless
    appeals process where we cannot remove a clearly incompetent
    employee without sacrificing our own career to constant appeal
    and argumentation. There are ways to streamline this a little
    bit to make it easier.
        The Chairman. Dr. Sanders.
        Dr. Sanders. Senator, I would differentiate between
    protections and appeals. Employees have protections, and civil
    service employees have considerable protections. Nevertheless,
    those employees can still be removed. What tends to deter
    managers from taking that on is the prospect of months, or
    sometimes years, in an appellate process.
        At the end of the day, managers tend to be fairly
    successful in removing poor performers or employees who engage
    in misconduct, but the thought of going through that for a
    significant part of your working life is daunting.
        I think the protections strike the right balance the way
    they are. I think the appeal system needs some fairly radical
    restructuring so that those protections can come to fore, can
    be adjudged, and then we can get on with business.
        Mr. Jasper. I would just like to add a little bit to what
    Dr. Sanders said. I do not have current data, but data I used
    to be familiar with showed what he suggested has long been the
    case, that, by and large, disciplinary actions are upheld.
        Most of the time that management loses in the appeal
    process, it is because it failed to follow its own established
    procedures, not on the merits of the case. So if people would
    do their homework and follow the procedures, they would almost
    invariably win. As Dr. Sanders suggested, if you shorten the
    appellate process, that should make it entirely possible to
    live with the current system.
        The Chairman. Let me turn to another problem. Our hearings
    have shown that many IRS employees are concerned about
    retaliation if they report misdoings on the part of other
    employees. What can be done about that? How can we change a
    culture so that an employee who is doing a good job and tries
    to ensure that the agency is complying with its manual, and so
    forth, does not find himself or herself the object of negative
    action?
        Mr. Light. There has been a longstanding effort to deal
    with how to protect whistle blowers, which the Chairman dealt
    with on Governmental Affairs.
        The Chairman. I am talking more than whistle blowers.
        Mr. Light. But, I mean, the fact that you are in an agency,
    within a department, that has an historically weak Office of
    Inspector General, historically weak commitment to self-
    policing, I think that reduces the desire of somebody to come
    forward with a complaint in the belief that he or she, by
    making the complaint, it will never be resolved.
        I think part of giving employees confidence that if they
    see something wrong they ought to report it, is to make sure
    that when something is wrong it is fixed. I think we are
    struggling a little bit with that on the Treasury Department
    OIG problems.
        Dr. Sanders. Mr. Chairman, I would agree with that. I
    think, again, the protections are adequate. There are
    protections for whistle blowers and those who do something not
    quite reaching that threshold.
        I think the confidence that they lack, as Paul said, is
    structural; once they raise the issue, will somebody do
    something about it, or do I put myself at risk? So I think the
    language is sufficient, the structure may even be sufficient,
    but the enforcement mechanisms, I think, could be strengthened.
        Mr. Jasper. Another important consideration is what you
    touched on in your opening statement, and that is, the manager
    sets the tone for the agency. If the manager sets the tone of
    wanting to know about abuses and protecting the persons who
    report those abuses, everybody will get the message on both
    ends, the abusers and the reporters as well.
        That is why we have stressed so much accountability. If you
    have a single person who is fully accountable for the
    performance of the agency, he can take that responsibility very
    seriously and not have it diluted.
        The Chairman. Well, my concern is that we had many
    employees wanting to come forward with information, but there
    is a real fear and it is not localized, it is very broad
    throughout the organization, that people are very fearful that
    if they come forward to give information to, say, this
    committee, that there may be retaliation. So it is a very
    serious problem.
        Gentlemen, we have a number of additional questions that we
    would submit to you and ask that you reply in writing. As we
    proceed with the legislation, undoubtedly we will want to call
    on you for further suggestions and recommendations. This is an
    important effort and we appreciate the fact that you took the
    time to be here with us today. Thank you very much.
        [The questions appear in the appendix.]
        The Chairman. It is now my pleasure to call forward the
    second panel, which is made up of employee representatives. We
    are very pleased to have Mr. G. Jerry Shaw, General Counsel of
    the Senior Executives Association; Mr. Robert Tobias, President
    of the National Treasury Employees Union; and Ray Woolner,
    National President of the Professional Managers Association.
    Again, gentlemen, it is a pleasure to have each of you here. We
    look forward to your comments.
        I understand, Mr. Tobias, you have a scheduling conflict,
    so we will ask you to start with your testimony.

      STATEMENT OF ROBERT M. TOBIAS, PRESIDENT, NATIONAL TREASURY
                    EMPLOYEES UNION, WASHINGTON, DC

        Mr. Tobias. Thank you very much, Mr. Chairman. I appreciate
    being invited to testify on the IRS Restructuring and Reform
    Act.
        I recently had the opportunity to serve with two very able
    members of this committee, Senators Kerrey and Grassley, on the
    Commission to Restructure the IRS. The commission's report,
    which I supported, formed the basis for H.R. 2676, which I
    support and urge the committee to quickly enact.
        The commission strongly believed, and I agree, that a key
    to the IRS's success is the creation of an oversight board. It
    is necessary to restore credibility, to ensure that the IRS
    becomes more responsive to taxpayers, to avoid another tax
    systems modernization disaster, and to provide needed long-
    range stability.
        With respect to the powers of the board, I believe H.R.
    2676 strikes an appropriate balance that will allow the IRS
    Commissioner to manage the agency without undue interference,
    while ensuring that longer term, broad-based decisions are
    reviewed, analyzed, and given support.
        The makeup of the board has generated some interestbecause
    it includes ``an individual who is a representative of an organization
    that represents a substantial number of Internal Revenue employees.'' I
    believe it is very important to have the voice of employees on this
    board.
        First, this person can be removed at the will of the
    President if he or she acts improperly by interfering with the
    sound management or administration of the Internal Revenue
    Service, as some have inferred or stated might occur.
        Second, a representative of NTEU current serves in a
    similar role on the IRS Executive Committee and has done so for
    the last 6 years. I have been that person. While there has been
    some disagreement at times, the IRS believes, I think, that my
    service on that group has not been a detriment to the
    accomplishment of agency objectives, but rather an asset.
        Third, an employee representative was put on the board
    because of, not in spite of, his or her role on behalf of IRS
    employees. Therefore, suggestions of a conflict of interest due
    to the representative's role with regard to employees, I
    believe, frankly, has no merit.
        Fourth, and finally, it is important to point out that the
    board has no approval authority concerning senior manager
    selection, evaluation, or cooperation, as some have seemed to
    imply.
        Unlike the attention generated by the IRS oversight board,
    the personnel flexibility section will allow the IRS to
    experiment with hiring, pay, classification, performance,
    management, and other personnel matters outside the current
    restrictions.
        The bill uses current law on demonstration projects as the
    model. The demonstration project statute, as Dr. Sanders
    articulated, requires union and management to reach agreement
    on a change and then present it to OPM for approval.
        H.R. 2676 eliminates the OPM oversight rule to allow for
    faster implementation, but retains the obligation to reach
    agreement before implementation.
        While NTEU agrees that experimentation outside of the
    existing laws and regulations is important, I believe there
    must also be a check on the exercise of that authority.
    Requiring an agreement prior to implementation provides that
    check.
        Now, some have characterized the written agreement language
    as providing the employee representative with a veto over
    agency proposals because it does not provide for appeal to the
    Federal Service Impasses Panel, which can impose a decision
    when an impasse is reached. While this approach does mirror the
    current law with respect to demonstration projects, NTEU would
    support a change to allow appeals to the Federal Service
    Impasses Panel.
        Mr. Chairman, NTEU strongly believes that enactment of this
    legislation will allow employees to do the kind of job the
    American taxpayers expect and the American taxpayers deserve.
    Thank you very much.
        The Chairman. Thank you, Mr. Tobias.
        [The prepared statement of Mr. Tobias appears in the
    appendix.]
        The Chairman. Mr. Shaw.

    STATEMENT OF G. JERRY SHAW, GENERAL COUNSEL, SENIOR EXECUTIVES
                      ASSOCIATION, WASHINGTON, DC

        Mr. Shaw. Thank you, Mr. Chairman, for allowing us to
    testify.
        Listening to the prior panel and some of the statements
    that have been made, one would believe that the IRS is in
    shambles and cannot collect the taxes. With all due respect,
    that is baloney.
        This is a highly effective agency that has consistently
    accomplished its mission in the face of a constantly changing
    law, changing priorities from Congress, changing political
    leadership, and a constantly fluctuating budget. The fact that
    career management have made it work at all is astonishing; they
    have been bailing the Titanic for a number of years.
        Mr. Tobias talks about, and the union always talks about,
    how the managers are responsible for all the wrongs at IRS, yet
    Mr. Tobias just stated that he has been on the IRS Executive
    Committee for a number of years. Obviously, as the union
    representative on the committee, he has not prevented all of
    these problems that supposedly his being on the IRS oversight
    board would prevent.
        We believe an oversight board should be advisory, but if it
    is not, we strongly urge that there be public disclosure of the
    assets and the business relationships of all of the members of
    the oversight board, not just to Congress and the
    administration, but to the public. It is the integrity of the
    agency and the public's perception of it that is at stake.
        We strongly oppose the union being on the oversight board.
    We think it has a clear conflict of interest. Agency managers
    are scared to death that the union will bypass agency
    management and complain to the board all the time, and they
    will be unable to deal with the union in a labor/management
    context.
        We suggest a subcommittee of the board be established,
    placing a representative from the union, from the Professional
    Managers Association, from SEA, and from any other appropriate
    employee organization, that the oversight board can consult
    with any time they have questions about the views of employees.
        The union is given veto power over personnel reform
    initiatives in H.R. 2676. The union has conceded now that they
    would allow the Impasse Panel procedure to be included now in
    the bill.
        However, the problem is not necessarily the Impasse Panel
    procedure, the problem is the scope of that which the union has
    authority over, or would have authority to veto. Without their
    written agreement, as the bill now stands, the Commissioner and
    the oversight board could implement no personnel reforms that
    would involve bargaining unit employees. That is unprecedented
    in labor law history in the United States, in the civil service
    and in the private sector.
        The Commissioner has told us that he has no problem with
    the 120-day get-acquainted rule provision remaining in effect
    and that provision that would do away with that should be
    stricken from H.R. 2676.
        As far as Inspection Service, Mr. Chairman, I must confess
    proudly that I served as a government manager and executive in
    the IRS from 1970 to 1980, and as its agency ethics officer for
    a number of years. The internal security function of IRS is an
    extremely important one, and they were my client when I was in
    the Chief Counsel's Office.
        If you believe it necessary to take the authority over the
    IRS Inspection Service away from the Commissioner, our
    suggestion is that you only do that for the internal security
    function. The allegations have been that Inspection has not
    conducted investigations when allegations have been made, they
    have held down complaints, et cetera.
        Our suggestion is that the internal security functionreport
    not only directly to the Commissioner, but to the General Accounting
    Office. GAO, by a continuous review of the Inspection Service internal
    security function, would be able to ensure that citizens and employees
    of the IRS's complaints are, in fact, being acted on and being
    investigated.
        Second, GAO already has a hotline that employees could
    utilize to make their complaints. So that would give them the
    outlet and GAO could have some oversight over the internal
    security function. We think the internal audit function, on the
    other hand, must remain under the Commissioner's authority.
        On the demonstration project authority, we would like
    protected the MSPB appeal rights for Federal managers, the
    current leave rules, and the current retirement system.
        On restrictions on terminating or beginning audits, we
    think that should be expanded to include all political
    employees in the Executive Branch, and provide that only
    employees who are in charge of enforcement or administration of
    the tax laws should be able to recommend initiation or
    termination of audits.
        The proposal to allow a number of executives to be brought
    in from outside government, we do not object to so long as they
    are nonpartisan. And when we say nonpartisan, we mean
    nonpolitical. We are not talking about politics, generally, but
    party politics.
        So long as they are nonpartisan and so long as they are
    required to meet the same kind of qualifications for the job
    that any other hire would have to meet we are comfortable with
    the proposal. With those two caveats, we do not care how many
    people the Commissioner brings in, remembering that the
    integrity of the IRS as a nonpartisan agency is absolutely
    essential.
        On the personnel flexibilities, generally, and to talk
    about the problems that managers have, we have a whole section
    in our testimony on that. But the fact is, managers are at a
    decided disadvantage in trying to deal with problem employees.
    They have been. So long as the structure remains as it is, they
    will be.
        They wind up becoming the defendant themselves in any
    number of actions before a multiplicity of Federal agencies,
    and we suggest a consolidation of those agencies we have
    provided information about that in our written statement.
        We believe that to change the culture of the IRS, it is
    absolutely necessary that there be training on exactly what the
    expectations are for every single employee in the IRS. You do
    not change the culture of an agency unless the Commissioner and
    every employee, manager, and executive knows what the
    expectations are.
        We think that is absolutely necessary and the funds should
    be included in this bill to ensure this happens. Every IRS
    employee, every person who comes to work for the IRS, must
    receive the same orientation and training. That does not exist
    now. It has never existed, so far as I know. It is something
    that is badly, badly needed if you are trying to restructure an
    agency. Thank you.
        The Chairman. Thank you, Mr. Shaw.
        [The prepared statement of Mr. Shaw appears in the
    appendix.]
        The Chairman. Mr. Woolner.

      STATEMENT OF RAY WOOLNER, NATIONAL PRESIDENT, PROFESSIONAL
                  MANAGERS ASSOCIATION, WASHINGTON, DC

        Mr. Woolner. Thank you, Mr. Chairman. Mr. Chairman, we
    appreciate this opportunity to present our members' concerns
    and suggestions on IRS restructuring and reform to your
    committee.
        The managers and management officials of the Internal
    Revenue Service are dedicated to the fair and efficient
    administration of the tax law, and these dedicated people have
    spent their working lives in the public service pursuing the
    goal of fair and efficient tax administration on a daily basis.
        PMA members believe that improving the government's
    operations is at the core of their role as a Federal manager,
    and it is in that spirit that we offer the following comments
    concerning IRS reform.
        The ultimate standard to which any reform legislation must
    be held is the best interests of the American people. Whether
    the bill currently before your committee will best serve the
    American taxpayer, it seems to us, is still an open question.
        PMA supports Charles Rossotti's restructuring plan as
    outlined before your committee, and we look forward to
    participating in the process that will ultimately lead to those
    reforms.
        We are concerned, however, that the bill now before the
    committee has serious structural and procedural flaws that will
    significantly diminish the effort to improve IRS operations and
    will hinder Commissioner Rossotti's ability to implement his
    plan.
        Specifically, PMA has serious concerns about the viability
    of the oversight board concept as set out in the bill. We do
    not oppose an oversight board. However, this board and its role
    in the operations of IRS has the potential to seriously
    negatively affect tax administration. Because of that
    potential, we believe all steps should be taken in the
    legislation to limit the opportunity for the board to directly
    affect ongoing tax administration operations.
        The focus of the board should be long-term planning and
    resource identification or allocation and not the daily
    operation of the tax administration system. In that regard, PMA
    does not believe that the oversight board should be granted the
    authority, under 6103 of the IRS Code, to allow access to
    taxpayer account information.
        Our second concern with the bill, is the placement of the
    head of the employee union on the board. With all due respect
    to Mr. Tobias, we believe that that placement is both
    unnecessary and ill-advised. In addition, it compromises the
    balance intended by the labor/management relations title of the
    Civil Service Reform Act and creates serious conflict of
    interest issues.
        The balance of power has been carefully established in
    statute to allow that labor and management, in the spirit of
    cooperation and collaboration, work together through their
    differences and ultimately engage the help of third parties.
        Powers granted by this seat on the board, along with powers
    assigned in other parts of the legislation, would give the
    representative of this one segment of employees of the agency
    an inordinate amount of influence over agency operations.
    Decisions and directions assigned by the board must ultimately
    be bargained with the union, where any of their concerns can be
    appropriately aired.
        At the same time, the union as a part of the board would
    oversee the activities, evaluations, and perhaps even
    selections, of managers and leaders of the agency, including
    the Commissioner.
        These two roles clearly present conflicts and barriers to
    the operation of labor/management relations under the statute,
    and to the goal of this legislation, IRS reform.
        We strongly endorse the previous testimony of former
    Commissioners Donald Alexander and Sheldon Cohen, that the union not be
    given a seat on the oversight board. However, if the role of the board
    is such that employee views are necessary for it to function, we
    recommend that a representative of IRS managers also have a seat on the
    board to ensure the benefit of the widest range of IRS management and
    employee views.
        On another front, Section 9301(b) of the bill gives the
    union far too much control over the personnel flexibilities
    through which the Commissioner is charged with reforming the
    agency. It results in what can only be called a union veto of
    management's actions, and this section of the legislation
    should be stricken as well.
        PMA would like to offer some specific suggestions on the
    legislation for your consideration. First, we believe that the
    labor/management relationship in the IRS should adopt a
    standard based on good government. The standard should require
    the parties to pursue solutions on the basis of how they
    promote customer service, mission accomplishment, quality,
    productivity, and efficiency.
        This standard would put the interests of good government
    before all others in resolving disputes between the parties, an
    especially important matter given the flexibilities in the
    legislation.
        Second, we believe that there is a need for an alternative
    system of pay and benefits for managers, supervisors, and
    management officials. Under present systems, managers are not
    provided incentives to think and act in innovative ways about
    their organization's goals and mission. A human resource system
    that rewards managers and supervisors and motivates them to
    reinvent and reform their operations is needed.
        Third, we need to reform the system for dealing with poor
    performers to promote speed of decision making and appeals. We
    would endorse Mr. Shaw's views in his written testimony to
    improve the appeals process for quicker and more efficient
    decisions on cases.
        Fourth, we believe that you should grant the IRS authority
    for voluntary separation incentives in the form of buy-outs in
    order to help them through the period of transition that
    Commissioner Rossotti is involved in.
        Fifth, we would ask you to allow pay banding to permit
    managers to properly compensate those employees whose work is
    deserving, and to withhold pay increases from those whose work
    is lacking.
        Real authority to grant increases or withhold them will
    significantly change the employer and employee relationship and
    empower managers to create better performers at the work place
    by connecting compensation with performance.
        Last, the wide grant of authority given to this
    Commissioner under this legislation to create demonstration
    projects and develop other personnel flexibilities should be
    accompanied by a requirement to consult with representatives of
    managers and management officials over how those changes will
    affect them.
        Reformation of the culture of the organization must begin
    with its managers and its leaders. Participation in decisions
    about matters affecting the working conditions, personnel
    practices, and policies for managers should be mandated by this
    legislation.
        Thank you. I would be happy to answer any questions.
        The Chairman. Thank you, Mr. Woolner.
        [The prepared statement of Mr. Woolner appears in the
    appendix.]
        The Chairman. Mr. Tobias, I know you have to leave, but I
    thought I would give you the opportunity to make any rebuttal
    you may care to make.
        Mr. Tobias. Well, Mr. Chairman, I think this is a very
    important hearing and I am going to stay through the end. I do
    appreciate the opportunity to make rebuttal, but I am going to
    stay. So, if you have additional questions, I will be happy to
    answer.
        I think that, as I said in my opening statement and in the
    full testimony submitted for the record, this issue of conflict
    of interest, labor/management, really ignores what is happening
    in the private sector today and what is happening in some parts
    of the Federal sector.
        This idea of labor management conflict is something that is
    a holdover from the 1930's, 1940's, and 1950's. It is not the
    way we are trying to have labor and management deal today.
        That is, in the context of recognizing overlapping
    interests and pursuing those overlapping interests of
    increasing productivity, increasing efficiency, and increasing
    job satisfaction, and eliminating the conflict, eliminating the
    adversarialism.
        I think that that is really the focus, and ought to be the
    focus, of attention. It has been the focus of, certainly, my
    efforts with the Internal Revenue Service over the last few
    years.
        This idea that somehow the union gets a double bite at the
    apple, or whatever, I think is just not the case because we are
    not bargaining over budgets in the IRS and NTEU. We do not
    bargain over budgets. This board has the approval authority
    only in three areas, and they are not bargainable matters:
    strategic plans, major reorganization, and budget.
        So I do not see this conflict of interest that has been
    articulated by the other folks. I believe that the voice of
    employees on this board can add value to the decision making
    process, and I think that is why the commission supported
    having an employee representative on the board, and I think
    that is the value that can be added to the decision making
    process.
        The Chairman. Mr. Shaw, do you want to make any further
    comment?
        Mr. Shaw. Well, I agree with Mr. Tobias. I have a
    tremendous amount of respect for him. We have not only started
    organizations together, but served on boards together. Bob is a
    very, very astute individual and a highly regarded person in
    this town.
        He is speaking of partnership. Partnership is a very
    important concept. IRS has been involved in partnership, that
    is why Bob Tobias has been on the IRS Executive Committee for
    all these years, and I would assume that he should remain
    there.
        However, partnership requires, in a public sector context,
    accountability and responsibility. Managers wind up being held
    accountable for whether the place works or not and have the
    responsibility for making sure that it works. The union does
    not.
        The union has, through testimony, through individual
    employees, and through other means, participated in this
    painting of IRS management as a bunch of ``damn devils'' that
    are out there trying to abuse all of the taxpayers, and they
    are allegedly doing it through these poor puppets that sit out
    there in the workplace and are driven to do these terrible
    things to taxpayers, and that is baloney. Bob knows it is
    baloney, I know it is baloney, and frankly I think the American
    public knows that a lot of it is baloney.
        Tax protesters are a very artful crowd. Employees sometimes
    have to be stern. Some employees go overboard; they should be
    dealt with. Some managers go overboard; they should be dealt
    with.
        But to say that partnership means that the union should sit
    in judgment of this agency and be able to interact and bypass
    the Commissioner, bypass all the managers in the normal labor/
    management relationship dealings, be able to have power and
    authority over the managers with no managers on that board
    other than the Commissioner, possibly, as a political
    appointee, is a total distortion of the labor and management
    relationship and the concept of partnership. Because, the union
    will be in a position of dictatorship, not partnership. We
    believe in partnership. We do not believe in dictatorship. In
    partnership, both parties have to be accountable and
    responsible.
        The Chairman. Mr. Woolner.
        Mr. Woolner. Yes. I would just add that the idea of
    partnership is one that I was involved with personally as the
    director of Labor Relations in IRS in 1981, and we began
    cooperative efforts at that time in that agency. It has worked
    well ever since.
        There are times, however, when partnership should find its
    rightful place. With respect to the oversight board, I think
    that partnership rightfully belongs in the context of the
    agency's deliberations, not the oversight board's
    deliberations.
        The Chairman. All right. Thank you.
        I would like to go to a couple of questions I asked the
    earlier panel about the rights of the taxpayer, as well as the
    rights of the employee.
        Taxpayers, I think, have a right not to be abused by IRS
    employees. I think we all agree that the majority of employees
    are good, hardworking, well-meaning individuals, but there are
    exceptions. How do we address that problem? One of the problems
    is, do the current rules make it difficult for the IRS to
    discipline or terminate employees who abuse taxpayers? Mr.
    Shaw?
        Mr. Shaw. The answer, Mr. Chairman, is yes. Now, when I am
    talking about employees here, I am not talking about bargaining
    unit employees, I am talking about all levels of employees.
        Employees have a tremendous number of rights. Bargaining
    unit employees have more than other employees throughout the
    chain of command because they have a collective bargaining
    agreement and can go to arbitration.
        But employees who a manager is trying to hold accountable
    has many avenues, I listed seven different avenues in my
    written statement that they can take to try to go after a
    manager who was trying to hold them accountable.
        They can file an EEO complaint, they can file a grievance
    under their labor contract, they can file an allegation that
    there is sexual harassment or they are part of a workplace that
    is not comfortable for them. It just goes on and on.
        They can file a whistle-blower complaint or a complaint
    with the Inspector General anonymously. They can try to get the
    Office of Special Counsel to come in and conduct an
    investigation and prosecute the manager. This is why managers
    do not take actions against employees.
        The system is totally out of balance. The system has got to
    be streamlined. There has got to be one appeal of any action,
    performance or conduct. There has got to be one decision, and
    that has got to be the end of it.
        Every person should have due process. They have got a right
    to know what they are supposedly doing wrong, and they must
    have a right, if it is performance, to correct that. Then they
    have either got to cut the mustard, or they do not.
        If they do not, then they get disciplined, discharged, or
    retrained, or rehabilitated, or whatever you do. Then if they
    want to appeal that action to the Merit System Protection Board
    or to another alternative that we have outlined in our
    testimony, appeal it, have one hearing, one decision, and that
    is the end of it.
        Right now, you can have four, five, or six agencies beating
    up on a manager because an employee has made all these
    allegations, just because the manager is trying to get them to
    do their job, trying to get them to come to work on time,
    trying to get them not to abuse sick leave, trying to get them
    to do day to day stuff. And I am not just talking about
    bargaining unit employees, I am talking about all Federal
    employees at whatever level.
        The Chairman. Mr. Woolner.
        Mr. Woolner. Yes. I generally agree with Jerry's comments.
    It has been my experience, however, that managers have a
    different experience with causing disciplinary actions to take
    place when it comes to conduct matters versus performance
    matters. Performance matters are a very, very heavy burden on
    managers. They, in fact, distract managers from involving
    themselves in the performance of the remainder of their
    employees once they are taken on.
        With conduct matters, I have seen and have been a part of
    the process there and I know that conduct matters come quickly
    to fruition in terms of disciplinary actions in most cases. It
    is when a manager anticipates the kind of appellate hell, if
    you will, that Jerry was just talking about that the manager
    steps back and wonders about whether or not to take the action.
        With respect to performance-based actions where someone is
    just not doing the job, I think that what we need in that
    process is a reformation of that process to shorten its time
    frames, to make more agile its appellate process so that it
    does not take forever, and that managers do not have to
    basically set aside their responsibilities for the remainder of
    their work force that they are trying to manage in order to
    take care of this one case.
        The Chairman. Mr. Tobias.
        Mr. Tobias. Mr. Chairman, I think that the prior panelists
    answered the question by saying that employer-initiated actions
    in the Federal Government are, for the large part, sustained.
    The last time I looked, I think it was about 82 or 83 percent
    of those actions are sustained. That is the first thing.
        The second thing is, you asked, what about employees who
    abused taxpayers, do the rules in existence prohibit action. I
    think Mr. Woolner is right on track; that is a conduct case in
    the Internal Revenue Service.
        We are not talking about performance here, it is a conduct
    case. When that happens, the IRS moves very quickly. For
    bargaining unit employees, there is arbitration. There are not
    these multiple levels of appeals that Mr. Shaw was talking
    about here.
        If somebody is discharged for conduct, that is it. It goes
    to arbitration, the arbitrator makes a decision, it is up or
    down, it is over. So when we are talking about conduct cases
    and we are talking about abuse of taxpayers, the rules are very
    clear.
        I might add that when we see these cycles of abuse of
    taxpayers, they have come three different times in the IRS in
    my history, and I have been with the union since 1968. They
    have all come, predictably, two, three, four years after the
    Internal Revenue Service has changed the way it measured
    employees and managers.
        When those measures turn out to be dollars collected, cases
    closed, obviously, that leads to abuse of taxpayers. I think
    that is what the internal security audit that has already been
    furnished to this committee has found once again for the third
    time in the history of the IRS.
        So I think if we are looking for the root cause of this
    issue, I think we have to look at how the agency views its
    mission, how the agency measures that mission, and if the
    mission is correct and the measures are correct, there will not
    be abuse of taxpayers, there will be taxpayers who are
    supportive of the IRS.
        The Chairman. Well, as you know, we have been very
    concerned about the use of statistics data as a means of
    judging performance.
        Mr. Tobias. You have. You have and, I think, quite rightly
    so.
        The Chairman. Let me ask one more question, then we will
    turn to Senator Kerrey. Time is growing late.
        I would like to go back to the question that IRS employees
    also have a right not to be abused or retaliated against by
    other IRS employees, or by management, for that matter. As I
    mentioned, we had a number of employees come forward with
    concerns and problems, but very much concerned with the
    question of retaliation. What can we do about that; how much of
    a problem is this?
        Mr. Shaw.
        Mr. Shaw. Well, it is a problem. I think it is a problem in
    any agency. It is also a problem by the organization that
    receives the allegation determining whether or not it has
    validity. But the suggestion I made about putting the internal
    security function of the IRS under a supervisory mode of the
    General Accounting Office, I think, would solve that problem.
        One, employees should be told that if they have problems or
    they think there is something going wrong, they should contact
    the GAO. GAO has a hot-line now. It is an arm of Congress. As
    an arm of Congress, the committee is going to be able to
    consult with GAO to make sure that investigations are ongoing
    and things are being done.
        GAO would be able to ensure that the inspection service
    was, in fact, conducting the investigations that they should
    conduct and could call them to task so that nothing could get
    buried.
        Three, GAO would know who, in fact, had made the allegation
    or would be able to determine. If they did that, then if an
    employee had a legitimate complaint they could tell GAO about
    it and GAO could intervene through any number of ways, and the
    committee could, too. So I think that is one way to do it.
        I think GAO is a better alternative than a Treasury IG,
    again, for the simple reason that Congress will have some
    oversight.
        The Chairman. Does that raise a constitutional question?
        Mr. Shaw. I do not believe so, if GAO's role is to ensure
    that all the allegations that are made are, in fact,
    investigated--I think that is an extension of the oversight
    role of Congress--and that people are held accountable. Their
    report, obviously, is going to be to the committee rather than
    to the Treasury. And I am not saying that internal security
    should not also be reporting to the Commissioner, it should,
    but directly to the Commissioner.
        In recent years, the internal security function and the
    Inspection Service has been reporting to the Commissioner
    through the Deputy Commissioner, and the Deputy Commissioner is
    a career employee that is where some of the allegations have
    come from, that the Deputy Commissioner somehow has not allowed
    cases to be pursued against buddies, and that kind of stuff.
    Again, I do not think there is any substance to that, but that
    is the allegation.
        When originally set up, Inspection reported strictly to the
    Commissioner, not to the Deputy Commissioner, not through any
    other chain, and that should be reinstituted in the statute.
    They also should be reporting to GAO and GAO should be
    providing them allegations that they receive, and overseeing
    them to make sure they are investigated.
        The Chairman. Well, my concern about the GAO is, of course,
    they can investigate but they cannot direct.
        Mr. Shaw. I understand. What they are going to do is
    monitor, in my suggestion.
        The Chairman. Yes.
        Mr. Shaw. Again, I do not think they should have direct-
    line authority over them. I think that should remain the
    Commissioner.
        The Chairman. But it would raise, I think, a constitutional
    issue.
        Mr. Shaw. Right. They could monitor that. They could refer
    the allegations made by IRS employees to the Inspection Service
    and require that the Inspection Service give them reports on
    whether they are following up and doing investigations, et
    cetera, and providing that information to the committee.
        The Chairman. Mr. Woolner.
        Mr. Woolner. Mr. Chairman, I spent some time as the Ethics
    Program Manager for the Internal Revenue Service, and in that
    regard we studied the feelings and perceptions of employees
    with regard to retaliation.
        What we found, was there were those persons who perceived
    that they would be retaliated against if they were to come
    forward on some matter, but we found almost no one who was
    willing to report situations in which retaliation had occurred.
    Now, that report is on people's perceptions, and it seems to me
    that the facts of whether there are or are not retaliation
    almost become secondary to the perception issue. If there is
    that perception, then we do not have a system that is working
    openly. That, to me, is a matter of the culture of the
    organization.
        I think that the kind of tone that is being set by the new
    Commissioner is one in which the doors are opening, there is
    more open communication coming down, and it is tending to be
    two-way, which is very important as well. In that regard, over
    time you will see, I believe, if that track continues, that
    people will not feel as hesitant to come forward as they have
    in the past.
        The Chairman. Mr. Tobias.
        Mr. Tobias. I would say two things. I agree with Mr.
    Woolner about the idea of the openness that Commissioner
    Rossotti has created in this agency. For example, two or three
    weeks ago we did anonymous focus groups of over 2,000 people
    with a video conference where these folks reported on the
    barriers that they saw between themselves and providing
    effective customer service. It was an incredible list of
    barriers and solutions.
        I have traveled extensively since that time, but every
    person that I have spoken to has said this is a new way I am
    being heard, my complaints are being heard, my solutions are
    being considered in a way that has never happened before. So I
    think that the way the Commissioner is engaging the work force
    is one way of driving away this fear of retaliation.
        But, second, and fundamentally and systemically, I think
    the change that has been recommended, that the IRS change its
    measurement system to one which includes employee evaluation,
    customer service evaluation, and business measures, will,
    indeed, create a more open IRS because those who are managing
    will have to be paying attention to those they are supervising
    on an annual basis in the context of their own evaluation. That
    is a systemic solution to a very difficult, real, perception
    problem. So I think that really gets at the nub of what has
    been an IRS problem for a long time.
        The Chairman. Senator Kerrey.
        Senator Kerrey. Thank you very much, Mr. Chairman.
        I would ask Mr. Shaw and Mr. Woolner, do you consider the
    Treasury Secretary and the Commissioner of the IRS to be part
    of the management team; are they managers?
        Mr. Shaw. Yes, sir.
        Senator Kerrey. And they are included on the proposed
    board, at least as it came out of the House. Now, the House
    expanded the number of people on the board from the original
    legislation, but they certainly are two very strong voices for
    management on that board, are they not?
        Mr. Shaw. They are the ultimate managers, Senator. But they
    do not deal with the union on a day to day basis. They do not
    conduct the negotiations with the union, they do not deal with
    labor/management problems at the local district level, or
    whatever level. That is the role of the career managers and
    career executives. They do not have the types of information
    that is going on on a day to day basis.
        Senator Kerrey. There are lots of things they do not have,
    lots of things they do not understand, but they are clearly
    management representatives on the board.
        Mr. Shaw. Yes.
        Senator Kerrey. I mean, there are lots of things that they
    may not be, but it is not fair, as one of you indicated, that
    the Commissioner is just a political appointee. They manage the
    agency. At least, that is what they represented to us when they
    came before the commission. Are you aware that both of them
    support having a labor representative on this board?
        Mr. Woolner. I am aware of that, Senator.
        Mr. Shaw. I am not aware of that.
        Senator Kerrey. Well, I have informed you that they are
    both in support.
        Mr. Shaw. Well, I am sorry, Senator, but that is not my
    information. I mean, politically, the administration is backing
    that. That is not necessarily the views of all interested
    parties.
        Senator Kerrey. You are saying that they came before
    Congress and testified they are for it, but privately they----
        Mr. Shaw. I am not saying anything, Senator, other than
    that I am not aware of that being the case.
        Senator Kerrey. It is the case. They have both, before this
    committee, indicated that they support that change and support
    having a labor representative on the board.
        But what I am saying to you is, the commission judgment
    was, because of the restructuring that is going to be required,
    that a representative ought to be on there and that management
    needs to be represented as well, and that they were well
    represented with the Treasury Secretary and the Commissioner.
        Mr. Shaw. Senator, I do not think that either the Secretary
    of the Treasury, nor the Commissioner, has the time nor the
    inclination to know about and deal with the local labor/
    management problems at an IRS district or an IRS service
    center, or whatever. Mr. Tobias does. He has a tremendous
    network of people out there that are going to be feeding him
    information, and to which he can feed information.
        It is going to place the career management at such a
    disadvantage that, in effect, you are turning over the agency
    to the union. If that is your policy decision to do that,
    Senator, then that is one set of circumstances. If it is not--
    --
        Senator Kerrey. One vote of 11, sir. Earlier you set up a
    comparison. You are for partnership, but you are against
    dictatorship. One vote in 11, sir, is not a dictator.
        Mr. Shaw. Well, I beg to differ, Senator, when also
    included in H.R. 2676 and in the recommendations is absolute
    veto power granted to the union over any changes that the
    Commissioner or the oversight makes that would affect
    bargaining unit employees.
        Senator Kerrey. Well, let us deal with that on a separate
    issue. I was going to raise that up as a separate issue. But as
    far as representation on the board, your objection to the union
    representative being on the board is that management is not
    being represented. Management is represented.
        Mr. Shaw. Senator, not the kind of management that has to
    deal with the union on a day to day basis. I am sorry, but that
    is not a factual statement. The career managers of that agency
    have to make that agency work. They have 100,000 employees
    working for them.
        When they can be bypassed by a union president sitting on a
    board complaining about them, and even though Bob Tobias has
    sat on this executive board, he has not taken any
    responsibility or accountability for the IRS problems. They are
    all managers' problems. The union has no accountability, they
    have no responsibility.
        The only thing that they are accountable for or responsible
    for are to the people that elect them, which are their
    bargaining unit employees. This gives them too much power.
    Managers and executives in government will be unable to deal
    with them. That is a fact, sir.
        Senator Kerrey. It is not a fact. You are drawing what I
    would call a draconian, hyperventilated conclusion about the
    possibilities that could occur as a result of labor being
    represented on this board, a position that is not shared by the
    two top managers that I suspect would disagree when you say
    that they have neither the time nor the inclination to be aware
    of what is going on down in the lower ranks.
        You are saying they do not have the time to be informed and
    they do not have the inclination. My guess is that Mr. Rossotti
    would strongly disagree with that. My guess is that Mr.
    Rossotti, as Commissioner of the IRS, would not agree with the
    assertion that you just made on his behalf.
        Mr. Shaw. Senator, we can all guess at what Mr. Rossotti
    might or might not do, or say. But I can tell you that the
    career executives at the Internal Revenue Service unanimously
    are absolutely opposed to the union being on that board. They
    know that they will be totally unable to manage. They know that
    they will be bypassed. They know that they will be in a
    position subordinate to the union and the union will run the
    agency. I speak not for myself, sir, I speak for them. I have
    met, talked with, and surveyed many of them.
        Senator Kerrey. I appreciate your speaking for them, sir.
    But you are arguing on the basis of them, with one vote out of
    11, having dictatorship power, and then you reference another
    section which I think is an important section.
        As far as being on the board, the two top managers support
    them being on the board. The two top managers that you say do
    not have the time or the inclination to be involved with labor/
    management disputes support them being on the board.
        My guess is that Mr. Rossotti would say that he does have
    both the time and the inclination to understand what is going
    on in those negotiations. As to the second part, I would like
    Mr. Tobias to have a chance to respond.
        Mr. Shaw. All right. I would like to make one other
    suggestion. If you believe it is absolutely imperative that
    this union representative be on the board, then there has to be
    a representative of the career managers and executives on that
    board.
        Senator Kerrey. Sir, there is a representative.
        Mr. Shaw. There is not. Not of the career managers and
    executives. The Commissioner cannot deal with 100,000 employees
    day to day. He relies on the management structure to do that.
        Senator Kerrey. That is going to come as a rude shock to
    Mr. Rossotti, who is the top manager of the IRS. My guess is,
    he is going to say that he can represent management and that
    the Treasury Secretary can as well. I mean, that is my own
    view. Now, if you want to argue that you ought to have a representative
    on there, argue that you ought to have a representative on there, a
    representative from your association on there.
        Mr. Shaw. I think that with the union on the board and
    career managers being on there would make it difficult for a
    policy board to function. But, if the union is going to be on
    the board, there is going to have to be a voice of the managers
    and executives at IRS that are career.
        Senator Kerrey. Well, let me ask Mr. Tobias to respond to
    the statements that Mr. Shaw made, that you would become a
    dictator, that this legislation vests you with the authority to
    essentially run the IRS and be a dictator of the IRS.
        Mr. Tobias. I think to merely state the supposition is to
    come to the conclusion that that is absolutely impossible unto
    this legislation. One vote out of 11 does not a dictator make.
        As to this issue of having more information, I have no idea
    what that means in the context of the board's responsibility to
    be approving strategic plans and major reorganizations and
    participating in the development of the budget. These are not
    the subjects which are discussed in any manner, under any
    circumstances, in any labor/management relationship in the
    Internal Revenue Service.
        Senator Kerrey. There are two issues here. One is the board
    and your representation on the board, and we have addressed
    that. The second, is the representation having to do with
    personnel flexibilities and veto power over the use of
    personnel flexibilities and the organizational units they
    represent.
        Mr. Tobias. The language which is in the House bill
    reflects the existing law on demonstration projects. In my
    testimony, I have said that we would be perfectly willing to
    send any impasse to the Federal Service Impasses Panel, if that
    be the wish of Congress.
        We are not interested in having veto power. The language
    was drafted to reflect existing law for demonstration projects.
    If Congress believes so, we would support these decisions go to
    the FSIP, the panel in the Federal sector currently empowered
    to decide and resolve impasses.
        Senator Kerrey. Thank you.
        Thank you, Mr. Chairman.
        The Chairman. Gentlemen, thank you for being here today.
        Again, we will keep the hearing record open for a
    sufficient amount of time to allow the committee to request and
    obtain written responses to questions from our witnesses.
        Thank you very much for being here today, gentlemen. The
    committee is in recess.
        [Whereupon, at 11:58 p.m., the hearing was concluded.]
                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

                   Prepared Statement of Donald C. Alexander

                                 i. introduction
         My name is Donald C. Alexander and I served as Commissioner of
    Internal Revenue from 1973 into 1977. I am appearing before the
    Committee to express my personal views on the recommendations, embodied
    in S. 1096, of the National Commission on Restructuring the IRS. While
    I support much of S. 1096, I cannot support some proposals in their
    current form. I will also comment on certain changes made by the Ways
    and Means Committee in the House-passed counterpart, H.R. 2676.
         That there is widespread dissatisfaction with the Internal Revenue
    Service at the present time is beyond dispute.[1] Some of this
    undoubtedly stems from the highly publicized troubles of the Service in
    its Tax Systems Modernization project. Some stems from frustration with
    a perceived inability of the Service to deliver prompt, responsive and
    accurate service to taxpayers. Some stems from highly publicized
    instances of taxpayer abuse.[2] Taxpayers should be treated fairly and
    courteously, and some of them have clearly not received such treatment.
    Some IRS revenue officers and agents seem to believe that all taxpayers
    are dishonest and some of their supervisors seem to share this belief.
    But while it is wrong to believe that all taxpayers are dishonest, it
    is equally wrong, I think, to pretend that all of them are always
    honest
         Part of the widespread dissatisfaction, I believe, stems from a
    pervasive antigovernment attitude nurtured by political rhetoric.
    Because of its wide-ranging contacts with voters and its duty to try to
    collect the nation's revenues, IRS is in the forefront. In his
    recently-released instructions for candidates, Mr. Frank Luntz stated:
             Don't forget the IRS. Nothing guarantees more applause and
            more support than the call to abolish the Internal Revenue
            Service. . . . The IRS should be a major focus of Republican
            efforts over the next two years. I urge you in the strongest of
            terms to allocate significant time and attention to this
            political ``winner.''
     Unfortunately, some have apparently followed Mr. Luntz' advice.[3]
         In considering what legislative and administrative changes should
    be made to and in the IRS, a basic question is: ``What is the job of
    the Internal Revenue Service?'' In section 2 of S. 1096, we are told
    that IRS should be transformed into a ``world class service
    organization.'' We are also told that the bulk of Federal revenue is
    generated through voluntary compliance. This is true, and most drivers
    stop at red lights and, occasionally, at stop signs. But how long would
    you expect compliance with the traffic laws to last if no traffic
    police enforced such laws? Are the tax laws so different (is money
    worth less than time?) that voluntary compliance at the present level
    would continue if there were no meaningful enforcement of the tax laws?
         I think the job of the Internal Revenue Service is to try to
    collect the proper amount of revenue due under the Internal Revenue
    Code. While this job necessarily includes assisting taxpayers to
    understand and meet their responsibilities and to assert their rights,
    should taxpayer service be the primary function of the Internal Revenue
    Service? I continue to differ with those who push the so-called
    ``Compliance 2000'' strategy that is apparently based on the notion,
    unrealistic to me, that substantially all taxpayers will comply if the
    Internal Revenue Service is warm and fuzzy and educates them about
    their rights. Moreover, I question whether ``taxpayer satisfaction''
    must be IRS' sole goal, for I don't believe that the Internal Revenue
    Service has an obligation to satisfy such taxpayers as Leona Helmsley.
         Having expressed these antediluvian views, I support many of the
    proposals to reconstruct the Internal Revenue Service as embodied in S.
    1096 and H.R. 2676.
                ii. specific provisions in s. 1096 and h.r. 2676
         Section 102 of S. 1096 provides a five-year term for the
    Commissioner of Internal Revenue. This is a sound proposal. While the
    Commissioner could still be removed within such period, the
    Commissioner's tenure would not be nearly so precarious as it was in my
    Watergate time. Continuity in office is important for long-range
    planning and administrative effectiveness. If this proposal is enacted,
    future Commissioners should commit themselves to serving the full
    statutory term. I also favor the proposal to revise the IRS Chief
    Counsel's position and job title. The Chief Counsel should not be an
    Assistant General Counsel of the Treasury Department, and I regret that
    the House Bill no longer contains this provision.
         Also in section 102 is a wise provision to grant additional
    funding for IRS Employee Plans and Exempt Organizations office. The
    workload of this office has doubled since enactment of ERISA when I was
    Commissioner. Unfortunately, the funds available for the conduct of
    this office's vitally significant duties in overseeing retirement plans
    and exempt organizations are now less than half what they should be. I
    think it unfortunate that the House Bill would delete the authorization
    of increased appropriations from the Code. Apparently, the pension
    trade associations became concerned about possible costs to their
    members. It seems to me that to the extent such fears are right, they
    can be met without such a drastic step.
         Easing the present restrictive personnel rules is a highly
    meritorious idea, and I am glad to see that this issue is addressed in
    Section 111. Unfortunately, in both S. 1096 and the House Bill, much of
    the proposed flexibility cannot be implemented without the Union's
    consent. This should be reconsidered. Also, Title II promotes
    electronic filing. Since electronic filing is in the interest of both
    taxpayers and the Internal Revenue Service, encouraging such filing by
    legislation is a sound concept. I hope, however, that this objective
    can be attained without imposing unrealistic mandates on the Internal
    Revenue Service and taxpayers.
         Moreover, section 203 of S. 1096 requires IRS to develop
    procedures for the acceptance of signatures in digital or other
    electronic form and states that until such procedures are in place IRS
    must accept electronically filed returns and other documents on which
    the required signature appears in typewritten form. The filer is
    required to retain a signed paper original of all such filings until
    the statute of limitations expires. What if the filer loses the signed
    paper original? The Ways and Means Committee Bill as reported takes a
    somewhat different approach, permitting IRS to waive the requirement of
    a signature. Both of these approaches to a desirable goal--electronic
    filing--may create substantial administrative problems. Code section
    7206(1) states that a taxpayer who ``willfully makes and subscribes'' a
    false return is guilty of a felony. Does the taxpayer ``subscribe'' a
    paperless return without a written signature? The House Bill attempts
    to remedy the problem by stating that a return ``filed without
    signature'' shall be treated for all purposes, civil and criminal, ``in
    the same manner as though signed and subscribed'' and establishing a
    presumption tracing the return to the taxpayer. I am not sure that this
    solution will work, and I think that further study is needed.
         The proposals in Subtitle C, Title IV, of S. 1096 dealing with tax
    law complexity and the role of the Internal Revenue Service in the tax
    legislative process are long overdue. Most, but not all, survived the
    Ways and Means mark-up of the House Bill. The Senate Bill's provisions
    are preferable. If these or similar measures were already in effect,
    perhaps both the taxpaying public and the Internal Revenue Service
    might have escaped the monstrous obligations imposed upon them by the
    ``Taxpayer Relief Act of 1997.'' The IRS is regularly blamed for
    complexities, ambiguities and just plain mistakes enacted by Congress
    and signed into law by the President. How could any private ``world
    class service organization'' cope with an ever-changing mess like this?
         And I don't fully subscribe to the argument that the
    Administration and Treasury must speak with one voice (Treasury's);
    this argument muzzles the IRS until after the mistakes are made. There
    is some substance, however, to the ``one voice'' argument, and if it
    continues to prevail, at least Joint Committee on Taxation staff could
    be directed to work with IRS to develop mock tax returns so that the
    tax-writing committees would see, in advance, what they propose to do
    to the American public.
         Subtitle B's proposals with respect to the IRS budget are highly
    constructive. IRS badly needs funding in excess of the discretionary
    caps, and IRS also needs funding stability. Multiyear budgets are
    highly desirable, if not essential, for long-range planning.
    Unfortunately, these provisions were very severely curtailed in the
    Ways and Means Bill.
         Similarly, the proposals in Subtitle A of Title IV expanding the
    powers of Joint Committee on Taxation are useful, and the effort to
    centralize and coordinate oversight responsibilities (although perhaps
    unrealistic) is sound.
         While many of the recommendations in Title III to strengthen
    taxpayer protection and rights are reasonable, I have some specific
    concerns. For example, section 302, expanding the authority to award
    costs and fees, defines prevailing party (p. 72), literally so as to
    render the IRS' position ``not substantially justified'' unless IRS had
    prevailed on the same issue in at least three Courts of Appeal. I think
    the intent is to reward the taxpayer and punish the IRS if the IRS
    (actually the Justice Department) continues to force trial of an issue
    after it has lost in at least three Courts of Appeal. This correction
    has been made in the Ways and Means Bill.
         Section 303 would grant taxpayers the right to sue IRS if a
    collection officer acted negligently. The Code now permits such suits
    only if the collection officer's action is reckless or intentional. I
    think the extension to mere negligence is an invitation to further
    litigation and I hope this provision will be reconsidered.
            iii. ways and means committee bill--ornaments on the tree
         One of the ornaments that crept into the House bill (action 341)
    is an extension of the privilege of confidentiality in certain non-
    criminal cases to certified public accountants and enrolled agents. As
    I see it, this has little to do with restructuring the Internal Revenue
    Service but much to do with impeding the search for truth in tax
    controversies. This issue deserves independent review by the Congress,
    perhaps with the assistance of the General Accounting Office, to test
    its advantages and disadvantages. Should the confidentiality privilege
    be extended to 32,000 enrolled agents who can hardly contend, as the
    CPAs do, that they are a ``learned profession?''
         Another ornament (section 344) in the House bill would strictly
    limit IRS' authority to require production of computer source codes.
    Does the ordinary taxpayer really need such protection? A further
    provision (section 349) would prevent IRS from threatening an audit
    ``in an attempt to coerce'' a restaurant into entering into a tip
    agreement. The likely effect of this, as I see it, would be (a) to
    increase IRS' audits of restaurants if any effort is made to secure
    something more than the minimal compliance we now have with the
    reporting of tips or (b) to lessen compliance in an area where it is
    already unacceptably low. A further provision (action 343) added in the
    Ways and Means Committee bill would purportedly limit so-called
    financial status audits. I strongly believe that IRS should have the
    authority to probe for unreported income in situations where the
    taxpayer's lavish living style demonstrates the likelihood of
    noncompliance, but perhaps the House bill's limitation may not
    substantially impede the fulfillment of IRS' obligation to see to it
    that dishonest taxpayers (or non-taxpayers), particularly those with
    illegal income, are called to account.
         S. 1096 calls for a study of whether the burden of proof in
    taxpayer-IRS controversies should be changed. Unwisely in my judgment,
    the Ways and Means Bill would put the burden of proof on factual issues
    in court proceedings on the Internal Revenue Service (section 301).
    Whether this would actually abrogate the long-standing judicial rule
    that agency action is presumptively correct may be an open question. As
    limited by the Ways and Means Committee explanation, this change might
    not severely damage tax administration and, consequently, might not
    materially aid taxpayers whom it is apparently intended to benefit. All
    individuals, including billionaires, would be beneficiaries of the new
    rule, but partnerships, corporations, and trusts would be subject to a
    limitation of less than about $7 million in net assets. A wholesale
    shift in burden of proof would devastate tax administration for
    taxpayers would be encouraged to play hide-the-ball and, without
    extremely expensive and intrusive efforts, the Internal Revenue Service
    could not determine the facts. While this shift appears to be much more
    restrictive, the legislative language of the House Bill is troublesome
    and would produce further controversy (perhaps a preliminary trial)
    about whether the taxpayer complied with the conditions precedent to
    the shift in burden. Under the House Bill, the taxpayer must have
    ``fully cooperated'' with the Internal Revenue Service, including
    satisfying the reasonable requests of the Service as to witnesses,
    information and documents ``within the control of the taxpayer.'' What
    does ``within the control'' mean? Is a third-party witness within the
    taxpayer's control? What if the taxpayer loses records, inadvertently
    or deliberately? What are ``reasonable'' requests? If ``full
    cooperation'' actually includes ``exhaust administrative remedies,''
    why not say so? Cf. Code Section 7430(b).
         Moreover, the House provision contains a questionable reservation
    that it shall not be construed ``to override any requirement of this
    title to substantiate any item.'' The basic requirement in Code section
    6001 for the keeping of books and records is not a substantiation
    provision like that in section 274(d). Despite Committee Report
    language, is there a negative inference that section 6001 is
    overridden?
         In response to the Committee's request, the Chief Judge of the
    Court has substantiated a thoughtful letter about the House's proposed
    change in the burden of proof. I strongly recommend reconsideration of
    this provision.
                               iv. irs governance
         Title I, Subtitle A of S. 1096 proposes a basic change in
    governance of the Internal Revenue Service. It would create a nine-
    member Oversight Board that would apparently share responsibility with
    the Treasury for the ``administration, management, conduct, direction
    and supervision of the execution and application of the Internal
    Revenue laws or related statutes and tax conventions to which the
    United States is a party.'' Exceptions to this general grant of
    authority are (i) the making of tax policy, (ii) ``specific law
    enforcement activities'' of the IRS, and (iii) certain other specific
    activities under procurement and other delegation orders. While the
    Board would include a union representative (presumably Mr. Tobias), and
    the Secretary of the Treasury (or Deputy Secretary), the Commissioner
    would not be a member. The other seven members would be part-time
    government employees appointed on the basis of experience and expertise
    in management of large service organizations, customer service,
    compliance, information technology, organization development, and the
    needs and concerns of taxpayers. The Board would have the authority to
    select and remove the Commissioner. The Internal Revenue Service would
    remain a component of the Treasury Department.
         I think that such a Board, with the composition and the authority
    assigned to it by the present wording of S. 1096, could and likely
    would create serious operational and other problems for the Internal
    Revenue Service. The first problem is the presence of the head of the
    union on a Board having the right to select and remove the
    Commissioner. As I have said before, I think the union head has no
    business whatever being on such a Board. Second, I think the
    Commissioner should be a member of the Board. Third, I don't think the
    Board should have the right to select and remove the Commissioner. The
    Commissioner should be appointed by the President for a five-year term
    and the President should retain the right to remove the Commissioner
    for cause. The President's power to remove the Board is, in my
    judgment, insufficient.
         If the changes suggested above should be made, I would be much
    less troubled by the Board. However, problems will still remain so long
    as the Internal Revenue Service stays a component of Treasury. One of
    these is to whom the Commissioner would actually report and to whom he
    or she would be accountable. Would it be the Secretary of the Treasury,
    or would it be the Board, or would it be both? What if there should be
    a flat disagreement between the Secretary and the Board on a major
    matter?
         The authority given to the Board, even with the limitations on
    such authority, would present the perception, and possibly the reality,
    of conflicts of interest. While Board members would be forbidden from
    participating in ``specific law enforcement activities,'' they would
    have major duties with respect to IRS' plans, programs and budget.
    These projects involve the assignment of IRS enforcement personnel and
    the allocation of such personnel among IRS' service and enforcement
    responsibilities, not excluding the coordinated examination program
    through which the IRS regularly audits the largest corporations in
    America. What if the Board should decide that IRS' primary role is
    indeed that described in the Commission's findings and it is devoting
    far too much of its resources to enforcement such as examining the tax
    returns of large corporations? Would a skeptical public, much less the
    press, believe that a budget decision to beef up taxpayer service and
    weaken compliance activities directed at large corporations (including
    those that had employed or were currently employing Board members) was
    done entirely for proper reasons?
         Furthermore, the efforts evident in S. 1096 to prevent Board
    members from interfering in specific administrative and enforcement
    actions are insufficient. Since Watergate, a time when the Internal
    Revenue Service was sorely tested and came through well, I think there
    have been extremely few, if any, instances of improper interference
    with specific taxpayer audits or collection actions.[4] However, there
    have been a number of efforts, some successful, to cause IRS to reverse
    itself and concede, through a ruling, an industry-wide action or
    otherwise, an interpretative position which IRS was taking in the
    examination of a particular group of taxpayers or a particular
    industry. This is where the problem exists. What if a Commissioner
    having the duty to decide a material issue affecting the tax treatment
    of a particular industry, as well as a personnel question on which the
    union is taking a strong stand, should face a Board with removal
    authority among whose dominant members are an executive from the
    particular industry and the union executive? What if the Commissioner
    should decide, solely on a sound analysis of close questions, to
    concede both the industry issue and the union issue? Would the public
    (and the press) believe that there had been no improper influence by
    the Board? It goes without saying that I strongly oppose granting Board
    members authority to pay into individual cases.
         Therefore, while I think that there is genuine merit in having an
    outside Board with responsibilities and duties much greater than those
    of the advisory groups now providing outside assistance to IRS, I have
    serious questions about the Board as proposed in S. 1096 with the right
    to appoint and remove the Commissioner. If the Board were reconstituted
    and its powers limited as suggested above and if the IRS were an
    independent agency, a Board would be not only helpful but necessary to
    guide IRS during this difficult period and to deflect unjustified
    criticism.
         H.R. 2676's counterpart provisions reflect material changes.
    First, the number of Board members would be increased to 11, but the
    Commissioner would be a member of the Board. Second, the Board would
    not have the authority to appoint and remove the Commissioner but would
    instead have the responsibility to recommend candidates for appointment
    as Commissioner and, more significant, recommend the removal of the
    Commissioner. The Board would retain the authority to submit its own
    IRS budget to the Congress. While the changes made in the House Bill
    reduce to some extent the problems of overlapping authority, I believe
    that so long as the Internal Revenue Service remains a part of
    Treasury, the concept of an oversight board is problematic.
         A final point: Under S. 1096 almost all of us who have had the
    privilege of serving as Commissioner of Internal Revenue for the last
    45 years would be ineligible for appointment. Section 102 now provides:
    ``[T]he appointment [of the Commissioner] shall be made on the basis of
    demonstrated ability in management and without regard to political
    affiliation or activity.'' I like the latter requirement; politics
    should be irrelevant. But neither I, nor my successors (except the
    current Commissioner) and living predecessors, could show the required
    ``demonstrated ability in management.'' My managerial experience, prior
    to IRS service, consisted of co-managing a Cincinnati law firm and
    managing more than 200 men in World War II. Maybe we have all done
    lousy jobs since the Internal Revenue Service was removed from
    politics, but I don't think that a tax professional should be forever
    barred from serving as Commissioner. This problem was corrected in the
    Ways and Means Bill.
                                    endnotes
     [1]: Some of the most vocal critics stress that IRS does not measure
            up to the best of the private service sector. This is true, but
            is it the right comparison? When compared to any other tax
            administration system, IRS measures up very well indeed. It is
            ironic that at the very time that IRS is being bashed by
            Congress, the Ford Foundation, Harvard School of Government and
            the Council on Excellence in Government gave it the Innovation
            in American Government Award for its TeleFile program.
     [2]: In contrast to the impression given at the recent Senate Finance
            Committee hearings that abusive behavior might be the IRS norm,
            the Restructuring Commission's Report (p. 43) stated: ``The
            agency spends significant resources educating personnel to
            treat taxpayers fairly, and the Commission found very few
            examples of IRS personnel abusing power.''
     [3]: On June 4, 1997, I received a fund-raising letter that stated the
            following:
       ``Armed with your responses and demands, GOP Senate Leaders can call
            for TELEVISED SENATE HEARINGS ON THE IRS!
       Working together, we can publicly expose the IRS's worst
            transgressions against honest, responsible taxpayers like
            you.''
     [4]: H.R. 2676 contains a provision explicitly forbidding the
            President, Vice-President and certain other high-level
            executives to request the conduct or termination of an audit or
            other investigation of a particular taxpayer. If any such
            provision is adopted, why not extend the prohibition to Members
            of Congress?

                    Responses to Questions From Senator Roth

                            strengthening oversight
        Question 1. Should the Inspections Division be more independent?
    Should the IRS Inspections Division be transferred to the Treasury IG?
        Answer. I think that Inspection should be left within IRS. The
    internal Security component of Inspection has an essential police
    function, protecting IRS men and women and assuring the integrity of
    IRS. It has served both IRS and taxpayers well in the past, in my
    judgment, and I think moving it to Treasury would disrupt it and lessen
    its effectiveness. Internal Audit, the other Inspection function, has a
    different mission: to examine various IRS operations and to determine
    whether activities have been carried out correctly, fairly and
    efficiently. It reports to the Commissioner, and I found it an
    essential tool for managing IRS. I believe that subsequent
    Commissioners have had the same experience. Particularly if Congress
    agrees that Commissioner Rossotti is on the right track, he should not
    be deprived of this essential element in his management of IRS.
        Moreover, recent problems with Treasury's Inspector General have
    been widely publicized. Until Treasury demonstrates that its inspection
    function is operating (a) efficiently and (b) nonpolitically, I think
    it unwise to give Treasury additional inspection authority.
        Question 2.  One of the most important lessons learned from the
    Committee's oversight hearings last September is the need for greater
    oversight of the IRS. The Congress needs to do more oversight--which we
    intend to do. But also there must be more oversight on the IRS in the
    Executive Branch. There are, at least, two ways we can improve that
    oversight. The first is to vest significant oversight responsibility
    with the Oversight Board that is created in the House-passed bill. The
    second way is to substantially increase the power of the Treasury
    Inspector General. What are your views on both of these ideas?
        Answer. For the reasons stated above, I would not give the Treasury
    Inspector General any additional authority over IRS. Nor would I give
    such authority to other Treasury minions. The Secretary of the Treasury
    should be the person to whom the Commissioner reports, and the
    Secretary should give IRS, by far the largest component of Treasury,
    more of his time and his judgment.
        I think the Oversight Board has been given sufficient, if not more
    than sufficient. authority under H.R. 2676.
        Question 3.  Is the Oversight Board created in the House bill an
    executive board, or merely advisory? Does the Board have legal
    authority to direct actions taken by the Commissioner?
        Answer. I believe that the Oversight Board is an executive board.
    It shares authority with the Secretary of the Treasury, and, as I
    indicated in my written statement for the Hearing, I think this divided
    authority can and likely will create problems.
        Question 4.  If the Oversight Board is created and Commissioner
    Rossotti is able to turn the agency around, should the Board be
    sunsetted?
        Answer. So long as IRS is not perceived as ``turning around''
    sufficiently (and this may last as long as demonizing IRS is popular) I
    doubt that IRS will ever turn around sufficiently to make certain of
    its critics happy. Therefore, I doubt that the Board will be sunsetted.
    On the other hand, I hope that Congress will sunset the Board in a few
    years.
        Question 5.  Our hearings have also indicated a need for the
    Committee to consider protection for the taxpayer in a number of very
    specific areas.
              (a). What are your thoughts on changes the committee ought to
            consider in the penalty and interest area?
        Answer. I think that the Committee should study and revise our
    overlapping penalty structure. For many years penalties were
    inadequate; now there are too many of them and they are too heavy. Some
    of them have been enacted for revenue-raising reasons, and penalties
    should not be viewed as revenue-raisers. If our system worked
    perfectly, no penalty would be assessed. The penalty area is long
    overdue for basic reconsideration and reform. I will be glad to submit
    specific recommendations if this would be helpful.
              (b). The Committee's oversight hearings showed considerable
            problems with the IRS's exercise of its lien, levy, and seizure
            authority. This has to be fixed. I'm concerned about taxpayers
            who do not receive real notice and wake up in the morning only
            to find that the IRS has taken their bank account business or
            other assets. Should the taxpayer have a right to a judicial
            hearing before seizure?
        Answer. Taxpayers certainly should receive notice before IRS
    exercises its lien, levy or seizure authority. In my experience they
    always have received such notice. To the extent that there are cases
    where breakdowns have occurred, the system should be fixed. However, I
    would recommend that you limit the right to a judicial hearing before
    seizure to a seizure of the taxpayer's residence.
              (c). The current Offer in Compromise program doesn't seem to
            work. In too many instances, people go into the program,
            nothing gets resolved, and by the time they get out they are
            socked with horrendous interest and penalties. Is this program
            broken? How would you improve it?
        Answer. IRS has a current project to reconsider and improve its
    offer in compromise program. I agree that overly tight standards,
    frequently imposed in the past, have lead to failures. IRS should adopt
    more liberal standards, uniform except for cost of living variations in
    different sections of the country, which would make the offer in
    compromise program and Installment Agreements work better for taxpayers
    and for the IRS.
              (d). The IRS has the power to label a taxpayer as an
            ``illegal tax protester.'' Such a label is important for the
            IRS in its efforts to protect its agents. But such a label also
            brings serious consequences for the labeled taxpayer. It is
            important to protect IRS employees. However, our investigation
            has revealed that some taxpayers may have been labeled as
            illegal tax protesters merely because they wrote an article in
            a newspaper. Should there be a review of such labeling to
            prevent abuse of the labeling system to the detriment of law
            abiding taxpayers?
        Answer. The label ``illegal tax protester'' should apply only to
    those that fit all of such label's requirements. Simply writing an
    article derogatory about IRS in a newspaper clearly does not meet such
    standard. Nor, for that matter, does writing a nasty letter to the
    Commissioner (I used to receive plenty of those). Administrative action
    should go tar towards solving this problem.
              (e). The case of Father Ballweg indicated to all of us the
            importance of a system that is customer friendly. Shouldn't
            most correspondence be signed so that agency personnel are
            accountable? At some stage in the process, where a problem
            arises, should the taxpayer be given an employee to whom the
            taxpayer may turn to resolve the case?
        Answer. Requiring mass communications to be signed in a particular
    person's name is difficult for all mass communicators, including the
    IRS. On the other hand, specific communications should be signed by, or
    in the name of, a live person that the taxpayer can talk with.
        Question 6.  Should the Taxpayer Advocate and problems resolution
    officers be independent from the IRS?
        Answer. The Problem Resolution Office (which I created) and the
    Taxpayer Advocate should remain a part of IRS, but the Taxpayer
    Advocate should report directly to the Commissioner and the Taxpayer
    Advocate Office should be given additional powers and stature.
        Question 7.  Are you aware of any instances of IRS employees who
    were abusive to taxpayers or retaliate against other employees who were
    not disciplined because management believed the disciplinary process is
    too burdensome?
        Answer. Yes. The process is too burdensome, the Union throws up too
    many obstacles, and the system doesn't work very well. For a recent
    example, look at the Boston browser.
        Question 8.  The Committee's hearings last September dramatically
    demonstrated the need to institute greater taxpayer protection. I think
    we were all very disappointed by the poor performance of the taxpayer
    advocate's office. The idea, though of a tax ombudsman--someone who has
    the knowledge to guide taxpayers and the power to resolve snafus--seems
    to me to be a good one. On the other hand we should be striving for an
    IRS where problems are solved right the first time by the front line
    agency personnel that deal with the public.
        Until we achieve such a happy state one avenue open to the
    Committee is to increase the resources devoted to the advocate's office
    develop a separate professional career path for the people who work in
    it, and have the office report to both the Commissioner and the
    Oversight Board. What is your reaction to that?
        Answer. I like it.
                              changing the culture
        Question 9.  Improving oversight and protecting the taxpayer are
    not the only things we need to be doing to respond to the problems
    uncovered at the IRS. We need to change the very culture of the agency
    itself. That will require a complete new look at its organizational
    structure, its managerial rules, its performance measures, and its
    training programs.
              (a). One of the surprises of the Committees investigation
            into the IRS is how fearful many employees are at how they are
            managed. They paint a picture of the IRS as a vindictive and
            unhappy place to work. What changes would you like to see in
            personnel rules and other procedures to change the culture of
            this organization?
        Answer. In any large organization, there are always some unhappy
    people. There are also some bad managers, and IRS' Oklahoma City office
    was a good example. But I continue to believe that most IRS managers
    are not vindictive and most employees are not unhappy most of the time
    at IRS any more than they are at this law firm. I would like to see
    more openness at IRS, more mingling of top managers with the troops and
    less destructive political criticism of IRS. How can you be happy when
    you are told by the Senate Majority Leader that you are evil? IRS needs
    to shape up, but so do its most vitriolic critics.
              (b). There are a considerable number of people who feel that
            it is not possible to reform the culture of the IRS without
            dismantling the agency. For these people a whole new tax system
            that isn't dependent on a collection agency is the way to go.
            What is your response to people who, because of their
            experiences with IRS, believe this agency beyond saving?
        Answer. I know of no tax system that isn't dependent upon some
    collection agency. A truly voluntary tax system wouldn't work. Some
    people hate paying taxes and, therefore, hate the tax collector.
    Sometimes, this hatred has some justification. Nevertheless, I continue
    to believe that IRS is a good agency that has an enormously difficult
    job to do and, on the whole, has done its job pretty well. Why don't we
    try comparing IRS to other tax collection agencies and find out how it
    measures up?
              (c). In 1994, Congress passed the Government Performance and
            Results Act (GPRA). This was an effort to get the Congress and
            the Executive Branch to focus on performance standards. Do you
            support such standards for the IRS? If you do, what do you
            think the performance standards should be?
        Answer.  I think that OMB's directives in implementing the
    Government Performance and Results Act and IRS' attempts to comply with
    such directives created at least some of the problems for which IRS has
    recently been blasted. Imposing performance measurement standards on an
    agency that has law enforcement duties, like collecting taxes and
    curbing tax evasion, is a very risky thing to do at best, and I think
    that careful thought should have been given to (a) either exempting law
    enforcement from the Government Performance and Results Act or (b)
    probably better, making as certain as possible in this imperfect world
    that applying the Act to law enforcement activities did not create the
    reality or appearance of unwise goals or, even worse, a quota system.
              (d). During the September hearings employee witnesses
            testified that many IRS employees ignore the Internal Revenue
            Manual and other official procedures with impunity. Should IRS
            employees be required to follow the Internal Revenue Manual and
            other official procedures?
        Answer. Certainly IRS employees should follow IRS' official
    procedures and Manual directives. I remain skeptical that the employees
    who testified in September were a representative sample of IRS
    employees.
                           oversight board questions
        Question 10.  The House bill establishes a board ``to oversee'' the
    IRS in its ``administration, management, conduct, direction, and
    supervision'' of the administration of the tax laws. What does
    ``oversee'' mean to you? What should be the relationship between the
    Commissioner and the Board?
        Answer. To me, the word ``oversee'' means periodic (at least
    quarterly and probably monthly) review of IRS' functions and programs.
    I hope that the Commissioner will be a member of the Board, and I think
    that the Commissioner should regularly report to and work with the
    Board in much the same way as a CEO reports to and works with a
    corporate board of directors, having in mind the Commissioner's
    responsibilities to his boss, the Secretary of the Treasury. I have
    previously expressed my concerns about dual, and possibly conflicting,
    authority.
        Question 11.  I am troubled that the bill prohibits the board from
    exercising any authority over ``law enforcement activities'' such as
    collections--an area which our hearings have shown to be rife with
    taxpayer abuse. Should the Board have oversight authority over law
    enforcement activities to prevent taxpayer abuse?
        Answer. I repeat my strong view that the Board should not have any
    authority over individual cases, whether examination or collections,
    and should not have 6103 access to tax returns. Working with the Board
    and the Treasury, Commissioner Rossotti will have a strong hand in
    curtailing future abuses.
        Question 12.  If an IRS Oversight Board is established within
    Treasury, should Board members be part-time or full-time employees?
        Answer. I think the Administration's Board of full-time Treasury
    political appointees was a bad idea. It is much better to have a part-
    time Board of outsiders than a Board composed of a group of Treasury
    political types. I remember Watergate; while the then-Secretary of the
    Treasury was a tower of strength and a strong force for sound tax
    administration, many others were not. I have little more confidence in
    the present group, apart from Secretary Rubin and Assistant Secretary
    Lubick, both of whom I admire, than the crowd that President Nixon
    appointed to Treasury positions.
        Question 13.  What is your opinion regarding who should serve on
    the proposed IRS Oversight Board? Should a union representative be
    guaranteed a slot on the Board? Should the Commissioner and Secretary
    of Treasury be on the Board?
        Answer. I think that the Secretary of the Treasury and the
    Commissioner of Internal Revenue should be on the Board. A Union
    representative should not be on the Board. In this Administration,
    there are enough problems with the mislabeled ``partnership'' with the
    Union anyway; I understand that the Union forced IRS to rehire the
    Boston browser.
                              simplifying the code
        Question 14.  I think that we would probably all agree that a
    significant part of taxpayers problems with the IRS stem from the
    complexity of the code. What parts of the code do you think are prime
    candidates for simplification?
        Answer. I agree completely that a significant part of taxpayers'
    problems are created by the Code being so complex. While it would
    unduly delay and lengthen this reply for me to list everything that
    should be changed, I do have some basic suggestions:
              (1) Refundable credits like the EITC and the 1997 child
            credit are actually welfare grants or wage supplements to the
            extent that they exceed income taxes otherwise payable. Move
            them out of the tax system and let HHS try to administer them.
              (2) Try to return to the 1986 model of lower rates and a
            broader base.
              (3) Get rid of the alternative minimum taxes.
              (4) Refrain from enacting any future spending programs
            through the tax system (such as the Hope Scholarship and the
            Administration's current silly proposals for environmental
            credits) and remove as many of these ornaments as possible from
            the existing Code. Use the savings to reduce rates or increase
            personal exemptions.
              (5) Don't use penalties as revenue-raisers; instead simplify
            the penalty system and reduce overlap and excessive penalties.

                                   __________

                    Prepared Statement of Karen J. Andreasen

        My name is Karen Andreasen and I reside in Tampa, Florida. I am
    currently teaching 4th graders at a small, private school and taking
    classes myself to update my certification. Although I am presently
    divorced, I was married for 19 years and have 3 wonderful children
    Christopher, Michael and Brittany.
        My ex-husband is a former field auditor for the Internal Revenue
    Service (IRS). For approximately the last 10 years of our marriage, he
    had a tax and IRS representation practice and, during the course of his
    career, he had also been an expert witness in litigation cases. His
    intimate knowledge of the IRS and tax issues far exceeded any knowledge
    I had.
        During our marriage, my former husband kept all our business and
    most personal information at his office and, as a result, I was
    excluded from our financial dealings. I loved my husband but--
    mistakenly trusted him--to handle the financial end of things while I
    was busy taking care of our children.
        At the time of our divorce, the value of my former husband's
    practice and earnings became an issue for alimony and child support
    purposes. Under the advice of my attorney, I engaged a Certified Public
    Accountant (CPA), Gayla Brey Russell, who has particular expertise in
    the areas of tax and litigation. Upon reviewing my former husband's
    business documents it became apparent to the CPA that there were clear
    discrepancies between my former husband's sworn statements and what the
    documents said. Two questions were becoming obvious--whether or not my
    former husband had actually filed the returns he said were filed and
    whether or not he had ever paid the estimated taxes as shown on the
    copies of documents we had in our possession. If neither had been done,
    the tax liabilities for these years would exceed $12,000, even before
    ongoing penalties and interest were added. This all started in the fall
    of 1995.
        In February 1996, I received a notice from the IRS inquiring into
    the whereabouts of my former husband's and my 1993 tax return. Although
    I knew I had not signed any such return, my former husband insisted
    that both the 1993 and 1994 returns had been filed. I was led to
    believe by my husband that the IRS had lost them. That April, I
    submitted a request to the IRS for copies of both the 1993 and 1994
    returns, however they responded saying that no such returns could be
    found. It was now becoming very clear that no estimated taxes for those
    year had ever been made. I realized at this point that I of 2 things
    should have occurred: if the tax returns had been filed, we should have
    received notices demanding payment of the taxes due. However, if the
    estimated payments had been made and no returns sent in, the IRS would
    have sent us a notice of credit and inquired where we wanted those
    credits applied. In my case, neither of these scenarios unfolded.
        My accountant advised me to file new separate tax returns for the 2
    years in question. Upon learning of this, my former husband forged my
    signature and filed joint tax returns before my separate returns could
    even be prepared. Not knowing what he had done, I went ahead and filed
    my own forms. Of course these were returned to me by the IRS with a
    cover letter stating that his joint returns had already been received.
    Copies of these joint returns were included with the IRS' notice. My
    former husband had not even tried to disguise his attempt to forge my
    signature. The signature, in fact, was an exact replica of his own. At
    this point the battle lines were drawn.
        My CPA refiled my separate returns with a cover letter stating that
    the joint returns my former husband had filed reflected a forged
    signature. It informed the IRS that the IRS already had a history of
    correspondence regarding these particular returns. The letter also
    included samples of my signature along with the forged signature
    appearing on the joint returns. The IRS' response to my correspondence
    was that they were very sorry, but my only recourse was to file suit in
    civil court!
        By this time I was deeply in debt and my mother sold her own home
    and moved in with me to help with the children. My husband remarried
    and was now providing me with support payments only when he felt like
    it. My former husband had basically skated passed the IRS and the
    family courts--he had effectively accomplished exactly what he had set
    out to do.
        A formal protest, along with more proof of the forgery and case law
    that should have been in my favor were filed. At the same time, I also
    received a letter from the IRS saying the case law was not applicable
    to my case because I was not currently undergoing an audit! It seemed
    to me that case law is to be used only when the IRS deems it is
    proper--or convenient.
        In the meantime, I requested from the IRS an extension for filing
    my tax returns. I did this in an attempt to hold off on the actual
    filing, hoping the matter could be resolved during that period of time.
    I was, in fact, anticipating receiving a large refund and I knew if the
    IRS did not reverse its decision that my refund could be applied to pay
    my former husband's back taxes. By October 1997, I had heard nothing
    from the IRS so I sent my 1996 returns into them not knowing what was
    going to happen. By now tax liens had been placed on my home and the
    bank had threatened me with foreclosure.
        In December 1997, the dreaded IRS notice indeed arrived stating
    that my refund was being applied to my former husband's back taxes. The
    $3,693, refund that I so desperately needed was to be used to benefit
    my former husband after all.
        However, about 3 weeks ago I received a letter from the IRS stating
    that it was reversing its decision and that I would receive my refund
    in approximately 8 weeks.
        Mr. Chairman, it is now 2\1/2\ years since this roller coaster ride
    began. During this time my former husband was able to create a maze of
    papers that he thought nobody could untangle. If it had not been for
    the devotion and persistence of my friends and family I would clearly
    not have made it here today. However, my story is not over, for I now
    wonder how long it will take to remove the IRS lien that still remains
    against my home. The lien was in place against our home even before my
    husband relinquished it in our divorce settlement. My only hope is that
    getting rid of this lien, yet another reminder of my former husband,
    will not take years more to settle and take an even greater toll on my
    children and me.
        Throughout this ordeal I was treated as if I were guilty until I
    could prove my innocence. I know now that I was naive and trusting. I
    can only hope my ordeal can help other women in similar situations, and
    lessen their pain and frustration. My former husband knew--and used--
    the IRS system against me, a system that allowed itself to be
    manipulated in its quest to get at the money--anyone's money, right or
    wrong--just as long as they get it.
        I feel lucky to be receiving my refund at all. I also feel lucky to
    be able to appear before your Committee today. But luck should have
    nothing to do with it. There should be a logical process for disputes
    like mine, and one that does not require unlimited personal funds to
    file a law suit! I can only imagine the number of other innocent
    spouses that are out there now, drowning, in the same sea of red tape,
    fear, frustration and sense of helplessness that I did. A sea not
    calmed by the IRS in its effort to get anything it can from individuals
    who don't have the strength to fight back. Although my personal battle
    is not completely over, I no longer fear that I am just another
    fatality of the tax system--but I do fear for those still caught in it.
        Mr. Chairman and members of this Committee, thank you for your
    time, as it is a most precious gift. However, it is one that I cannot
    repay--just as you cannot repay me for the endless hours I spent in
    vain trying so desperately to reason with an unreasonable and
    unrelenting system.

                                   __________

                       Prepared Statement of Richard Beck

         Mr. Chairman and distinguished members, my name is Richard Beck
    and I am a Professor of Law at New York Law School. I have published
    five articles on the problems of joint and several liability for joint
    returns, one of which is the only study which attempts a historical and
    comparative analysis of how we got where we are, and how our law
    compares with other countries. I was instrumental in the American Bar
    Association's project which culminated in our recommendation four years
    ago that Congress should simply repeal joint liability altogether. Two
    years ago I testified before the House Ways & Means Oversight Committee
    and argued for repeal. And just two weeks ago I submitted an amicus
    brief for certiorari to the Supreme Court on behalf of Elizabeth
    Cockrell, whose testimony you have just heard. That brief was joined by
    the National Organization for Women, the National Taxpayers Union, and
    the Womens Bar Association of the State of New York. I am very grateful
    to you for the opportunity to be here today.
         The shocking statements you have just heard are unfortunately very
    similar to the stories of thousands of other women who are forced to
    pay their ex-husbands' taxes every year. Nobody knows for certain how
    many, because the IRS keeps no records of such collection attempts. To
    the IRS it is apparently of so little importance which ex-spouse it
    pursues that it does not even know, and could not tell the General
    Accounting Office, how often it collects from the wrong spouse or how
    much money is involved. My own rough estimate, and the GAO's as well, I
    believe, is that the IRS attempts collection from the wrong spouse
    after the couple's separation or divorce in at least 50,000 cases every
    year.
         Joint liability applies to nearly all married couples because
    almost all file jointly, and that is because filing separately usually
    results in a slightly higher tax. But very few taxpayers are aware, or
    have any reason to be aware that by filing jointly they incur joint and
    several liability. There is no joint liability clause at all on the
    Form 1040 itself, not even in fine print, much less the big and bold
    warning such a risk deserves. Even tax preparers and divorce lawyers
    generally do not take this liability into account, or mistakenly think
    they can protect their clients by agreement with the ex-husband. The
    victims of joint return liability are always taken by surprise.
         Based on the composition of the reported innocent spouse
    decisions, I estimate that over 90% of the victims of joint liability
    collections are women. The IRS usually attempts collection from
    whichever spouse it finds first. This has a significantly negative
    effect upon women, because after divorce the wife often remains at the
    marital address on the joint return, and the IRS will usually look no
    further, even if the victim tells the IRS where to find her ex-husband.
    Elizabeth Cockrell's case which we have just heard is all too typical:
    the IRS clearly knows her ex-husband's whereabouts, but has apparently
    done nothing to collect from him.
         No other developed country in the world imposes joint and several
    liability for income taxes in the way we do, including countries which
    also offer income-splitting on joint returns. In many countries which
    once imposed spousal liability, it has been repealed as archaic,
    unfair, and inconsistent with modern conceptions of women's rights to
    economic independence.It should be repealed here as well.
         How did we get where we are today? Joint and several liability was
    first enacted in the U.S. in 1938, and it appears that the IRS (then
    called the ``Bureau of Internal Revenue'') may have misled Congress
    into enacting it. The story begins with an IRS error which led to a
    1935 decision in the 9th Circuit by the name of Cole. In Cole, the IRS
    could not collect a large tax deficiency due from the wife's separate
    income because the IRS had mistakenly assessed her husband instead. As
    a result, the IRS negligently allowed the statute of limitations to run
    as to the wife. When it discovered its error, the IRS then continued
    trying to collect from the husband anyway, on its completely invented
    theory that filing jointly entailed joint and several liability. In
    court, the IRS argued that it needed joint liability because joint
    returns do not exhibit each spouse's separate income and deductions,
    and so, the IRS claimed, it could not figure out which spouse to tax
    and for how much.
         One may wonder whether the IRS made the argument in good faith,
    because at that very same time, the Treasury was promulgating new
    regulations which would limit charitable deductions on joint returns to
    15% of the donor spouse's separate net income, which necessarily
    involved the very same calculation of separate incomes which the
    government was arguing in Cole that it could not make.
         In any event, the Ninth Circuit rejected the IRS' argument of
    ``administrative necessity'' because the separate liabilities of the
    spouses were in fact stipulated in Cole. The court then noted that if a
    case should ever arise in which some doubt actually existed, the IRS
    remained free to assess both spouses and let them prove their
    respective incomes.
         The court then rejected joint liability on the ground that it
    would violate the cardinal principle of the income tax, which is that
    it is levied in accordance with ability to pay, which means in
    proportion to each taxpayer's own income, and no one else's.
         After its 1935 defeat in Cole, the IRS urged Congress to enact
    joint and several liability, which Congress did in 1938. The only
    explanation put forth in the committee reports was the very same
    ``administrative necessity'' which had been rejected in Cole.
         Joint and several liability was far too broad a solution to the
    perceived problem, if indeed there ever was a problem at all. A much
    better and more focussed solution, for example, might have been to
    authorize an extended statute of limitations applicable to a taxpayer
    if he has notice of an incorrect assessment against his spouse. Another
    obvious answer to the IRS' pretended dilemma would have been for the
    IRS to redesign its own joint return forms to show the information it
    needed for each spouse in two columns, as many state joint tax returns
    do.
         At any rate, Congress improvidently handed the IRS a blank check
    in 1938 which it gradually emboldened itself to employ--and abuse--in
    situations very far removed from any administrative necessity. It
    appears that Congress originally intended to do no more than provide
    the IRS with a shield to prevent IRS mistakes from resulting in a
    perceived unjust enrichment of still-married couples in cases like
    Cole. Eventually, however, the IRS turned this shield into a sword to
    attack divorced women. The current application of joint liability to
    separated and divorced women seems entirely unintended. There were a
    half dozen cases decided before 1938 in which the IRS pressed its
    theory of joint liability, and not one had involved divorce, including
    Cole. Nor could Congress have foreseen in 1938 the postwar explosion in
    divorce rates.
         To pursue divorced women for their husbands' taxes without even
    attempting to collect from the husband first is certainly not an
    administrative necessity. Just the reverse, it is on its face a
    gratuitous and intolerable abuse of power.
         Adequate reasons for imposing joint and several liability have
    never been provided. Contrary to widely held belief, joint return
    liability was not enacted as the ``price one must pay'' for lower tax
    rates on joint returns.
         Joint returns were first introduced in 1918, apparently for the
    sole purpose of convenience both for taxpayers and for the government,
    and provided no special rates or privileges for married persons. The
    favorable tax rates for joint returns computed by income-splitting were
    not introduced until 1948, some 10 years after enactment of joint
    liability. Income-splitting was not enacted as a quid pro quo for
    assuming joint return liability, but for the entirely different purpose
    of equalizing the tax burden between the common law states and the
    community property states, where income-splitting had been allowed on
    separate returns since 1930 under the Supreme Court's decision in Poe
    v. Seaborn.
         The quid pro quo justification for joint return liability is as
    weak logically as it is historically. The tax advantage of joint filing
    is usually quite modest. But even this advantage exists only when
    compared with the punitive rates applicable to married persons filing
    separately. For nearly half of all couples, joint returns require
    higher taxes than the couple would pay if they were not married at all.
    This is the ``marriage penalty.''
         Also, the size of the alleged benefits of joint filing, if any,
    bears no relation to the joint return liability assumed, which may be
    unlimited in amount. The benefit explanation cannot justify joint
    liability for an amount greater than the tax saving from filing
    jointly.
         And finally, the alleged benefits of joint filing usually inure to
    the husband alone, while the liability almost always is borne by the
    wife. Joint return liability is not only unfair in principle, as
    applied it is highly discriminatory against women.
         A second rationalization for joint liability, which is no better
    than the first, is that the married couple is an economic unit, and as
    it shares its income and assets it should share its tax burden.
    However, there is no evidence that couples who file jointly share
    assets any more than couples who file separately. In any case, to apply
    the one-pocketbook theory of marriage to couples who have already
    divorced and divided their assets is simply ludicrous.
         To sum up, joint liability never had any legitimate purpose even
    when it was first enacted, and it is now a huge national problem. It
    permits the persecution of women through the tax system, and it is
    perfectly legal.
         What should be done about it? Congress should repeal joint
    liability outright and completely, as the American Bar Association
    recommended in 1995. Congress should repeal joint liability now, and it
    should make the repeal fully retroactive for all open cases, because
    joint liability was a mistake.
         Repeal would not open any doors to abuse. Any tax schemes based on
    separate liability are possible right now by just filing married
    separate returns. And repeal would probably not cost much in revenue,
    if it cost anything at all. The IRS might have to do a little more work
    to find the husband, but it also might find its administrative costs
    lowered if it stopped trying to squeeze blood from turnips. The IRS
    might actually collect more revenue at less cost if joint liability
    were repealed, although the IRS own failure to keep records makes this
    hard to prove. I have seen in my own work the IRS waste taxpayer money
    pursuing single mothers on public relief for assessments they could not
    possibly pay. Elizabeth Cockrell's case is the same writ large: if the
    government wins, it will succeed only in bankrupting her at enormous
    cost to all involved, and then if it wants actually to collect its
    taxes it will have to look to her ex-husband John Crowley, which is
    where the IRS should have started and ended.
         I would like to close with two other recommendations which I will
    make very quickly. The first is that Congress should also repeal the
    other form of spousal liability by which women in community property
    states are forced to pay their husbands' taxes, which is the doctrine
    of Poe v. Seaborn. The reasons are very similar, and they are spelled
    out in my written statement, as they are also in the American Bar
    Association's Report and Recommendation.
         The second is that Congress should not try to solve these problems
    of abuse by amending the innocent spouse rules yet another time. The
    innocent spouse rules can never be made to work properly because the
    underlying rule of joint liability is wrong. There is no natural
    stopping point for innocent spouse relief. Wherever you draw the line
    you will unfairly exclude some women, when no woman should ever be
    forced to pay her ex-husband's taxes. We should make a clean break with
    a past that should never have happened at all, and we should make the
    repeal apply retroactively to help the women in this room who have
    testified today, as well as the tens of thousands of others who are
    currently embroiled with the IRS.
         Thank you very much.

                                   __________

                     Prepared Statement of Josephine Berman

                           ``innocent spouse issues''
        Good morning. My name is Josephine Berman. I'm here today to help
    put a human face on the issue before this Committee. I am an innocent
    spouse. I have existed under the black cloud of an immense tax debt for
    the last 28 years. My indebtedness is solely the result of having
    signed my name to joint income tax returns in 1968, 1969 and 1970.
    Since that time I have been continually harassed, threatened,
    intimidated into signing waivers of the statute of limitations, and had
    my entire retirement nestegg seized by the Internal Revenue Service.
    Due to circumstances beyond my knowledge and control, I stand before
    you today at the age of sixty-eight unable to afford to retire, unable
    to ever repay a debt for which I am being unjustly held responsible,
    and without any means to reverse my fortune. This is my story.
        This is not a case of tax evasion or fraud. The debt for which I am
    being held responsible is the result of disallowed deductions claimed
    by my husband for the years 1968-1970. During that time my husband was
    a 50% stockholder of a subchapter S corporation. The deductions he
    claimed were for legal expenses incurred during litigation with his
    partner. The disallowance of those deductions was a result of the IRS's
    interpretation of weather the expenses were incurred to protect income
    or stock. I'm not entirely sure what this means but it is what has been
    explained to me.
        I have been held responsible for this tax liability as a result of
    signing joint tax returns during those years. The original debt of
    $62,000 is now approximately $400,000 with interest and penalties. I
    was never involved in any of my husband's business activities nor was I
    ever included in any business or tax decisions. As was typical for
    those times, I was the homemaker and he was the breadwinner.
        During the years that my husband was in litigation our marriage
    became troubled. In 1970 we separated. Needless to say communication
    between us became even more sparse than it had been before. I did not
    even become aware of any tax problems until 1972 or 1973 when an IRS
    agent (I will call him Mr. X) came to my home and threatened to post
    tax sale posters on the trees in front of the house.
        At this point my husband and I had been separated for two years. My
    husband had not worked since 1970 and he would not work again for
    another several years. The entire responsibility of raising our 10, 14
    and 16 year old children was left to me. The family subsisted on money
    from insurance policies that my husband had cashed in, my $13,000 a
    year salary as a dental assistant and welfare.
        Mr. X was the first of many IRS agents that I would deal with over
    the years and he was brutal. He repeatedly harassed and bullied me in
    front of my children. Under the threat of eviction I signed the first
    of several wavers and a lien was put on my home. These conditions
    allowed us to keep the roof over our heads.
        I cannot overstate the desperateness of our situation. My husband
    was in a state of deep depression and the only thing that kept me going
    was my responsibilities to my children. I did nor understand the
    intricacies of the tax laws or why I was being held responsible for the
    debts of my husbands business. I was left to my own devices to deal
    with the situation and I was completely overwhelmed and wracked with
    worry. I was often overcome by rage and tears. I also had tremendous
    guilt because of the strife our situation clearly caused my children.
        Eventually my husband abandoned us completely leaving me to deal
    with the IRS on my own and a lien on our jointly owned home. Over the
    years I have been harassed by agents form Holtsville, New York City,
    Pennsylvania and New Jersey. Agents have come to my place of work as
    well as called my employers looking for information about my former
    husband and threatening to levy my wages My personal affairs have been
    exposed to my employers and co-workers. Not only is such conduct
    humiliating it also serves to strain my relationship with my employers.
        Agents have come to my home threatening to post sheriff notices for
    my neighbors to see or place foreclosure notices in the local
    newspapers My credit rating is destroyed. I frequently receive
    solicitations from companies claiming they can help resolve my debt to
    the IRS. My private life has become totally public. This conduct has
    been consistent and relentless for the past 28 years.
        The utter impossibility of my situation was punctuated in late 1935
    when, notwithstanding the lien on my home, the IRS seized my IRA
    account of approximately $40,000. Over the years I had to struggle but
    by penny pinching and doing without I was able to set some money aside
    each year for my retirement. As I stated earlier, with interest and
    penalties the tax debt now stands at approximately $400,000. The
    assessed value of my home is about 180,000. Clearly, short of winning
    the lottery I will never be able to pay this debt in full That IRA was
    the only asset I could hope to use in my impending retirement. When
    chat money was seized I was devastated. It was as if my government was
    stepping in and saying ``we know your poor, now we're going to make
    sure you'll be destitute for the rest of your life.''
        What was even more upsetting was that this action was being taken
    by an agent in Pennsylvania which is where my husband resides. I live
    in New Jersey. Ironically, to my knowledge, my husband has never been
    subjected to the same oppressive treatment by the IRS as me.
        In an effort to stop the seizure I contacted the Internal Revenue
    Service Dispute Resolution Office in New Jersey. Agents in that office
    expressed surprise to learn of the seizure of my account. They advised
    me that this should not have occurred and it was done so in error.
    Unfortunately, nothing was done to stop this arbitrary act of the
    Pennsylvania agent and the money was seized.
        I now live from paycheck to paycheck with nothing standing between
    me and abject poverty. I cannot adequately describe the horror of the
    position I'm in and knowing that it is my government that put me there
    I have lived nearly half my life under the weight of this crushing
    debt. Now, after slaving for all this time all I will have to retire on
    is social security Twenty-five years ago I worked my way off welfare.
    With the final indignity of stealing my retirement money, the IRS
    insured that is where I will end up.
        Since being charged with this debt I have raised three children. I
    have worked my way off welfare. I helped put my children through
    college and paid off a mortgage. And I have paid my taxes along the
    way! I have done all this on a high school education and by my wits and
    guile
        Now, at the end of my life, I live in a home that I paid for but I
    don't own. What little I was able to save has been seized and I don't
    know how much longer I will be able to work to support myself. I have
    done nothing wrong. I am guilty only of contributing to society as
    every hard-working American is supposed to.
        Senators, not long ago I heard a story about a man who had been
    sentenced to 15 years to life for manslaughter. He was released on
    parole for good behavior after serving just under 8 years in prison. A
    killer gets released from prison after 8 years but I'm serving a life
    sentence.
        The laws as they exist now are unjust and immoral You have the
    power and responsibility to change this; I urge you all to do so.
        Thank you for this opportunity to be heard.

                                   __________

                   Prepared Statement of Douglas C. Burnette

         The National Society of Accountants (NSA) is pleased to testify on
    the issue of Internal Revenue Service restructuring and reform. NSA
    commends Chairman William V. Roth, Jr., and the other members of the
    Committee on Finance for holding this most important hearing on reform
    of the Internal Revenue Service. NSA strongly supports the goal of
    creating a modernized, efficient and responsive tax agency.
         My name is Douglas C. Burnette and I am President of the National
    Society of Accountants. I have been in the practice of public
    accounting in Lancaster, South Carolina for 27 years. My firm offers a
    wide range of accounting services, from individual tax preparation to
    corporate tax and consulting projects.
         NSA is an individual membership organization. Through our national
    organization and affiliates in 54 jurisdictions, we represent the
    interests of approximately 30,000 practicing accountants. Our members
    are for the most part either sole practitioners or partners in
    moderate-sized public accounting firms who provide accounting, tax
    return preparation, representation before the Internal Revenue Service,
    tax planning, financial planning, and managerial advisory services to
    over four million individuals and small business clients. The members
    of NSA are pledged to a strict code of professional ethics and rules of
    professional conduct.
         The National Society of Accountants commends you as Senate Finance
    Committee Chairman for the landmark hearings held this fall on IRS
    reform. We are confident that these historic hearings will result in
    the enactment of meaningful legislation to restructure the IRS by
    Spring 1998. NSA also is grateful to Senators Robert Kerrey and Charles
    E. Grassley, two Finance Committee members, for their active work on
    the recent National Commission on Restructuring the IRS and in their
    sponsorship of (S. 1096) legislation to implement the Commission s
    recommendations.
         For the purpose of helping you in your deliberations on IRS
    reform, NSA is pleased to provide comments on H.R. 2676, the Internal
    Revenue Service Restructuring and Reform Act of 1997, which was
    approved by the House of Representatives on November 5, 1997. The
    National Society is also providing comments on certain provisions
    contained in S. 1096.
                          the irs management structure
    Internal Revenue Service Oversight Board
         H.R. 2676 establishes an Internal Revenue Service Oversight Board.
    The Board would oversee the administration, management, and direction
    of the Internal Revenue Service. Its specific functions include the
    approval of the IRS strategic plan, review of the agency's operational
    functions, and review of the selection of a Commissioner.
         The National Society of Accountants views this provision of H.R.
    2676 as being one of the legislation's most important measures. We
    believe the Oversight Board will enable the IRS to become a more
    customer service oriented agency. An independent Oversight Board has
    the potential of affording the opportunity to take an objective look at
    the agency s procedures and programs--as well as creating a real
    opportunity for overcoming problems concerning the agency.
         H.R. 2676 requires the eight Board members (appointed from outside
    the federal government) to have, among other attributes, information
    technology backgrounds. However, it prohibits the Oversight Board from
    having any responsibilities in the specific procurement activities of
    the IRS. The National Society finds this dichotomy ironic and
    troublesome. Since the IRS largest procurement purchases will come from
    the area of technology, NSA believes the Oversight Board should have
    the authority to review the agency s procurement activities. We believe
    the Board s authority to review procurement activities should extend to
    a review of such specific procurement activities as the purchase of
    computers and telephone systems.
         Chairman Roth stated in a November 7, 1997 Senate floor speech
    that the Senate Finance Committee will investigate whether or not the
    Oversight Board should look at audit and collection activities.
    According to National Society of Accountants members, the IRS
    examination and collection activities are the two areas generating the
    greatest number of taxpayer complaints. For this reason, we support an
    expansion of Board authority to oversight of audit and collection
    activities. We believe such authority will enable the agency to achieve
    an even higher level of customer service. An emphasis on customer
    service--as opposed to increased compliance--is what NSA believes is
    needed to significantly improve the federal tax administration process.
         Another area on which the legislation should focus regarding the
    Oversight Board's duties relates to the ethics, integrity, and civility
    of IRS officers and employees. Recent hearings have punctuated the fact
    that such officers and employees do not all subscribe to acceptable
    levels of professional conduct in their dealings with taxpayers and
    practitioners. This is harmful to the tax system and the public. It
    also is at variance with the customer service goals of the legislation.
         The National Society of Accountants believes the legislation
    should address the ethics, integrity, and civility of IRS officers and
    employees as a specific objective of the Board's oversight. Attorneys,
    certified public accountants, and enrolled agents, under Treasury
    Department regulations, subscribe to enforceable standards of conduct
    in their duties to their clients and the IRS. Those who work for the
    IRS also should have standards of conduct in the work they perform.
         In addition, as a separate matter, the National Society recommends
    that Board members be provided with a separate staff and a small
    expense account allowance for telephone calls, mailings, and other
    miscellaneous expenses.
    Small Business Representation on the IRS Oversight Board
         We all have heard stories of small business people working 60 to
    80 hours a week in their businesses. Small business persons wear many
    hats. For example, they are the firm s salesperson, marketing agent,
    bill collector, and service provider. At the same time, the small
    business person must comply with a complicated federal tax laws and
    regulations. The unfortunate result is that a small business person
    often pays--proportionately--a greater level of tax penalties than
    large businesses; a clear indication that smaller firms are more
    susceptible to pressure from zealous IRS collection personnel. Large
    business establishments are better able to afford and contest a tax
    matter as opposed to the average small business person.
         The National Society of Accountants believes that the frustrations
    of small taxpayers and small business persons played a critical role in
    the reasons for formation of the IRS Restructuring Commission. To give
    small business interests an opportunity for further input, NSA strongly
    recommends that the Senate Finance Committee include small business
    representation on the IRS Oversight Board. H.R. 2676 already mandates
    that large businesses be represented on the Oversight Board as
    reflected by a requirement that Board members have professional
    experience and expertise in the area (among others) of management of
    large service organizations. Small business must be provided with
    direct representation on the Board as well. Without such
    representation, NSA believes the IRS might not receive input from a key
    and critical constituent group, small business. With such
    representation, the needs and concerns of all taxpayers, large and
    small, will be heard at the IRS.
    Office of IRS Commissioner
         The National Society strongly supports the provision contained in
    H.R. 2676 making the Commissioner of Internal Revenue position a five
    year appointment, similar to the Chairman of the Federal Reserve Board
    and certain other federal agencies. We also support the provisions of
    the legislation which give the Commissioner greater flexibility in the
    hiring, firing, and salary decisions involving IRS senior management.
         H.R. 2676 states that the appointment of Commissioner shall be
    made without regard to political affiliation or activity. The
    legislation also suggests that any new Commissioner must have the
    capacity and expertise to manage a large establishment or entity--in a
    similar fashion to a chief executive officer managing and running a
    Fortune 500 company. While the National Society clearly appreciates the
    need for the IRS to have the very best management possible, we
    recommend that the Senate Finance Committee include safeguards in the
    legislation to ensure that a new Commissioner is sensitive to the needs
    of small business. In order to appreciate the unique needs of these
    taxpayers, we recommend the Senate bill (or report language) stress the
    need for the Commissioner to meet on a regular or routine basis with
    the IRS national office small business specialist and with
    representatives of the small business community.
         By providing the IRS with a new management culture, NSA believes
    that fundamental and positive changes will take place within the
    agency. In many ways, legislative enactment of these management
    oriented proposals will begin the process of restoring the respect of
    IRS employees for themselves and by the public. The last several years
    of budget cutbacks for the IRS has contributed to a high level of
    demoralization and dissatisfaction within the agency s work force; in
    turn, it has had a clear and negative impact on the level of customer
    services provided by IRS employees.
                                customer service
    Overview of Customer Service
         One of the major objectives of this IRS reform legislation is to
    upgrade the level of customer service provided by IRS employees to that
    which private financial services companies offer the public. The tax
    practitioner community is an important stakeholder relative to customer
    service. A great number of taxpayers deal with the IRS through their
    tax practitioners. Consequently, they experience IRS customer services
    at all levels, from telephone contact through examination audits,
    collections, and appeals. Based on their repeated and varied contacts
    with the IRS, practitioners have a unique perspective on customer
    service.
         The legislation emphasizes the concept of customer service over
    compliance. This is unlike the traditional view that the IRS main
    mission is tax compliance, i.e. audits and collections. While the
    importance of compliance obviously is clear, NSA agrees that the
    service component of the IRS should be the primary engine which drives
    the agency s mission. We believe that a customer service oriented
    mission will bring out the best in all who deal with the tax system.
    This is what the American public wants, and it is what we believe IRS
    employees want as well.
         There should be improvement in all aspects of IRS customer
    service. For example, from the public s perspective, the front lines in
    IRS customer service is what they experience when they speak with an
    IRS employee on the telephone. The quality of IRS telephone systems, as
    well as the way in which the IRS employees answer the telephone, has
    shown substantial improvement in recent years. Nevertheless, the IRS
    telephone system and customer relations process continue to cry out for
    further and dramatic improvement.
         The proper training of IRS employees and providing them with
    technology are important keys to quality customer service. The Report
    of the Commission on Restructuring the IRS strives to portray IRS
    employees as competent, hard-working employees who want nothing more
    than to deliver the highest quality service to the public. In order to
    turn around the supertanker we call the IRS, there needs to be a change
    in the management structure of the IRS along the principles described
    above. This includes better training of IRS employees. They also need
    to be provided with more of the basic technology tools of the 1990s,
    tools which NSA s members often take for granted. This includes
    providing employees with more fax machines, copiers, and computers.
    Office of Taxpayer Advocate
         As part of a Senate floor speech on November 7, 1997, Chairman
    Roth mentioned that the Finance Committee will investigate making the
    Taxpayer Advocate completely independent and responsible to the IRS
    Oversight Board. The National Society of Accountants believes that this
    is an excellent idea. We urge the Finance Committee to adopt this
    concept as part of the Committee s IRS reform bill. We view this
    proposal as a critical component of any effort to improve customer
    service at the IRS.
         By including an independent Taxpayer Advocate provision as part of
    its bill, the Finance Committee would be adopting a measure which
    builds on the beneficial customer service provisions found in the
    Taxpayer Bill of Rights II (P.L. 104-168). The Taxpayer Bill of Rights
    II (TBORII) created the office of Taxpayer Advocate within the Internal
    Revenue Service. TBORII empowered the Advocate to resolve individual
    taxpayer problems, to analyze problems with the nation s tax system, to
    propose legislative and administrative solutions to those problems, and
    to report to Congress on the operations of the Advocate s office.
    Moreover, TBORII empowers the Advocate with broad authority to
    affirmatively take any action as permitted by law with respect to
    taxpayers who would otherwise suffer a significant hardship as the
    result of IRS action.
         The National Society of Accountants stated, in testimony earlier
    this year, that in order for the Taxpayer Advocate to be successful in
    these tasks, he or she must possess an intimate knowledge of the
    functioning of the Internal Revenue Service, knowledge gained from
    years of experience within the Service. At the same time, we stated
    that in order to truly be the taxpayer's advocate, this individual must
    be willing to question, publicly as well as internally, the functioning
    of the very agency to which his or her career has been devoted. The
    position of Taxpayer Advocate requires an individual with special
    talent to represent the taxpayer's position while drawing upon his or
    her intimate knowledge of the IRS.
         H.R. 2676, the House Ways and Means Committee bill, requires the
    Advocate to have substantial experience in representing taxpayers
    before the Internal Revenue Service or with taxpayer rights issues. A
    Taxpayer's Advocate, who previously has worked a significant time
    period for the IRS is required by H.R. 2676 to agree not to accept any
    employment with the IRS for at least 5 years after ceasing to be the
    Taxpayer Advocate. NSA supports inclusion of these criteria in the
    final bill.
         It is fitting that taxpayers not be foreclosed from benefitting
    from the appointment of a Taxpayer Advocate who may happen to have the
    experience and insight of an IRS veteran. Requiring any IRS veteran
    interested in the Taxpayer Advocate position to take an oath that he or
    she will not work for the IRS for at least 5 years after leaving the
    Advocate post, would be a critical step to help ensure open reporting
    about potentially sensitive issues within the IRS.
         H.R. 2676 broadens the scope of the Taxpayer Advocate s annual
    report to identify areas of the tax law that impose significant
    compliance burdens on taxpayers or the IRS. The scope of the report is
    broadened to identify--in conjunction with the National Director of
    Appeals--the ten most litigated issues for each category of taxpayers
    with recommendations for mitigating such disputes. In addition, the
    legislation makes certain improvements in the selection process,
    geographic allocation, and career opportunities of problem resolution
    officers. The National Society strongly supports these measures as
    improvements in the Taxpayer Advocate's position. We are particularly
    supportive of the requirement that the Advocate take steps to ensure
    that local telephone numbers for the problem resolution officer in each
    internal revenue district be published and made available to taxpayers.
    Performance Awards
         Another area the Senate Finance Committee should investigate is
    the IRS conduct of employee performance evaluations, including the
    granting of performance awards to employees. The National Society of
    Accountants strongly supports this area of investigation by the Finance
    Committee. We believe that no IRS employee should receive a cash reward
    based on tax enforcement results. IRS revenue officers should never be
    paid based on the amount of tax revenues they collect.
         H.R. 2676, as passed by the House of Representatives, requires the
    IRS to establish a performance management system covering all IRS
    employees, with the exception of members of the IRS Governance Board,
    the Commissioner, and the Chief Counsel. As part of this performance
    management system, the bill generally provides the IRS flexibility in
    granting awards to employees. More specifically, the legislation
    provides that A cash award . . . may not be based solely on tax
    enforcement results. For the reasons stated in the preceding paragraph,
    the National Society is concerned that this particular sentence could
    be misconstrued to authorize IRS officials to make cash awards to
    employees principally on tax enforcement results. This must be
    corrected.
         The National Society believes that H.R. 2676's criteria for cash
    awards should be redrafted to highlight the point that customer service
    should be considered as an important, positive factor with respect to
    any determination to make a cash award to an IRS employee. Tax
    enforcement results should be considered as only one factor in a
    determination of making a cash award to such employee. The Finance
    Committee's adopting this language as part of the IRS reform bill will
    be consistent with the focus of the IRS Restructuring Commission report
    calling for the IRS to place greater reliance on customer service and
    less on tax enforcement. This kind of change in the final IRS reform
    language is good for tax compliance and for taxpayers as well.
                                electronic filing
    Overview of Electronic Filing
         The National Society of Accountants strongly recommends the
    Finance Committee to include provisions in the IRS reform measures
    designed to encourage more tax professionals and taxpayers to utilize
    electronic filing. However, we also recommend the Committee avoid
    mandating the use of electronic filing.
         One can interpret H.R. 2676 as not mandating electronic filing
    based on a review of Title II, Section 201(a) of the legislation. This
    provision states It is the policy of the Congress that paperless filing
    should be the preferred and most convenient means of filing tax and
    information returns and that by 2007, no more than 20 percent of all
    such returns should be filed on paper. However, in describing goals of
    an electronic filing strategic plan for the IRS, section 201(b)(1)
    states, To the extent practicable, such plan shall provide that all
    returns prepared electronically for taxable years beginning after 2001
    shall be filed electronically. NSA is concerned that this statement may
    actually amount to a back door method of imposing electronic filing on
    many taxpayers and on all tax preparers and professionals.
         In this regard, S. 1096, as introduced by Senators Kerrey and
    Grassley, rejects the notion of requiring preparers by a certain date
    to file only electronic returns. We recommend the committee support
    this position. It will avoid many of the daunting perception problems
    which harmed implementation of the Electronic Federal Tax Deposit
    System (EFTPS) over the last two years.
         The EFTPS system is an excellent program and the National Society
    of Accountants fully supports its implementation. NSA recognizes that
    electronic filing contributes to significant efficiencies in terms of
    the tax administration process. Nevertheless, the fact EFTPS is largely
    a mandatory system generated antagonism towards the program by small
    business persons and some practitioners. The drafters of S. 1096 chose
    the wiser course of letting the market place determine the future
    growth in the overall electronic filing program.
         Under H.R. 2676, the IRS is required to develop a plan within 180
    days enactment to eliminate barriers, provide incentives, and use
    competitive market forces to increase electronic filing gradually over
    the next 10 years . . . To facilitate development and implementation of
    the plan, the legislation requires the IRS to establish an Electronic
    Commerce Advisory Group. The IRS also is required under H.R. 2676 to
    implement procedures for providing incentive payments to transmitters
    or persons utilizing electronically filed returns.
         To encourage more tax professionals to embrace electronic filing,
    the National Society of Accountants recommends the Finance Committee
    examine inequities currently existing between practitioners who file
    returns electronically and practitioners who file paper returns. For
    example, a practitioner who files using the paper method is not
    prohibited from continuing to file paper returns if he or she is
    assessed with a tax penalty or preparer penalty. However, a
    practitioner enrolled in the electronic filing program is prohibited
    from filing any returns electronically once he or she, for any reason,
    is assessed with any kind of tax penalty. The assessment of a preparer
    penalty is more damaging to an electronic return originator than to a
    preparer who does not participate in the electronic filing program.
    This is a strong disincentive to use of the electronic filing program
    for many professional preparers.
         Another example of inequities between electronic filing and paper
    filing may come to the forefront next year when IRS plans to accept
    electronically transmitted payments in conjunction with electronically
    transmitted returns. An electronic payment will be debited from the
    taxpayer's bank account on April 15. A check included with a paper
    return postmarked April 15 could take up to two weeks or more to clear
    the taxpayer's bank. This presents taxpayers who might have temporary
    cash flow difficulties a clear advantage for filing a paper return
    rather than using e-file. If the IRS wants to encourage taxpayers and
    tax professionals to use electronic filing, these inequities must be
    addressed.
         The National Society of Accountants views the overall thrust of
    the requirement--that the IRS develop a plan to spur growth in the use
    of electronic filing--as being very positive. We are hopeful that this
    plan will be responsive to many of the concerns practitioners have had
    with utilization of electronic filing in the past. According to
    previous surveys of our membership, it is our understanding that only
    about 35 percent of NSA members transmit electronic filed returns on
    behalf of their clients. Tax practitioners who file complicated tax
    returns are the least apt to use electronic filing. The IRS electronic
    filing program to date has principally focussed on the filing of simple
    returns by taxpayers expecting a refund. H.R. 2676 clearly attempts to
    rectify these problems by making significant attempts to reach out to
    the practitioner community.
    Checkoff Box and Regulation of Preparers
         The National Society of Accountants strongly supports the
    provisions of H.R. 2676 involving a checkoff box on electronic returns.
    Under the checkoff provision of H.R. 2676, the IRS is required to
    establish procedures for taxpayers to authorize the preparer of
    electronically filed returns to communicate with the IRS on matters
    included on such returns. This should be expanded to include paper
    returns as well.
         However, NSA is concerned that H.R. 2676 does not include a
    provision to regulate all preparers of tax returns, a concept which we
    strongly recommend for the Finance Committee to include in its upcoming
    IRS reform bill. According to the National IRS Commission report,
    uniform requirements of this kind will increase professionalism,
    encourage continuing education, improve ethics, and better enable the
    IRS to prevent unscrupulous tax preparers from operating. NSA supports
    these policy goals.
    Electronic Commerce Advisory Committee
         As stated above, H.R. 2676 requires the IRS to convene an
    electronic commerce advisory group. The House bill further requires
    that the advisory group include representatives from the small business
    community and from the tax practitioner, preparer, and computerized tax
    processor communities and other representatives from the electronically
    filing industry. We strongly support implementation of this electronic
    advisory group. NSA views the group as a central component of any
    strategy designed to foster the growth in the use of electronically
    filed tax returns.
         The National Society is pleased to note it was our recommendation
    that small business representation be included on the electronic
    commerce advisory group that resulted in an amendment to H.R. 2676
    during the House Ways and Means Committee markup of the legislation.
    Including small business input at the early stages of development of
    any new electronic filing program will avoid some of the public
    relations mistakes the IRS made in the implementation of EFTPS.
    Procedures for Facilitating Truly Paperless Electronic Filing
         H.R. 2676 requires the IRS to develop procedures for the
    acceptance of digital signatures. Until the IRS develops a method for
    acceptance of digital signatures, the bill states that the IRS may
    waive the requirement of a signature for all returns or classes of
    returns or provide for other alternative methods of subscribing all
    returns or other documents.
         The National Society of Accountants supports the elimination of
    any signature form. We believe this will help expedite the filing
    process for practitioners. However, NSA recommends the Finance
    Committee not include any measures in its bill requiring filers of
    electronically filed documents to retain a copy of a signed return. NSA
    is concerned that this type of requirement if not implemented properly
    may increase the professional liability exposure of tax preparers,
    thereby negating any real prospect for spurring the use of electronic
    filing overall. Several models exist where organizations accept
    electronic tax returns without signature documents, including Canada,
    Australia, and the state of California. Rather than adopt a new complex
    system using transmission codes or Personal Identification Numbers
    (PINs), NSA recommends the Senate consider simply allowing the taxpayer
    to maintain the original signed copy of his or her return.
         H.R. 2676 also requires the IRS to establish procedures to receive
    explanatory statements or schedules in electronic form. We believe this
    is a positive provision, one which is designed to facilitate the filing
    of complex tax returns electronically.
                           taxpayer protection rights
         The National Society commends the Finance Committee for holding
    its September 1997 hearings on the IRS. These hearings clearly
    substantiated the need for enhanced taxpayer protection rights. While
    the hearings uncovered a need for increased taxpayer rights and serve
    as a starting point for drafting legislation, NSA is pleased to provide
    the following comments on additional taxpayer protection initiatives.
    Burden of Proof
         As a general concept, the average taxpayer is likely to be very
    supportive of the provision contained in H.R. 2676 which shifts the
    burden of proof from the taxpayer to the IRS under limited conditions
    for certain tax disputes. The average tax practitioner also is likely
    to support the concept of a shift in the burden of proof.
    Unfortunately, NSA does not believe the burden of proof measure of H.R.
    2676 accomplishes its intended objectives.
         H.R. 2676 imposes the burden of proof in any court proceeding with
    respect to any factual issue relevant to ascertaining the income tax
    liability of a taxpayer. However, before the burden of proof can be
    shifted, it must be shown that: (1) the taxpayer fully cooperated with
    the IRS with respect to the issue in dispute and (2) the taxpayer has
    provided the necessary backup documents and books and records for
    purposes of substantiation of the item in dispute.
         Based on the criteria stated in the immediately preceding
    paragraph, NSA believes that the burden of proof measure (as contained
    in H.R. 2676) will help only a very limited number of taxpayers. In all
    likelihood, with respect to perhaps over 90 percent of all tax cases
    before the IRS Examination or Appeals Divisions, the burden of proof
    measure of H.R. 2676 is likely to have little or no impact.
         While the burden of proof provision of the House bill is unlikely
    to have any significant impact on most tax cases, you have expressed
    concern that the measure may actually make things more complicated for
    taxpayers when facing an IRS audit. It is possible that the provision
    might actually result in the IRS becoming more intrusive in audit
    examinations. As stated in H.R. 2676, the provision allows a shift in
    burden of proof only when the taxpayer can demonstrate cooperation and
    proper substantiation. It is possible the IRS could insist on intensive
    examination in order for the taxpayer to show ``full cooperation'' and
    extensive documentation, even to excruciating detail, for the taxpayer
    to demonstrate adequate substantiation. Similar ``judgment call''
    situations have created problems in the Offer in Compromise program and
    could lead to uneven IRS treatment of taxpayers in audit situations.
    These are valid concerns which must be addressed before enactment into
    law of a provision which is likely to help only a very small number of
    taxpayers. The National Society strongly recommends that the Finance
    Committee carefully review the impact of this burden of proof measure.
    Taxpayer Rights Involving Certain Court and Administrative Proceedings
         H.R. 2676 provides taxpayers with expanded rights when involved in
    a tax proceeding. Specifically, the bill provides for an expansion of
    the authority to award attorney s fees based on the complexity of the
    issues involved with a case, the award of administrative costs incurred
    after the 30 day letter, and the award of other costs and fees under
    certain defined circumstances involving a tax proceeding. The House
    bill also permits a taxpayer to sue for up to $100,000 in civil damages
    to the extent an IRS officer or employee had negligently disregarded
    the tax law and regulations. A taxpayer would not be eligible to bring
    such action unless he or she exhausted all administrative remedies.
    Further, the House bill increases the dollar cap with respect to cases
    on the small case calendar of the U.S. Tax Court from $10,000 to
    $25,000. The House bill provides for certain positive reforms in the
    area of innocent spouse relief, and it suspends the statute of
    limitations on filing refund claims for taxpayers suffering a physical
    or medical impairment.
         The National Society considers all of the above measures involving
    certain specified court and administrative proceedings as being
    positive, pro-taxpayer provisions. For this reason, NSA recommends that
    the Finance Committee include these measures as part of its bill.
    Privilege of Confidentiality
         Under current law, no privilege of confidentiality exists when a
    taxpayer is represented by a non-attorney in a federal tax matter.
    Conversely, under current law, the attorney-client privilege is limited
    to communications between a taxpayer and his attorney. H.R. 2676
    extends the privilege of confidentiality to communications between a
    taxpayer and a non-attorney [meaning a certified public accountant
    (CPA) or enrolled agent].
         The National Society of Accountants supports the confidentiality
    provision of H.R. 2676. However, in order to help ensure the provision
    accomplishes its intended objectives, we believe tax practitioners need
    further guidance regarding the scope and meaning of the measure. First,
    H.R. 2676 does not extend the privilege of confidentiality to tax cases
    before the U.S. Tax Court or with respect to a refund case before a
    federal court. In a Commerce Clearing House Federal Tax Weekly article
    (dated November 13, 1997), the article's author suggests that IRS
    attorneys may be able to subpoena a written communication between a
    taxpayer and a CPA or enrolled agent through use of normal litigation
    discovery procedures. Ironically, the article also suggests that these
    papers might not have been attachable through IRS summons authority
    during the earlier audit examination or appeals stages of the case.
         NSA also believes guidance is needed with respect to the impact of
    the confidentiality provision on state tax proceedings or cases
    involving private litigants. The written communications between a CPA
    or enrolled agent and a taxpayer might be subject to discovery in such
    proceedings without any privilege protections. Under these
    circumstances, once the accountant s papers have been made available in
    a state proceeding or to a private litigant, the IRS (arguably) would
    have a right of access to those otherwise confidential papers.
         We fully understand it will become incumbent on professional
    societies like NSA to educate their memberships about risk management
    techniques and how to best utilize the confidentiality privilege to
    protect a taxpayer s rights. For example, H.R. 2676 states the
    privilege of confidentiality (between a taxpayer and a non-attorney) is
    not available in criminal tax matters. In this context, NSA believes
    clarification is needed with respect to how a non-attorney should
    handle a case which starts out as a traditional IRS audit examination,
    i.e. a civil administrative matter, but later ends up being referred to
    the IRS Criminal Investigation Division (CID).
         In order to ensure a taxpayer s rights are afforded the strongest
    protections possible, the National Society is interested in working
    closely with the Finance Committee to address the questions we have
    raised about the meaning and scope of the House s confidentiality
    measure.
    Expansion of the Authority to Issue Taxpayer Assistance Orders
         In order for a Problem Resolution Officer (PRO) to issue a
    Taxpayer Assistance Order (TAO) under current law, the PRO must
    determine whether the taxpayer is suffering or is about to suffer a
    significant hardship. If a significant hardship is determined to exist,
    the PRO then makes a determination as to whether the IRS action
    warrants being changed. The Tax Regulations define a significant
    hardship as meaning a serious deprivation caused or about to be caused
    to the taxpayer as a result of IRS administration of the tax law.
         The National Society of Accountants supports the provision
    contained in H.R. 2676 expanding the authority of the Taxpayer Advocate
    to issue a Taxpayer Assistance Order. H.R. 2676 provides the Taxpayer
    Advocate consider several factors when determining whether to issue a
    TAO. The factors include an analysis as to (1) whether there is an
    immediate threat of adverse action, (2) whether there has been
    unreasonable delay in resolving taxpayer account problems, (3) whether
    the taxpayer will be forced to pay significant fees for professional
    representation due to the problem, and (4) whether the taxpayer will
    suffer irreparable injury.
         While NSA supports the measure contained in the House bill, we
    believe the language contained in S. 1096 regarding the expansion of
    the issuance of TAOs provides a clearer definition of ``significant
    hardship.'' The language contained in S. 1096 specifically defines by
    statute what constitutes significant hardship for purposes of issuance
    of a TAO. Of critical importance, it is the definition of ``significant
    hardship'' which constitutes the operative language for issuance of a
    TAO under Internal Revenue Code section 7811. We recommend that the
    Finance Committee adopt the language of S. 1096 when crafting the
    provision on TAOs.
    Protections for Taxpayers Subject to Audit or Collection Techniques
         Under H.R. 2676, the IRS is generally not permitted to use
    financial status or economic reality examination techniques to
    determine the existence of unreported income of a taxpayer unless the
    agency has a reasonable indication that there is a likelihood of such
    unreported income. NSA views this measure as an important pro-taxpayer
    provision, particularly since financial status or economic reality
    audits can often become very vexatious for taxpayers. These specialized
    audit techniques, when utilized by IRS Revenue Agents in civil audit
    examination cases where there is little possibility of unreported
    income, create the impression of a criminal tax investigation.
         Another important provision of H.R. 2676 is the measure involving
    the extension of the statute of limitations by agreement. This measure
    requires the IRS to notify the taxpayer of his or her right to refuse
    or to limit the extension of the statute of limitations with respect to
    an audit or collection matter. NSA strongly recommends inclusion of
    this measure in the upcoming Senate Finance Committee bill on IRS
    reform.
    Offers in Compromise
         H.R. 2676 provides for the IRS to develop and publish schedules of
    national and local allowances to ensure that taxpayers entering into a
    compromise can provide for basic living expenses. While the National
    Society of Accountants believes this particular provision attempts to
    address a real problem underlying the IRS collection process, we are
    concerned that the provision (as currently drafted) does not provide
    any practical relief to taxpayers.
         NSA members believe the current allowable expense standards for
    Offer in Compromise and Installment Agreements are inconsistent with
    the real cost of living for families. Our members are concerned that
    the expense standards do not adequately compensate for such factors as
    family size, housing and utility allowances, and the cost of car
    ownership. We also are troubled that with respect to the Offer in
    Compromise process, IRS Revenue Officers are adhering strictly to the
    expense standards rather than using them for general guidance.
         The National Society of Accountants believes better guidance
    should be given to IRS collection personnel. There should be allowance
    for exceptions with respect to a taxpayer s expenses under an Offer in
    Compromise, particularly when a reasonable basis exists relative to the
    taxpayer s state of health or his or her ability to generate income.
    Further, IRS Revenue Officers should be given authority to weigh
    available options for achieving the most realistic result. Often a
    taxpayer who cannot negotiate an Offer an Offer in Compromise simply
    files bankruptcy, causing the IRS to recover even less than if the
    original offer had been accepted.
         Our members have found there are often inordinate delays in the
    processing of Offers in Compromises by IRS Revenue Officers.
    Accordingly, NSA recommends that the IRS should have a set time for
    completion of an Offer. Should the agency not complete the Offer within
    this specified time period, the agency should inform the taxpayer why
    the Offer has not been completed. The National Society believes the
    Finance Committee must address the issue of time delays and taxpayer
    notification in its bill.
         The National Society urges the Finance Committee to consider
    further changes to the Offer in Compromise program. Currently, less
    than half of Offers in Compromise submitted by taxpayers are deemed
    processible by the IRS. Of those that can be processed, approximately
    one-half are resolved. The program as administered by the IRS
    Collections function is plagued by complicated application
    instructions, inordinate delays in processing, unprocessible
    submissions, delayed notifications and lack of consistency. The
    National Society recommends the Finance Committee consider removing the
    Offer in Compromise program from Collections and placing it in a more
    suitable location within the IRS, such as Appeals or an expanded and
    independent Taxpayer Advocate's Office. By doing this, the Committee
    will be protecting a taxpayer's right to a speedy and fair resolution
    of collection matters.
    Other Taxpayer Rights Issues
         In his November 7, 1997 floor statement, Chairman Roth raised a
    number of very important initiatives for possible inclusion in the
    Finance Committee s IRS reform bill. These proposals include the
    establishment of an independent inspector general within the IRS, the
    implementation of new procedures for due process in IRS liens and
    seizures, a prohibition on the use of false identifications by IRS
    employees, the requirement that all correspondence be signed, and a ban
    on use of Bureau of Labor Statistics data in determining a taxpayer's
    income.
         The National Society believes these initiatives should prove very
    significant in future terms of protecting a taxpayer's rights, and
    therefore we are supportive of the proposals.
    Tax Penalty Reform
         The National Society of Accountants supports the provision
    contained in H.R. 2676 calling for the Joint Committee on Taxation to
    complete a study of tax penalties. Within nine months of enactment, the
    legislation calls for a review of the administration and implementation
    by the IRS of the penalty reform provisions of the Omnibus Budget
    Reconciliation Act of 1989, including legislative and administrative
    recommendations to simplify penalty administration and reduce taxpayer
    burden.
         NSA believes tax penalty reform should become the next serious
    phase of IRS restructuring. Moreover, we strongly urge the Finance
    Committee to require, as part of its IRS reform bill, a review of the
    extent to which the federal government relies on tax penalties for
    revenue raising purposes.
    Removal of Preparer's Social Security Number from Tax Returns
         The practitioner community is becoming increasingly concerned with
    the current requirement that a paid preparer's Social Security number
    appear on returns. Revenue Ruling 79-243 states that under Section
    6109(a)(4) of the Internal Revenue Code, any return or claim for refund
    prepared by an income tax return preparer must bear the identifying
    number of the preparer, the preparer s employer, or both . . . (and)
    that the identifying number of an individual shall be the individual's
    Social Security number.'' Revenue Ruling 78-317 gives some relief by
    stating that ``an income tax return preparer is not required to sign
    and affix an identification number to the taxpayer's copy of a federal
    income tax return,'' being required only to affix his or her Social
    Security number to the copy of the tax return filed with the Internal
    Revenue Service.
         In today's world of instant access to volumes of sensitive
    information about an individual, including even credit reports
    accessible over the Internet, practitioners are understandably
    concerned that their Social Security number could be the key to
    unauthorized release of their personal financial information.
    Practitioners feel that the requirement they include their Social
    Security number on returns violates their privacy, as it could provide
    a possibly unscrupulous taxpayer the opportunity to access certain
    records that would not otherwise be available. Once the taxpayer leaves
    the practitioner's office, there is no guarantee the original copy of
    the tax return will be filed before making additional copies. There is
    always the possibility copies could end up in an undesirable location.
    As part of the Senate Finance Committee s deliberations on IRS reform,
    NSA suggests that the Committee review this requirement with the
    Internal Revenue Service and develop a separate system for identifying
    tax practitioners.
         The National Society is please to provide these comments on IRS
    reform and restructuring. NSA stands ready to work with the Finance
    Committee to develop a comprehensive approach on this most important
    issue for taxpayers and practitioners.

                    Responses to Questions From Senator Roth

                            strengthening oversight
        Question 1. There are two ways for improving Executive Branch
    oversight of the IRS. One is to vest significant oversight
    responsibility with the Oversight Board, and the second is to
    substantially increase the power of the Treasury Inspector General.
    What are your views on both of these ideas?
        Answer. The National Society of Accountants concurs with the
    Finance Committee regarding the need for significant oversight of the
    Internal Revenue Service. This oversight role can successfully be
    accomplished through the Internal Revenue Service Oversight Board, as
    provided for under H.R. 2676. NSA also could support a stronger
    Treasury Inspector General, an individual who would have significant
    investigatory authority over the IRS. NSA believes that there is room
    for both oversight programs in any final legislation. There is room
    both for a strong, effective oversight Board and an activist Inspector
    General.
        Question 2. Is the Oversight Board created in the House bill an
    executive board, or merely advisory? Does the board have legal
    authority to direct actions taken by the Commissioner?
        Answer. NSA supports the concept of making the Oversight Board a
    truly executive board, as opposed to merely an advisory panel. We
    support the specific functions delegated to the Board under the House
    legislation, including the authority to approve the IRS strategic plan,
    review the agency's operational functions, and review the selection of
    a Commissioner. The National Society also believes the Oversight Board
    should have the authority to review agency contracts, particularly
    since the agency's largest procurement purchases will come from the
    area of technology. NSA further supports an extension of the Board's
    authority to an oversight of audit and collections activities, as we
    believe this kind of authority would enable the agency to achieve an
    even higher level of customer service.
        Question 3. If the Oversight Board is created and Commissioner
    Rossotti is able to turn the agency around, should the board be
    sunsetted?
            Answer. NSA views the concept of an IRS Oversight Board as
            being one of the most important provisions of any final IRS
            reform legislation. Even after we reach the point that the
            Oversight Board and Commissioner Rossotti have been successful
            in restoring public confidence in the IRS, we do not support
            the notion that there should be any hasty sunsetting of the
            Oversight Board's legal authority. In many ways, the success of
            the Board should demonstrate a need for it, rather than for its
            abolishment.
                            protecting the taxpayer.
        Question 4. What are your thoughts on changes the committee ought
    to consider in the area of interest and penalties?
        Answer. We believe there is a clear need for comprehensive reform
    in the areas of interest and penalties. As part of any comprehensive
    reform effort, we support the concept that interest on a penalty should
    only begin to run after the time has expired for the taxpayer to pay
    the bill. In contrast to current law, interest on penalties should not
    be retroactively applied back to the due date for the tax return.
    Moreover, we also support reforms in the areas of the substantial
    understatement penalty, the failure to pay penalties, and payroll tax
    related penalties. These particular areas are mentioned most frequently
    by accountants who report taxpayer problems and complaints to NSA's
    national office.
        Question 5. Should the Taxpayer Advocate and problems resolution
    officers be independent from the IRS? What are the advantages and
    disadvantages of separating the Taxpayer Advocate from the IRS?
        Answer. NSA supports making the Taxpayer Advocate an independent
    official within the IRS. By making the Taxpayer Advocate independent,
    we believe the Finance Committee would be building on the beneficial
    provisions found in the Taxpayer Bill of Rights II, enacted into law in
    1996. The 1996 Act created the office of Taxpayer Advocate within the
    IRS.
        Question 5(a). Is the current offer in compromise program broken?
    How would you improve it?
        Answer. The National Society believes that the current Offer in
    Compromise program could be made a much more effective program. We
    believe meaningful changes must be made with respect to the IRS'
    current expense standards, which the agency uses to administer the
    Offer in Compromise and Installment Agreement programs. NSA considers
    the current expense standards as not adequately compensating taxpayers
    for such factors as family size, housing and utility allowances, and
    the cost of car ownership.
        Further, the National Society of Accountants recommends the Finance
    Committee consider removing the Offer in Compromise program from
    Collections and placing it in a more suitable location within the IRS,
    such as Appeals or an expanded and independent Taxpayer Advocate's
    office. less than half of Offers in Compromise submitted by taxpayers
    are deemed processible by the IRS. Of those that can be processed,
    approximately one-half are resolved. We believe relocating the Offer in
    Compromise program would be the best way of protecting a taxpayer's
    right to a speedy and fair resolution of collection matters.
        Question 5(b). Should there be a review of labeling (a taxpayer as
    an ``illegal tax protester'') to prevent abuse of the labeling system
    to the detriment of law abiding taxpayers?
        Answer. NSA could support a call for a study regarding the factors
    used by the IRS in terms of when the agency label's a person an
    ``illegal tax protester.'' We do not have enough information to support
    enactment of substantive legislative changes in this area at this time.
        Question 5(c). Should most (IRS) correspondence be signed so that
    agency personnel are accountable? At some stage in the process, where a
    problem arises, should the taxpayer be given an employee to whom the
    taxpayer may turn to resolve the case?
        Answer. The National Society appreciates the concern by many
    taxpayers that most correspondence should be signed by agency personnel
    to make them more accountable. In this regard, NSA also supports the
    requirement that the Taxpayer Advocate take steps to ensure that local
    telephone numbers for the problem resolution officer in each Internal
    Revenue District be published and made available to taxpayers.
                           oversight board questions
        Question 6. The House bill establishes a board ``to oversee'' the
    IRS in its ``administration, management, conduct, direction, and
    supervision'' of the administration of the tax laws. What does
    ``oversee'' mean to you? What should be the relationship between the
    Commissioner and the board?
        Answer. The National Society of Accountants believes the Oversight
    Board should work with the IRS by bringing together an experienced,
    knowledgeable management team to contribute outside ideas and
    expertise. The Board would work with the Commissioner to present peer
    viewpoints on key management issues that may be examined. The Board
    would also provide the influx of outside opinion concerning taxpayer
    rights issues. By bringing fresh ideas into the mix, the Board would
    operate as a check to the more static nature of the bureaucratic form
    of doing business. The Oversight Board would function by providing the
    Commissioner with guidance in the development and oversight of
    implementation of long-term strategies at the agency. The Board should
    have authority to hold IRS management accountable for the agency's
    performance. The Oversight Board should not have authority to remove
    the Commissioner, but should have authority to recommend to the
    President and to the Secretary of the Treasury that the Commissioner be
    removed from office.
        Question 7. . . . the bill prohibits the board from exercising any
    authority over ``law enforcement activities'' such as collections--an
    area which our hearings have shown to be rife with taxpayer abuse.
    Should the Board have oversight authority over law enforcement
    activities to prevent taxpayer abuse?
        Answer. According to National Society of Accountants members, the
    IRS' examination and collection activities are the two areas generating
    the greatest number of taxpayer complaints. For this reason, we support
    an expansion of Board authority to oversight of audit and collection
    activities. Many IRS abuses have been reported regarding seizures of
    taxpayer's property without proper notification or proper procedures
    having been followed. The Board should have authority to examine these
    situations and determine if taxpayers' rights have been protected or
    violated, and to take appropriate action, if necessary.
        The National Society of Accountants also believes the Board should
    have authority to examine the ethics, integrity, and civility of IRS
    officers and employees. Recent hearings have punctuated the fact that
    such officers and employees do not all subscribe to acceptable levels
    of professional conduct in their dealings with taxpayers and
    practitioners. Attorneys, certified public accountants, and enrolled
    agents, under Treasury Department regulations, subscribe to enforceable
    standards of conduct in their duties to their clients and the IRS.
    Those who work for the IRS also should have standards of conduct in the
    work they perform.
        Question 8. If an IRS Oversight Board is established within
    Treasury, should board members be part-time or full-time employees?
        Answer. The National Society of Accountants supports full-time
    status for Oversight Board members. This would enable Board members to
    focus their full concentration on the needs of taxpayers and the IRS.
    We would envision IRS Board members serving for a term of years, in a
    similar fashion to SEC Commissioners and Federal Reserve Board
    Governors.
                              changing the culture
        Question 9. Improving oversight and protecting the taxpayer are not
    the only things we need to be doing to respond to the problems
    uncovered at the IRS. We need to change the very culture of the agency
    itself. That will require a complete new look at its organizational
    structure, its managerial rules, its performance measures, and its
    training programs.
        (a). What changes would you like to see in personnel rules and
    other procedures to change the culture of this organization?
        Answer. The Commissioner must be given the flexibility to
    experiment with new administrative processes, procedures and programs.
    He must be given time and resources to reorganize the system and
    develop his personnel. Most of the individuals working for the IRS at
    the national, regional and district levels are hard-working people who
    pride themselves in providing quality and courteous service. However,
    antiquated computer systems and outdated processes have sometimes made
    their jobs difficult. It is very important that funds be allotted to
    improve equipment, including computers, fax machines, e-mail systems,
    and phone systems, that will allow IRS employees to efficiently perform
    their duties.
        Another very important change is a change in the IRS mission from
    one primarily focused on compliance to one emphasizing service. For
    example, in a compliance-oriented agency, answering taxpayer phone
    inquiries is not a primary consideration. Therefore, taxpayers
    experience frustration when they cannot get an answer to their tax
    filing questions. For many years, the Service tolerated a telephone
    condition where significant numbers of taxpayers were unable to speak
    to anyone who could help them resolve a problem. In a service-oriented
    agency, the ability to respond to taxpayers by telephone is crucial.
    Taxpayers who today can get answers to their questions will not be
    tomorrow's non-compliant problems for the Service.
        Hiring practices at the IRS should be made more flexible to allow
    more individuals from outside to be brought into the agency. The
    practice of only promoting from within allows a culture to grow that
    very seldom has an infusion of new ideas and different viewpoints. The
    IRS needs an employee culture that is as open to change as is the
    nation's business culture. In the past year, the Service has been
    forced by the National Commission on Restructuring the IRS to consider
    outside input to a much greater degree than at any time previously. It
    is this outside input that has caused the agency to reassess its
    methods and even consider new ways of addressing old problems.
        Finally, the IRS needs to expand training and education
    opportunities for employees, especially those that deal directly with
    the public. Private industry, such as banks and credit card companies,
    have been able to create knowledgeable, efficient workforces to deal
    with customer service. There is no reason why IRS cannot devote more
    resources to creating a similar type workforce to administer the
    nation's tax programs.
        Question 9(b). What is your response to people who, because of
    their experiences with IRS, believe this agency beyond saving?
        Answer. The National Society of Accountants believes that before
    the IRS is dismantled, it be given an opportunity to reform itself. The
    new Commissioner of Internal Revenue, Charles Rossotti, has shown a
    desire to change the way the IRS does business. We think he should be
    given the chance to implement his ideas. It is the tax code that needs
    to be reformed as much as the agency itself.
        Question 9(c). Should the IRS employees be required to follow the
    Internal Revenue Manual and other official procedures?
        Answer. Yes. The Internal Revenue Manual contains all IRS policy
    statements and provides guidance to IRS employees on agency policy and
    procedures. The IRM is designed to serve as the one official
    compilation of policies, delegated authorities, procedures,
    instructions and guidelines relating to the organization, functions,
    administration, and operations of the Service. It sets a standard for
    IRS employees in dealing with taxpayers. We believe IRS employees
    should be required to follow the IRM standards. In addition, we believe
    the IRM should be made public, in an easy to use and understand format,
    and easily available to taxpayers.
                              simplifying the code
        Question 10. What parts of the code do you think are prime
    candidates for simplification?
        Answer. The National Society of Accountants recommends numerous
    items for consideration under ``tax code simplification,'' including:
        --elimination of the various ``phase-out'' provisions;
        --elimination of the Alternative Minimum Tax;
        --elimination of multiple capital gains rates and holding periods;
        --consistency in use of tax terms and definitions across different
            sections of the tax code;
        --simplification in the Earned Income Tax Credit;
        --simplification in the passive activity loss limitation rules; and
        --simplification/elimination of estate and gift taxes.

                                   __________

                    Prepared Statement of Richard B. Calahan

        Mr. Chairman and members of the Committee, I appreciate the
    opportunity to appear before you today to testify on legislation for
    restructuring the IRS. Specifically, I have been asked to discuss the
    importance of establishing independent oversight of IRS. Let me start
    off by saying I commend this Committee's efforts to reform the IRS. The
    proposals that are under consideration by this Committee and contained
    in House bill H.R. 2676, clearly signal a desire to see the IRS become
    a better managed, more customer driven agency that works for, not
    against the American taxpayer. I think it is critical that a strong,
    independent oversight function be part of that reform. It can help
    Congress, the Secretary of the Treasury and the Commissioner of IRS
    ensure that these reforms are taking hold and no unintended
    consequences result.
        The discussion regarding an Office of Inspector General (OIG) for
    Treasury goes back a long time. When the Inspector General Act of 1978
    was being debated, the question of having an Inspector General for the
    Department of the Treasury was discussed extensively. A major item of
    debate at that time was the Inspector General's access to the programs,
    activities and functions of the Department of the Treasury law
    enforcement bureaus (Alcohol, Tobacco and Firearms; Customs; Secret
    Service; and IRS). At the time, it was decided not to have a statutory
    OIG for the Treasury, but this debate continued for the next 10 years.
        In the meantime, the Treasury Department did establish an
    Administrative Inspector General, but it was small and did not include
    the internal audit and internal investigative units of the four law
    enforcement bureaus. In 1986, GAO issued a report entitled, Treasury
    Department: An Assessment of the need for a Statutory Inspector
    General.'' GAO was critical of Treasury for only giving the
    administrative Inspector General direct responsibility for about one
    tenth of the Department. GAO recommended that the Congress establish a
    statutory Office of Inspector General at the Department of the
    Treasury. In making that recommendation, GAO also suggested the
    Congress consider special legislative provisions to accommodate the
    Department's concerns over the possible disclosure of sensitive law
    enforcement and tax information.
        When the Inspector General concept was expanded with the Inspector
    General Act Amendments of 1988, Congress created a statutory Inspector
    General in Treasury despite continued concerns about access to the law
    enforcement bureaus. As with other departments that handle sensitive
    matters, Congress acknowledged that some special provisions were
    required. Accordingly, Congress created a unique structure for the
    Treasury Inspector General. Under the 1988 Amendments, the internal
    audit functions of the Bureau of Alcohol, Tobacco and Firearms, the
    Customs Service and the Secret Service were transferred to the
    Department of the Treasury's Office of Inspector General, with the
    Office of Inspector General providing oversight. However, those three
    bureaus retained their internal investigative units. The Office of
    Inspector General was given oversight, but not supervisory authority,
    for those internal investigative units.
        With respect to the IRS, the internal audit and investigative
    functions were retained by the IRS Chief Inspector. As defined by the
    Congress and the Department's implementing procedures, the Inspector
    General's authority is carried out through an oversight function that
    determines the degree of compliance with applicable professional
    standards and with Departmental and Service policies and procedures.
    Additionally, the OIG is authorized to investigate alleged misconduct
    by senior-level IRS officials (officials in positions at the grade 15
    level or higher) and employees in the Office of the Chief Inspector and
    the Office of the Chief Counsel. The Act did not provide the new
    statutory OIG with any resources for IRS oversight. However, subsequent
    to passage of the 1988 Amendments, 21 Full-Time Equivalent positions
    (FTEs) were provided to the OIG through a Memorandum Of Understanding
    between the IRS Commissioner and the Inspector General.
        The end result of this is that the IRS Chief Inspector has primary
    cognizance for internal audit and investigative activities in the
    Service. The purpose of the Chief Inspector's Office is to promote
    public confidence in the IRS by providing management with professional
    audit and investigative products. The Chief Inspector pursues his
    mission through two major organizational components Internal Audit and
    Internal Security. The IRS Office of the Chief Inspector carries out
    its duties with approximately 1200 FTEs located in the four IRS
    regional offices and headquarters. The IRS Office of the Chief
    Inspector performs one of the most important audit and investigative
    functions in the Government, but has none of the elements of
    independence provided to the Presidentially-appointed Inspectors
    General. The more significant of these are that the Inspector General:
              1. Is nominated by the President and confirmed by the Senate.
              2. Can be removed only by the President.
              3. Reports to the head or deputy head of the agency.
              4. Generally, cannot be prevented from conducting an audit or
            investigation. (In the case of some departments, including
            Treasury, the Secretary may, in unusual situations, prevent an
            audit or investigation by giving written notice which the
            Inspector General must provide to Congress.)
              5. Has a legislative mandate to communicate directly with the
            Congress.
              6. Has a separate line item in the Administration's budget.
              7. Generally has its own legal counsel.
        Without these elements of independence, the Office of the Chief
    Inspector continues to face public and internal perceptions of its lack
    of independence. The current arrangement for OIG oversight of the
    Office of the Chief Inspector does little to mitigate the lack of
    structural independence. The present oversight arrangement is
    cumbersome and the resources provided us for this function are too few
    to offset the perception of lack of independence and the concerns that
    have resulted. In fact, this has been implicitly recognized by the
    Congress as it has requested the OIG to perform more and more
    assignments at the IRS over the years, several of which are ongoing.
        organizational structure and resources for oversight commitments
        Let me briefly describe for you how we are organized to carry out
    our oversight responsibilities for the IRS. Most of the work we do at
    IRS is performed by our audit and investigative units, although we also
    perform work out of our evaluations and information technology groups.
    Within our Office of Audit. we have 168 FTEs to conduct audits at ten
    Treasury Bureaus and the Department This includes 65 FTEs devoted full
    time to helping improve financial management in the Department and
    across government through financial statement audits. Within the Office
    of Audit, we have one unit of 13 auditors responsible for conducting
    and coordinating audit work at IRS as well as the Financial Management
    Service (FMS) and the Bureau of the Public Debt. This group also
    performs oversight reviews of the Chief Inspector's internal audit
    operations.
        Within our Office of Investigations, we have approximately 60 FTEs
    to conduct investigations at the ten Treasury bureaus and the
    Department. With that staffing, we have responsibility for
    investigating all employees at the six non-law enforcement bureaus and
    the Department, as well as senior level officials and all employees in
    the Offices of Inspection, Internal Affairs and Chief Counsel at the
    four law enforcement bureaus. The Office of Investigations has an
    oversight unit with a current staff of 11 which conducts oversight
    reviews of the four law enforcement internal investigative functions,
    including IRS. In addition, this unit handles most of our special
    reviews which result from congressional requests and hotline
    complaints. Currently, almost all of that unit's staffing is devoted to
    issues involving IRS.
                       benefits of the oversight function
        With its organizational placement in the IRS, the Office of the
    Chief Inspector has encountered problems that could have been avoided
    if it had been structurally independent. in this regard, the Office of
    Inspector General has had to serve as the vehicle for maintaining the
    Office of Chief Inspector's independence.
        For example, the Office of Inspector General twice stepped in to
    inform the Secretary of the Treasury about the Chief Inspector's
    position on Tax System Modernization (TSM) problems that should have
    been classified as material weaknesses under the Federal Managers'
    Financial Integrity Act (FMFIA). The Service had taken a different
    position and did not initially report the TSM problems as material
    weaknesses, despite the Chief Inspectors' objections. Without Inspector
    General intervention, two material weaknesses identified by the Office
    of the Chief Inspector would probably not have been included in the
    Secretary's assurance letter to the President. In both instances, once
    the position of the Chief Inspector was communicated to Department
    management. the FMFIA assurance letter was changed to reflect this
    position.
                    problems with the oversight arrangement
        Should the Congress decide to continue the Inspection Service in
    its current organizational context, there are important issues to be
    considered regarding improvement of the current oversight arrangement.
    We have grouped issues on oversight of the IRS audit and investigative
    functions into four general categories; resources, the definition of
    oversight, access and legislative impediments.
        One of the most significant problems with the current oversight
    arrangement is resources. The OIG this year has an FTE ceiling of 292
    from which we must provide audit and investigative coverage to the nine
    other Treasury bureaus and the Department. We have established a number
    of processes to keep us apprised of significant audit and investigative
    activities by the Chief Inspector Within our existing resources, we
    have reviewed the Chief Inspector's operations, conducted numerous
    investigations of senior IRS officials and performed our own audits of
    IRS programs where it was more appropriate for us to do so. While all
    of this in total has given us some presence in IRS, with the size,
    complexity and highly decentralized nature of an agency such as IRS, it
    does not provide the level of independent oversight that most other
    agencies are given with the more traditional Inspector General
    structure. A good example of the difficulties we face is the current
    work being performed on the inappropriate use of enforcement
    statistics. The Chief Inspector's office has close to 80 auditors
    assigned to this project. The size of this undertaking makes it
    impossible for the OIG to perform the assignment, work in partnership
    or perform meaningful oversight on a real time basis. This is just one
    of many significant reviews the Chief Inspector's office is performing.
        With regard to the definition of oversight, the 1988 Inspector
    General Act Amendments did not specifically define what oversight is or
    how it would be carried out. One key question has always been at what
    point does OIG recommended action become ``line management'' and
    therefore fall outside of the intent of the Act. There have been some
    situations where the OIG recommended actions that in its view fit
    within the meaning of oversight, but the Chief Inspector's office
    thought constituted exercise of line management. Resolution of these
    problems has taken a considerable amount of effort and delayed
    completion of the assignments.
        Some current examples where this has occurred include:
              Reviewing a Chief Inspector report prior to issuance. There
            were important issues being reported that the OIG thought
            should be commented on before the report became final. The OIG
            was not provided the opportunity to do this.
              Recommending that a Chief Inspector report be issued to an
            official in line management above the IRS Commissioner. All the
            officials in line management, including the then Commissioner,
            had been interviewed for the report. The OIG recommendation was
            not followed.
              Supervising Office of the Chief Inspector employees on the
            OIG audit of the IRS' administrative financial statements. When
            the OIG assumed responsibility for this audit from GAO, this
            became an issue which needed to be resolved.
              Reviewing a Report of Investigation sent to the Office of the
            Assistant Chief Counsel (Disclosure Litigation). The position
            of the Chief Inspector was that oversight authority did not
            cover this. The OIG was eventually allowed to review the Report
            of Investigation, but could not obtain a copy.
              With regard to access, the Inspector General does not have
            the same level of access to IRS information that is afforded to
            the Chief Inspector. While for the most part we have been able
            to obtain the needed information, we have had instances where
            access was refused or delayed and we had to expend unnecessary
            time and effort to resolve the matter or find alternatives to
            accomplish our objectives.
              Legislative impediments center around two provisions in the
            1988 Inspector General Act Amendments. First, the OIG is
            required to provide notice to the IRS of its intent to access
            return or return information, such as taxpayer returns. Second,
            with reference to Chapter 75 of the Internal Revenue Code, the
            OIG may report to the Attorney General only offenses under
            section 7214 without first obtaining the consent of the
            Commissioner of Internal Revenue. This provision restricts the
            authority of the Treasury OIG to refer violations of Internal
            Revenue Code, such as section 7213 pertaining to unauthorized
            disclosures of return or return information to the Department
            of Justice.
              Both of these provisions have affected our work. For example,
            on some assignments, repeated notices of intent are required as
            the OIG is informed that the notice on file does not quite
            cover records it is trying to obtain. This can be frustrating
            and time consuming. More importantly, it is a process totally
            inconsistent with normal investigative procedure because it
            requires OIG investigators to notify others of the direction in
            which their investigations are going. Such a process risks
            compromising audits and investigations, particularly in
            situations where Office of Chief Inspector employees may be
            under review or in some way related to the review.
              Similarly, the requirement for obtaining IRS Commissioner
            consent on referrals to the Department of Justice creates the
            potential for conflicts of interest. This situation also
            precludes the opportunity for an objective review by a party
            outside of the Department, namely the experienced Department of
            Justice prosecutors. Revision of these two provisions, which
            would require either an amendment to the Inspector General Act
            or enactment of separate legislation would greatly enhance our
            independence and the effectiveness of our operations.
              These issues also need to be considered if the Congress
            decides to leave the structural arrangements between the Office
            of the Chief Inspector and the OIG as they are.
              I would like to add that I met recently with Commissioner
            Rossotti and discussed these issues and he assured me of his
            full cooperation in helping to resolve them. In the long term,
            I believe more direct OIG authority to access IRS information
            is a better solution.
                      benefits of an independent structure
        An independent Inspector General function for the IRS has a number
    of benefits. Among these benefits are organizational objectivity that
    is independent of management control (and particularly independent from
    the program function) in performance of audits and investigations,
    department-wide perspective, and greater accountability to the
    Congress. I would like to elaborate a little more on each of these
    benefits.
        First, having an Inspector General function that is not under the
    direct supervision of the top program manager places the office in a
    structurally independent position. By its very design, this arrangement
    helps ensure organizational objectivity because the Inspector General
    is established as a separate line of business with its own mission,
    vision and values reporting directly to the Secretary or Deputy
    Secretary.
        Second, an independent Inspector General helps avoid the real or
    perceived conflicts of interest often present when the activity is an
    internal function of another program area. By having control over its
    own resources. the independent Inspector General structure would be
    less prone to interference or influence by IRS management.
        Third, the organizational independence places the OIG in a position
    where it can maintain a department-wide perspective of issues and
    problems. The OIG is the focal point for audit and investigative
    activity in the Department. From this vantage point as an independent
    bureau within the Department of the Treasury. the Inspector General is
    less likely to view issues from a parochial level and it can bring the
    broader knowledge of department-wide activities into play.
        Fourth, the independent Inspector General structure provides more
    direct accountability to the Congress. This is accomplished through
    semiannual reports to the Congress, budget submissions and other
    statutory reporting requirements, and Congressional hearings.
                                    options
        There are several options for the Committee to consider. From our
    point of view there are serious considerations pertaining to each
    option. In our view, the predominate consideration should be to provide
    as much independence to audit and investigative functions as is
    consistent with practical considerations. There are tradeoffs in this
    analysis. Historically, in this mix of tradeoffs, the Congress has
    properly established Inspector General-style independence as the
    standard The options, as I see them, are:
              1. Maintain the Chief Inspector within the IRS and retain the
            current oversight structure for the Treasury Inspector General.
                      Both the internal and external perception of a lack
                    of independence will continue because of the lack of
                    structural independence.
                      If this is the result, Congress will need to at least
                    resolve the difficulties in the current oversight
                    arrangement, particularly the restrictions on OIG
                    access to Internal Revenue Code 6103 material and
                    related restrictions on referrals to the Department of
                    Justice.
                      The Congress will also need to provide the OIG with
                    legislative authority to designate its investigators
                    full law enforcement authority to at least provide the
                    OIG investigators comparable standing with those in the
                    Office of the Chief Inspector.
                      Consideration should be given to adding some of the
                    OIG elements of independence to the Office of the Chief
                    Inspector, such as independent legal counsel and a
                    line-item budget.
              2. Establish an IRS Office of Inspector General with most or
            all of the Inspector General independence elements, and
            incorporating the IRS Office of the Chief Inspector into it.
                      This would be a unique arrangement. No other
                    department has two presidentially nominated and Senate
                    confirmed Inspectors General. (Consideration should be
                    given to the IRS Inspector General reporting directly
                    to the Treasury Deputy Secretary to remove many of the
                    difficulties presented under the following points.)
                      Under this arrangement, the IRS Inspector General
                    would continue to be part of the IRS whether it reports
                    to the Commissioner, the Board, or the Deputy
                    Secretary. (The Treasury OIG is a separate bureau
                    reporting directly to the Secretary or Deputy
                    Secretary.)
                      There would be serious difficulties with the IRS OIG
                    reporting to a part-time board that lacks access to
                    Internal Revenue Code 6103 material The amount of
                    knowledge the Board could have of specific program
                    issues would be seriously limited.
                      If the IRS OIG reported to the Commissioner or the
                    IRS Board, some oversight or coordinating arrangement
                    with the Treasury OIG would continue to be appropriate
                    to provide for a focal point in the Department for
                    audit and investigative activity.
                      The question would have to be resolved as to which of
                    the two Inspectors General would have authority and
                    responsibility to perform the financial statement audit
                    of IRS. This could impact our ability to render the
                    opinion on the Treasury Consolidated Financial
                    Statement.
              3. Move the IRS Office of the Chief Inspector under the
            Treasury OIG.
                      The Commissioner would lose the direct control of
                    audit and investigative staff. This is a practical
                    management disadvantage which would be offset by the
                    added credibility of the audit and investigative
                    products produced in a structurally independent OIG.
                      There would be practical difficulties with
                    reorganizing, such as the differences in comparative
                    size between the OIG and the Office of the Chief
                    Inspector, differences in organizational structure,
                    differences in authorities to access Internal Revenue
                    Code 6103 material, law enforcement authority, and so
                    forth. Because the Office of the Chief Inspector does
                    not have legal counsel under its own supervision,
                    additional legal staff should be provided to the new
                    combined OIG.
              4. Move a part of the Office of the Chief Inspector under the
            Treasury OIG, retaining an internal affairs unit and possibly
            other internal review or evaluation functions reporting
            directly to the Commissioner.
                      This would strengthen the independent oversight of
                    IRS, while recognizing that the Office of the Chief
                    Inspector has certain responsibilities that should
                    remain in IRS. It can also give the Commissioner
                    resources under his control that he can use to assess
                    how well the agency is being managed.
                      This would be more consistent with the other three
                    Treasury law enforcement bureaus which have their own
                    internal affairs units. Also, the Chief Inspector
                    performs some functions in IRS which are traditionally
                    not part of an Inspector General function. This
                    includes protection of IRS employees and conducting
                    background investigations. This would enable the
                    Commissioner of IRS to retain these functions and have
                    resources available to perform special reviews. This
                    option would have to be carefully studied to determine
                    appropriate staffing levels and how to establish clear
                    lines of jurisdiction between this function and the
                    Treasury Inspector General.
                                   conclusion
        In conclusion, let me say that establishing the right structure for
    strong independent oversight of the IRS is as important as any of the
    other organizational and tax law changes currently under consideration.
    Many of these are significant departures from the way IRS has done
    business in the past. This same thinking needs to be applied to
    changing the oversight structure. My office would be happy to work with
    this Committee to come up with the best possible solution.

                                   __________

                   Prepared Statement of Paul Cherecwich, Jr.

         Good morning. I am Paul Cherecwich, Jr., Vice President-Taxes and
    Tax Counsel for Thiokol Corporation in Ogden, Utah. I appear before you
    today as the president of Tax Executives Institute, the largest group
    of in-house tax professionals in North America. The Institute is
    pleased to submit these comments on proposals to restructure and reform
    the Internal Revenue Service H.R. 2676, which has been styled The IRS
    Restructuring and Reform Act of 1997, and its Senate counterpart, S.
    1096. The legislation, which passed the House of Representatives last
    November with overwhelming bipartisan support, is based on the work of
    the National Commission on Restructuring the Internal Revenue Service
    (of which Senator Kerrey was co-chair and on which Senator Grassley
    served). In the Institute's view, the legislation holds great promise
    for improving the management and oversight of the IRS and for
    significantly enhancing taxpayer rights while giving the agency the
    tools necessary to fulfill its congressionally approved mandate.
                                  i. background
         Tax Executives Institute is the professional association of
    corporate tax executives. Our 5,000 members are accountants, attorneys,
    and other business professionals who work for the largest 2,700
    companies in North America; they are responsible for conducting the tax
    affairs of their companies and for ensuring their compliance with the
    tax laws. Hence, TEI members deal with the tax laws and with the
    Internal Revenue Service on almost a daily a basis. (Most of the
    companies represented by our members are part of the IRS's Coordinated
    Examination Program, pursuant to which they are audited on an ongoing
    basis.) They also have day-to-day dealings with senior corporate
    management and corporate boards of directors, and accordingly, know
    first-hand the strengths and weaknesses of the corporate governance
    model. TEI believes that the professional training and experience of
    our members enable the Institute to bring an important, and balanced,
    perspective to the issues involved in efforts to restructure and reform
    the IRS.
                 ii. setting the tone for a constructive debate
         A. The Emerging Consensus. At the outset, TEI commends the members
    of the National Commission on Restructuring the IRS, the House
    Committee on Ways and Means, and this Committee for their unstinting
    efforts to identify areas of concern, to seek out the views of
    interested parties, and to craft thoughtful solutions. We especially
    commend the members of Congress who have cosponsored comprehensive
    restructuring legislation, and who have remained open to modifications
    in an effort to develop a bipartisan consensus for enhancing the
    management and administration of the IRS. Even though TEI disagrees
    with certain provisions of H.R. 2676, the Institute is convinced that
    the proposed legislation holds great promise for improving the Internal
    Revenue Service. The daunting support the bill garnered in the House of
    Representatives (426 to 4), coupled with the Clinton Administration's
    constructive support, speaks volumes not only of the bill's appeal but
    of the care the sponsors have taken in addressing a plethora of
    complicated issues.
         This is not to say, of course, that the bill cannot be improved.
    As this statement makes clear, TEI clearly believes it can. As the
    legislative process moves forward, however, TEI believes it is
    important that the perfect not become the enemy of the good. We also
    believe it is imperative that everyone concerned Congress, the
    Administration, the IRS itself, stakeholders in the private sector, and
    the public acknowledge that consensus has already been attained on a
    wide variety of issues, including the critically important issue of
    Executive Branch governance. Hence, the biggest obstacle to reform
    acceptance of the need to bring greater continuity, accountability, and
    expertise to the management and oversight of the IRS has already been
    removed. The key now is to ensure that whatever changes are adopted do
    not impede the IRS's ability to do its job collecting the revenue
    necessary to run the government today and into the future.
         B. The Need for a Balanced Approach. TEI is especially pleased
    that nearly all parties recognize that there is no single solution to
    what ails the IRS. What is needed is a balanced, integrated approach.
    One change say, the appointment of an IRS Oversight Board will not
    transform the agency unless it is effectively coupled with others,
    including coordinated and streamlined congressional oversight, stronger
    leadership by the Commissioner and senior IRS management, an increased
    focus on customer service, and the assurance of effective performance
    measures. Indeed, one of TEI's primary concerns is that the
    establishment of an oversight board not become just another layer of
    bureaucracy within the IRS. By itself, such a board will not make the
    agency more responsive and may even impede the government's ability to
    improve the development and administration of our tax laws. In tandem
    with other changes, however, enhanced Executive Branch oversight of the
    IRS can increase management accountability and contribute to a tax
    system that properly focuses on customer service without minimizing the
    importance of ensuring taxpayer compliance.
         C. Focusing on the Future. Once again, the focus of these hearings
    should be on the future. We should concentrate on clearly defining
    expectations, on streamlining and strengthening oversight of the agency
    by both the Treasury Department and Congress, and on providing the IRS
    with sufficient (and stable) budget resources to modernize its systems,
    to serve the public, and to ensure compliance with the tax laws. To the
    extent TEI has a regret about the process that has brought us to this
    point (including the Finance Committee's hearings last fall), it is the
    tendency by some to ``play to the gallery'' and engage in
    unconstructive, vitriolic criticism of the IRS and its personnel. To be
    sure, IRS management can be improved, but there is plenty of blame to
    go around. Unfounded, misplaced, and exaggerated attacks on the agency
    may have surface appeal and score well in public opinion polls, but in
    our view, they are not constructive; they are part of the problem, not
    the solution. The keys to giving the American people the tax system
    they deserve are to remain focussed on the future, to resist the
    temptation to micro-manage the IRS's day-to-day activities, and to
    complete the legislation as soon as possible so the IRS can get on with
    its work.
                   iii. the need for meaningful simplification
         Although the focus of these hearings is on improving the Internal
    Revenue Service, we believe it both proper and fair to observe that
    Congress itself bears a full measure of responsibility for the problems
    that plague the tax law and its administration. TEI respectfully
    submits that the biggest steps Congress can take toward meaningful
    reform are, first, to resist the temptation to use the tax system to
    address every social or economic ill that confronts the Nation and,
    second, to work to simplify the tax laws already on the books. Without
    a doubt, the taxpayer rights title of H.R. 2676 is important and TEI
    agrees that many of the proposed protections are laudable and merit
    enactment. At the same time, it should be remembered that the biggest
    abuses come not from excessive actions by IRS personnel but from the
    highly complicated laws and onerous administrative procedures that
    Congress enacts and the President signs into law. One need look no
    further than the complexity, complications, and confusion spawned by
    the Taxpayer Relief Act of 1997 for a prime example of how not to write
    the tax laws. As Winston Churchill might have said, never have so many
    provisions inflicted so much complexity for so (relatively) few tax
    benefits.
         TEI believes that the complexity of current law is a primary
    impediment to the effective operation of the tax system and the
    efficient management of the Internal Revenue Service. Stated simply, if
    the law is unadministrable, how can the IRS be expected to administer
    it in an efficient manner? Accordingly, TEI supports the provisions of
    the bill that would require Congress to focus more finely on the
    complexity of tax law proposals, for example, by requiring the Joint
    Committee on Taxation to prepare a ``tax complexity analysis'' for
    legislation reported out of the tax-writing committees and for all
    conference reports that would amend the Internal Revenue Code. By
    requiring that some attention be paid to exploring the relative
    complexity of tax law proposals and less complex alternatives, H.R.
    2676 may enable Congress to make meaningful incremental changes. We
    also support the requirement that the IRS provide Congress with an
    independent view of tax administration and, further, that the tax-
    writing committees receive testimony from front-line IRS technical
    experts on the administrability of pending changes. At the same time,
    we believe it would be imprudent to divorce totally the IRS's role in
    evaluating the administrability of legislation from the Treasury's tax
    policy responsibilities. It is the Treasury that should be ultimately
    responsible and accountable for determining the Administration's
    position on proposed legislation.
         The provisions in H.R. 2676, however, are not a panacea. For
    example, the availability of a tax law complexity analysis, with or
    without a complementary point-of-order mechanism, would not have
    prevented the 1997 tax law from being so complicated. The troublesome
    provisions were enacted not because their mind-numbing complexity was
    unknown but because it was ignored. TEI well appreciates that other
    policy objectives may sometimes outweigh the goal of tax law
    simplification, but until the Administration and members of Congress
    (and, concededly, private-sector interest groups) go beyond paying lip
    service to simplification and exercise self-discipline in championing
    complex measures, the goal of tax law simplification will remain
    illusive.
        iv. ensuring effective oversight of the internal revenue service
         Tax Executives Institute supports the provisions of H.R. 2676 that
    would establish a joint government-private sector oversight board to
    institutionalize enhanced Executive Branch oversight of the IRS. As
    previously explained, however, we do not believe that the establishment
    of a board by itself will solve the IRS's problems. Indeed, unless care
    is taken in establishing the board, it may become just another layer in
    the bureaucracy, impairing the IRS's ability to manage its affairs
    rather than facilitating it.
         A. Composition of the Oversight Board. As approved by the House of
    Representatives, the Oversight Board would have eleven members eight
    ``private-life'' members who would be appointed by the President with
    the advice and consent of the Senate, plus the Secretary of the
    Treasury (or, if the Secretary so designates, the Deputy Secretary),
    the Commissioner of Internal Revenue, and a representative of a union
    representing a substantial number of IRS employees.
         TEI supports the decision to provide for a reasonably balanced
    oversight board. Having representatives of both government and the
    private sector on the board would afford the IRS the benefit of
    private-sector expertise (which would be lacking on a government-only
    board) while recognizing the unique mission of the IRS as a tax-
    collection agency. TEI commends the decision to include the
    Commissioner, as well as the Secretary of the Treasury, on the board
    the Secretary (or Deputy Secretary) because he or she is ultimately
    accountable for the proper oversight of the IRS, and the Commissioner
    because he or she effectively serves as Chief Executive Officer of the
    agency. Although TEI appreciates the reasoning underlying the decision
    to include a union representative on the board (specifically, the buy-
    in of IRS employees will be critical if the agency is to meet the
    challenges of the 21st century), the Institute generally believes that
    members should be selected solely on the basis of their expertise in
    areas such as general management, finance, technology, and personnel.
    In other words, no particular group should be guaranteed a position on
    the board. Hence, we support the delineation in the statute of the
    various ``skill sets'' management of large service organizations,
    customer service, federal tax law (including tax administration and
    compliance), information technology, organization development, and the
    needs and concerns of taxpayers that should characterize the private-
    sector representatives on the board.
         B. Duties of the Oversight Board. Under H.R. 2676, the principal
    function of the oversight board would be to oversee the Internal
    Revenue Service in the administration, management, conduct, direction,
    and supervision of the execution and application of the internal
    revenue laws, related statutes, and tax conventions to which the United
    States is a party. The board would be involved in (1) reviewing and
    approving IRS's strategic plans (including the establishment of its
    mission, objectives, and standards of performance), (2) reviewing
    operational functions of the IRS (including plans for modernization of
    the tax system, training, and education), (3) providing for review of
    the Commissioner's selection, evaluation, and compensation of senior
    managers, and (4) reviewing and approving the Commissioner's plans for
    major reorganizations. In addition, the board would review and approve
    the budget request prepared by the Commissioner (to ensure that it
    supports the IRS's annual and long-range strategic plans), which would
    be submitted to Congress without revision. (The President's ability to
    submit his own budget request for the IRS would not be affected by the
    legislation.) H.R. 2676 provides that the oversight board would have no
    responsibilities with respect to (1) the development and formulation of
    federal tax policy relating to existing or proposed internal revenue
    laws, (2) specific law enforcement activities of the IRS, including
    compliance activities such as criminal investigation, examinations, and
    collection activities, and (3) specific procurement activities.
    Finally, the board would have authority to recommend candidates for
    Commissioner to the President and to recommend removal of the
    Commissioner.
         TEI has no serious quarrel with the duties that the legislation
    proposes to assign to the oversight board. In general, however, TEI
    believes the board should serve in an oversight rather than a decision-
    making capacity. Hence, although we believe the IRS can learn much from
    the private sector, we recognize that the corporate governance model is
    not perfect and we have residual concerns about the requirement that
    the board-approved budget be forwarded to Congress, even though the
    IRS's budget would formally be presented (with or without changes) as
    part of the Administration's overall budget proposal. (The proposal
    could blur the lines of accountability or heighten the possibility of
    conflict between the board and the Administration.) Hence, we believe
    it is important to remember that, with or without a board, it is the
    Secretary of the Treasury who will remain ultimately responsible and
    accountable for management of the IRS.
         Moreover, although we support the proposed prohibition on the
    board's becoming involved in the development and formulation of federal
    tax policy as well as the proposed prohibition on board members'
    receiving confidential taxpayer information experience teaches that the
    dividing line between policy and administration is not always easy to
    discern and maintain. For example, budgetary decisions regarding
    research or compliance programs could well affect how the tax law is
    interpreted or applied, thereby affecting policy. Hence, we agree that
    the presence of private-sector representatives on the oversight board
    raises conflict-of-interest issues of real moment. While these issues
    cannot be minimized or ignored (and, in our view, they would be
    exacerbated if board members were granted access to confidential
    taxpayer information), they should not be overstated. Institutional
    protections can and should be implemented (just as they have been in
    the private sector where the same individuals serve, for example, on
    multiple boards of directors).
         C. Appointment of the Commissioner. Under H.R. 2676, the
    Commissioner would continue to be appointed by the President with the
    advice and consent of the Senate, but the oversight board would have
    authority to recommend candidates to the President and, in appropriate
    cases, to recommend removal of the Commissioner.
         TEI strongly agrees that the Commissioner should continue to be
    appointed by the President. We also agree that the President should
    retain the authority to dismiss the Commissioner, who will be
    responsible for all functions of the IRS, including those beyond the
    board's areas of responsibility (such as specific enforcement and
    customer service functions).
                 v. other measures to improve tax administration
         A. Continuity and Flexibility of Management. Under H.R. 2676, the
    Commissioner of Internal Revenue would be appointed to a five-year
    term. We agree with this provision, as well as with the provisions to
    accord the Commissioner greater flexibility in hiring, firing, and
    salary decisions. The goals of continuity and accountability at the top
    of the agency will be advanced by appointing the Commissioner for a
    fixed five-year term and granting the Commissioner broader authority to
    manage the IRS.
         Indeed, we believe that granting the Commissioner greater
    discretion in recruiting, rewarding, and retaining the agency's top
    managers is critical to fulfilling one of the objectives of IRS
    restructuring and reform ensuring that taxpayers deal only with IRS
    employees who are trained adequately and possess the skills and tools
    necessary to do their jobs well. Continuity among the IRS's senior
    managers assuming they are qualified to do their jobs is essential if
    the IRS is to operate efficiently and regain the trust of Congress and
    the American people. Thus, we believe care must be exercised to balance
    the twin goals of flexibility and stability; in our view, the last
    thing the IRS needs is massive turnover in senior management ranks
    whenever a new Commissioner is appointed.
         B. Stability of Funding. TEI believes that the Internal Revenue
    Service should receive stable funding. If the leaders of the IRS are to
    undertake the proper planning to rebuild the agency's credibility and
    effectiveness, the agency must be assured that programs initiated and
    funded in one year in furtherance of the IRS's strategic plan are not
    eviscerated in the next.
         To be sure, the nature of government is such that Congress will
    retain authority to set the IRS's budget and to readjust priorities as
    times change and developments warrant. At the same time, we believe
    more can be done to stabilize the IRS's operational budget and insulate
    the agency from political winds. Hence, TEI supports the inclusion in
    the final legislation of provisions stabilizing funding for tax law
    enforcement and processing, assistance, and management. (The National
    Commission on Restructuring the IRS recommended funding be maintained
    at current levels for the next three years.) Moreover, although
    recognizing that Congress remains ultimately responsible to the
    American people for how the tax system operates, we believe the overall
    management of the agency would benefit from the implementation of
    multi-year budgets. More immediately, Congress must ensure that the IRS
    is given adequate funding to address both its modernization challenges
    and Year 2000 Compliance activities.
         C. Streamlining of Congressional Oversight. Title IV of H.R. 2676
    addresses congressional accountability for the IRS. TEI agrees that
    congressional oversight of the agency should be streamlined. Reforming
    the Internal Revenue Service requires more than the IRS and the
    Executive Branch officials who oversee it getting its house in order.
    With due respect, it requires Congress to get its house (or houses) in
    order. Currently, there are seven congressional committees and
    subcommittees that engage in oversight activities. The U.S. General
    Accounting Office not only undertakes projects assigned to it by those
    bodies but also ``self-initiates'' numerous projects each year. And
    each of those projects regardless of whether it leads to hearings or
    legislation consumes considerable IRS resources and may send mixed
    signals to the agency and the public about the proper direction for tax
    administration.
         While responsible oversight is absolutely essential to effective
    government, TEI agrees that steps can be taken to streamline
    congressional oversight activities and to make it at once less
    reactive, more constructive, and more integrated. In our view,
    coordinated, as opposed to reactive and sometimes disjointed, oversight
    by Congress must be part of the drive toward continuity and
    accountability. Thus, TEI supports the proposal that the Joint
    Committee on Taxation review and approve requests for investigations of
    the IRS by the GAO, and recommends that its coordinating role be
    extended to requests by committees or subcommittees. Such a process
    will permit Congress to eliminate overlapping investigations, ensure
    that the GAO has the capacity to handle the requested investigation,
    and ensure that investigations focus on areas of primary importance to
    sound tax administration.
         TEI also supports the proposal that joint hearings be held
    annually to review the IRS's strategic plans and budget and, further,
    to review the IRS's progress in meeting its objectives, improving
    taxpayer service and compliance, and implementing its modernization
    initiatives. In our view, the involvement of the oversight board in
    reviewing the IRS strategic plans and budgets should imbue them with
    greater credibility and contribute to a more positive and coordinated
    reception of the agency by Congress.
         Finally, we recommend that Congress carefully weigh the potential
    costs and benefits of requiring the IRS (or its constituent offices or
    advisory groups) to complete numerous studies (as H.R. 2676 would do)
    and to make periodic reports on various specific subjects (such as
    electronic filing), which can consume considerable IRS resources and
    distract the agency's management from attaining its policy objectives.
    Congress's role should be to provide oversight and ratify the IRS's
    strategic decisions, not become involved in managing day-to-day
    operations. In our view, the oversight board's involvement in the IRS's
    strategic planning and budget processes should help restore
    congressional confidence in the agency, thereby facilitating
    coordinated and streamlined legislative oversight.
                        vi. strengthening taxpayer rights
         TEI agrees that further steps should be taken to preserve and
    strengthen taxpayer rights. Thus, we support efforts to ensure not only
    that taxpayers are treated fairly and impartially by the IRS, but also
    that they are able to seek redress or review of IRS actions by the
    courts and to resolve conflicts creatively and expeditiously with IRS
    cooperation. An essential ingredient in protecting taxpayer rights is
    an independent, effective taxpayer advocate program. TEI has long
    regarded the IRS's problem resolution program as one of the agency's
    success stories, and we believe increased attention should be given to
    promoting the independence and effectiveness of the Taxpayer Advocate.
    Thus, although TEI believes that the Taxpayer Advocate should be
    appointed by, and report to, the Commissioner, we believe it would be
    appropriate for the oversight board to play a role in the Taxpayer
    Advocate's selection. We are also pleased by Commissioner Rossotti's
    testimony last fall, obviously before any legislation was enacted, that
    he intends to look outside the IRS for the next Taxpayer Advocate.
         TEI offers the following comments on specific taxpayer rights
    proposals in H.R. 2676:
         A. Refining IRS Performance Measures. TEI believes that, for IRS
    reform to be successful, the agency must address training, operations,
    technology, culture, and taxpayer education. More particularly, the
    Institute believes it is critical for the IRS to refine its performance
    measures to guard against real or perceived ``quotas'' as well as the
    evaluation of examination and collection personnel on the basis of
    increased production.
         Earlier this month, IRS issued an internal audit report on the use
    of enforcement statistics in the direction, achievement, and evaluation
    of the collection function. The report discussed the IRS's focus on
    increasing productivity and concluded that dollars collected had become
    the most important factor in setting program goals and evaluating
    program accomplishments. In response to the report, Commissioner
    Rossotti outlined a number of steps the IRS has already taken to
    address the concerns, including a redirection of the efforts of the
    IRS's Measures Advisory Group to identify performance measures that
    will promote quality and appropriate case actions consistent with
    customer service and taxpayer rights.
         Although the IRS's internal audit report focussed primarily on the
    collection function, concerns about the improper use of statistics go
    beyond that. TEI has previously voiced concerns that the National
    Office's concentration on increased production (as measured by
    ``dollars recommended'' during the examination process) could impair
    the overall effectiveness of the Coordinated Examination Program by
    encouraging revenue agents to pursue questionable issues. In response
    to such concerns, the IRS has undertaken to ensure that case managers
    and team members are not evaluated on the basis of ``dollars
    recommended.'' Any perceptions to the contrary, by IRS field personnel
    as well as the public, must be corrected.
         The adoption of meaningful performance standards is essential to
    the long-term success of the IRS's examination programs. Measures for
    overall programs and functions and for the individuals who execute them
    must be in harmony if the IRS is to achieve its mission of collecting
    the proper amount of tax (not the highest amount of tax) from
    taxpayers. The Institute is committed to working with the IRS to
    improve various performance measures, not only eliminating any hint
    that the IRS uses ``dollars recommended'' in evaluating agents but also
    encouraging the use of innovative techniques such as case management
    settlement authority, advanced issue resolution, early referral to
    Appeals, and the involvement of taxpayers in the audit planning
    process. We believe that District Offices should be evaluated on a
    range of performance criteria, including an in-depth review of any gap
    between the dollars proposed and the dollars sustained. Criteria such
    as the number of agreed issues, the number of issues sustained in
    Appeals, and the currency of audit activity should also be used,
    especially in long-term evaluations. The IRS's goal should be to
    conduct cost-effective, quality examinations with the least burden on
    both the taxpayer and the government. Although TEI has no formal
    position on whether the restructuring legislation should be amended to
    specifically address the issue of IRS performance measures, the
    Institute stands ready to assist the Committee should it decide to do
    so.
         B. Shifting the Burden of Proof. H.R. 2676 would shift the burden
    of proof in tax cases from the taxpayer to the government (once the
    case reaches court and assuming certain net worth requirements are
    satisfied). Although this provision has been promoted as advancing
    taxpayer rights, it would undermine the 50-year old principle that
    taxpayers have the responsibility of proving the correctness of items
    reported on their tax returns. TEI regrets that it could diminish the
    level of voluntary compliance and lead to a more intrusive IRS.
    Accordingly, the Institute recommends that it be stricken from the IRS
    restructuring bill.
         Currently, the burden of proof in tax cases is on the taxpayer in
    that the IRS's determination of tax liability will be presumed correct
    unless the taxpayer can rebut it. Proponents of shifting the burden of
    proof argue that it is inconsistent with the rule that the individuals
    are ``innocent until proven guilty.'' Except in criminal cases,
    however, the burden of proof already generally rests with the party who
    has control over the facts (here, the taxpayer). Otherwise, the party
    with the facts but not the burden could prevail by concealment.
         The burden-shifting proposal is subject to several limitations.
    First, it only applies to those cases that go to court each year. (Only
    one percent of all tax returns are audited, and of those, fewer than
    2,000 land in court.) Second, it applies only where the dispute between
    the taxpayer and the IRS is ``reasonable'' and where the taxpayer has
    ``fully cooperated'' with the IRS. And third, the proposal does not
    overturn specific recordkeeping requirements Congress has already
    enacted. Whether the burden-shifting law is as narrow as its proponents
    contend, however, will not truly be known until the courts become
    involved and define nebulous terms such as ``fully cooperated'' and
    ``reasonable.'' This prospect that prompted many commentators to lament
    that the burden-shifting proposal is unduly cumbersome, raising more
    questions than it answers. The technical problems with applying the
    proposal were carefully analyzed by Chief Judge Mary Ann Cohen of the
    U.S. Tax Court in a letter to the Committee dated December 19, 1997,
    and we urge the Committee to consider her comments carefully before
    proceeding.
         Indeed, in our view the real problem is not with the few cases in
    which the taxpayer satisfies the statute. It is with all the other
    cases. The message that the burden-shifting proposal sends will be
    mixed. Listen to the sound bites, and what you hear is not a limited
    proposal but an extraordinarily broad one one that promises to get the
    IRS out of taxpayers' lives. Scan the headlines, and what you see is
    that the limitations and nuances have been lost and that taxpayers are
    being told (or, at least, are hearing) that they will not have to keep
    records or substantiate their claims. The sky might not fall in those
    cases where the burden ultimately shifts, but the overall effect of the
    legislation may be to undermine voluntary compliance.
         Indeed, TEI is very much concerned about how the IRS might respond
    to burden-shifting. Although advertised as a ``get the IRS out of your
    life'' proposal, it may ironically move the tax system in the opposite
    direction. This is because, if the burden of proof is shifted, the IRS
    will likely intensify its enforcement activities to sustain its
    heightened burden. In other words, the few taxpayers who push their
    cases to court and satisfy the myriad requirements of the statute
    (after hiring lawyers to help them navigate the complicated provision)
    may find themselves better off than in the past, but most of us will
    probably be worse off. As former IRS Commissioner Fred Goldberg once
    testified, ``Change the burden of proof and IRS tactics of today will
    seem like child's play. . . . It's hard to imagine a more well-
    intentioned idea that would have more undesirable consequences.''
         Concededly, the proposal to shift the burden of proof in tax cases
    resonates with taxpayers. It is fraught, however, with risks for the
    tax system. Indeed, it is the archetypal ``easy solution'' that
    journalist H.L. Mencken warned existed to every human problem: It is
    neat, it is plausible, it is wrong. Because shifting the burden of
    proof could lead to a more intrusive IRS, decrease tax revenues, and
    cause a less efficient tax system, the proposal should be removed from
    the IRS reform legislation.
         C. Authority to Award Costs and Fees. H.R. 2676 would amend the
    Internal Revenue Code's current provisions relating to awarding
    taxpayer costs where the IRS's position is not substantially justified,
    thereby enabling more taxpayers to recover the cost of disputing
    proposed IRS adjustments. TEI supports the proposal and urges Congress
    to carefully weigh proposals to eliminate the ``net worth'' limitations
    on awarding costs and attorney's fees (which currently operate to deny
    most corporations any relief even where the IRS's position is wholly
    unsupportable).
         D. Eliminating the Interest Differential. Under current law, the
    Internal Revenue Code imposes a higher interest rate on tax
    deficiencies than it pays on tax refunds, which can have the effect of
    penalizing taxpayers who simultaneously owe and are owed funds by the
    IRS. H.R. 2676 would eliminate the harsh effects of the Code's interest
    rate differential (though only on a prospective basis) by (1)
    eliminating the differential in its entirety in respect of noncorporate
    taxpayers and (2) providing for other taxpayers that, during periods of
    overlapping interest (or mutual indebtedness), a net interest rate of
    zero would apply on equal amounts of tax underpayments and
    overpayments. The provision, however, would only apply in respect of
    income and self-employment taxes.
         TEI strongly supports the elimination of the interest differential
    during periods of mutual indebtedness. Indeed, we urge the Committee to
    consider eliminating the differential not only for noncorporate
    taxpayers but for everyone, thereby ensuring that the Code's interest
    provisions operate not to penalize (for example, in the case of so-
    called large corporate underpayments or overpayments) but rather only
    to compensate for the use or forbearance of money. Moreover, we urge
    Congress to confirm in the legislation (not merely in the committee
    reports) that the IRS has the authority and the responsibility to deal
    retrospectively with the inequities of the interest rate differential
    by implementing comprehensive crediting (netting) procedures for all
    open years.
         E. Extension of Privilege of Confidentiality to Non-Attorneys.
    H.R. 2676 would in effect extend a privilege of confidentiality to
    communications between taxpayers and non-attorneys authorized to
    practice before the Internal Revenue Service. Thus, accountants and
    enrolled agents who represent taxpayers in noncriminal proceedings
    would be able to interpose a privilege to prevent the IRS from securing
    communications that would have been privileged had they arisen in an
    attorney-client relationship.
         As an organization whose members include both attorneys and
    accountants and whose members routinely engage the professional tax
    services of both attorneys and accountants, TEI has no formal position
    on the privilege proposal. We do, however, wish to make the following
    observations that may be of benefit to the Committee as it assesses the
    proposal. First, taxpayers (including the companies represented by TEI
    members) are interested in securing the best advice and counsel
    available, regardless of the professional status of their advisers.
    Second, we are convinced that there are occasions where the guarantee
    of confidentiality and the candor it encourages between clients and
    their advisers can contribute to the quality of that advice. Third, we
    are concerned that, because the proposal is framed in terms of
    limitations on the IRS's summons authority (rather than as an amendment
    to the Federal Rules of Evidence), the benefits of the privilege might
    well be vitiated by the knowledge that, if a dispute proceeds to court
    (or involves the IRS Criminal Investigation Division or a grand jury),
    the promise of confidentiality would disappear. That is to say, because
    the non-attorney privilege would apply only at the administrative level
    in respect of noncriminal tax matters (and not at all in respect of
    state tax matters), its overall effect might well be muted.
         Finally, we are concerned by the so-called law of unintended
    consequences, which would come into play with an amendment to the IRS's
    longstanding authority to issue summonses for relevant materials. More
    to the point, we are concerned that limiting the IRS's authority to
    reach communications between taxpayers and their non-attorney advisers
    might well prompt the IRS to pursue relevant information through other,
    more intrusive means. All these concerns prompt us to urge the
    Committee to move cautiously in this area.
         F. Limitation on Authority to Require Production of Computer
    Source Code. H.R. 2676 would limit the IRS's authority to issue a
    summons for third-party tax-related computer source codes, i.e., the
    human readable instructions for any computer software program that is
    used for accounting, tax return preparation, tax compliance, or tax
    planning, along with design and development materials related to such
    software program. The proposed legislation would provide exceptions for
    criminal offenses or internal use software. The House report on this
    provision notes its belief that ``the intellectual property rights of
    the developers and owners of computer programs should be respected.''
         Mr. Chairman, this is an extraordinarily sensitive issue, and many
    taxpayers have found themselves often caught in the middle. Although
    taxpayers are indisputably obliged to make their own ``books and
    records'' available to the IRS, they are finding their audits held
    hostage while the IRS seeks access to software programs that are not in
    the taxpayers' possession and indeed do not relate specifically to any
    transactions they have engaged in. While taxpayers accept their
    responsibility to substantiate items on their returns, they must also
    respect their licensing obligations to third-party vendors whose very
    business may depend on the computer code's remaining confidential. In
    at least one appellate case, the court recognized the need to balance
    these competing interests by imposing restrictions on the IRS's use of
    a third-party software program. To date, however, the IRS has refused
    to accept similar limitations in other cases and persists in involving
    taxpayers in costly litigation to obtain the source codes despite their
    tenuous relevancy. No satisfactory explanation for the IRS's position
    has been offered, other than an assertion of its unfettered right to
    the information.
         Given the attenuated relevance of the source code information to
    the examination of the taxpayer's return and the highly sensitive
    nature of the trade secrets inhering in the code TEI is at once
    frustrated and disappointed that matters have reached this point.
    Although the Institute has previously supported the development of an
    administrative solution to this matter, we now believe a consensus
    exists for legislative action.
                                 vii. conclusion
         Tax Executives Institute appreciates this opportunity to provide
    its comments on proposals to restructure the Internal Revenue Service.
    I should be pleased to respond to any questions you may have.

                    Responses to Questions From Senator Roth

                            strengthening oversight
        Question 1. One of the most important lessons learned for the
    Committee's oversight hearings lust September is the need for greater
    oversight of the IRS. The Congress needs to do more oversight--which
    ire intend to do. But also there must be more oversight of the IRS in
    the Executive Branch. There are, at least two ways we can improve that
    oversight. The first is to vest significant oversight responsibility
    With the Oversight Board that is created in the House-passed bill. The
    second way, is to substantially increase the power of the Treasury
    Inspector General. What are your views on both of these ideas?
        Answer. Tax Executives Institute believes that the House-passed
    version of the IRS Restructuring Bill strikes the proper balance in
    respect of enhancing Executive Branch oversight of the Internal Revenue
    Service. Although we agree that a strong inspection function is
    critical to an effective IRS, we also agree that an Oversight Board
    should be established that oversees the IRS in the administration,
    management, conduct, direction, and supervision of the execution and
    application of the tax laws. The Board should be more than an advisory
    body (such as the current Commissioner's Advisory Group). It should be
    involved in (1) reviewing and approving the IRS's strategic plans
    (including the establishment of its mission, objectives, and standards
    of performance), (2) reviewing operational functions of the IRS
    (including plans for modernization of the tax system, training, and
    education). (3) providing for review of the Commissioner's selection,
    evaluation, and compensation of senior managers, and (4) reviewing and
    approving the Commissioner's plans for major reorganizations. The Board
    should also review and approve the budget request prepared by the
    Commissioner (to ensure that it supports the IRS's annual and long-
    range strategic plans). In general, however, TEI does not believe the
    Board should become involved in day-to-day decisionmaking at the IRS.
        TEI also believes that, regardless of whether the inspection
    function is part of the IRS or the Treasury Department, the
    Commissioner should be able to call upon, and use, Inspection personnel
    as a resource in identifying and resolving problems. The Institute is
    aware of no friction between the Treasury Inspector General and the
    IRS's Chief Inspector. We also think that internal audit reports should
    generally be shared with the Oversight Board (subject to appropriate
    safeguards to prevent improper disclosure of confidential taxpayer
    information).
        Finally, TEI agrees with Chairman Roth that an essential ingredient
    to improving the management and operation of the IRS is enhanced
    congressional oversight and accountability. Responsible, focused
    legislative oversight is needed for effective government, and TEI
    supports steps to streamline congressional oversight activities
    (including those of the U.S. General Accounting Office) and to make it
    at once less reactive, more constructive, and more integrated.
    Accordingly, the Institute recommends that the provisions in the House-
    passed bill on streamlining congressional oversight be restored to the
    Restructuring Bill.
        Question 2. Is the Oversight Board created in the House bill an
    executive board, or merely adsvisory? Does the board have legal
    authority to direct actions taken by the Commissioner?
        Answer. As stated in our response to Question 1, TEI does not
    believe that the Oversight Board should become involved in day-to-day
    management of the IRS; rather, the Board should be involved in
    developing and overseeing the implementation of the agency's strategic
    plans (including the development of balanced performance measures). We
    also believe that? strictly speaking, the Board should not have legal
    authority to direct the Commissioner to take particular actions. At the
    same time, the Board should and will have considerable influence.
    through its access to the Secretary of the Treasury, the reports it
    files with Congress, and most significantly, the expertise and
    experiences of its members.
        Question 3. If the Oversight Board is created and Commissioner
    Rossotti is able to turn the agency around, should the board be
    sunsetted?
        Enhanced oversight of the Internal Revenue Service (by the
    Executive Branch as well as by Congress) cannot be a passing fad. It
    must be ongoing and consistent. Because the need for strategic guidance
    is continual, we do not believe the Restructuring Bill should provide
    for an automatic ``sunsetting'' of the Oversight Board. We do believe,
    however, that the Board should not be retained if, after a period of
    years, it becomes an empty vessel. In other words, there should not be
    an Oversight Board just to have an Oversight Board. If Congress
    determines that the appropriate cultural and management changes have
    been effected at the Internal Revenue Service and further determines
    that Congress itself is providing consistent, credible oversight of the
    agency, then it should consider abolishing the Board. We do not
    anticipate that occurring for some time.
                            protecting the taxpayer
        Question 4. What are your thoughts on changes the committee ought
    to consider in the area of interest and penalties?
        Answer. TEI agrees that significant changes in the Internal Revenue
    Code's interest and penalty provisions should be considered, and we
    applaud the decision of the House of Representatives and the Senate
    Finance Committee to include ameliorating provisions in the
    Restructuring Bill. For example, we strongly support the proposal to
    eliminate the so-called interest rate differential pursuant to which a
    higher interest rate is imposed on tax deficiencies than is paid on tax
    refunds. (Indeed, we believe the proposal should be broadened to reach
    all types of taxes and all open years.) We also support the call for a
    comprehensive study of the Code's interest and penalty provisions. As
    the process moves forward, we recommend that Congress keep in mind the
    following general principles:
       The Code's interest provisions should operate not to
            penalize but rather only to compensate for the use or
            forbearance of money.
       Penalties generally should not be imposed for ``foot
            faults'' or for violations that involve non-purposeful
            behavior. Given the horrendous complexity of the Internal
            Revenue Code, taxpayers who strive in good faith to comply
            should not be penalized.
       Taxpayers who do not strive in good faith to comply should
            not be given a ``pass'' in respect of interest charges or
            penalties. To be sure, the Code's current interest and penalty
            provisions can sometimes operate to create inequitable (or at
            least highly sympathetic) situations. In seeking to enhance the
            rights of noncompliant taxpayers in lien and levy situations,
            however, Congress should take care not to send the wrong signal
            to the overwhelming majority of taxpayers who fully comply with
            the law.
       Congress should abjure the enactment of new (and onerous)
            interest and penalty provisions to raise revenue. Indeed, just
            as the Senate Finance Committee has rightly urged the IRS not
            to use penalty assessments in evaluating the success of its
            compliance programs, it is unseemly for Congress or the
            Administration to attempt to ``pay for'' other provisions by
            imposing higher penalties or interest rates out of all
            proportion to the market rate.
        Question 5. Should the Taxpayer Advocate and problems resolution
    officers be independent from the IRS? What are the advantages and
    disadvantages of separating the Taxpayer Advocate from the IRS?
        Answer. TEI believes that the Problem Resolution Program represents
    one of the IRS's success stories and that Problem Resolution Officers
    (PROs) are some of the unsung heroes in the tax system. We acknowledge
    that our members (as tax professionals) are more tax-savvy than most
    taxpayers, but nevertheless believe their generally satisfactory
    experiences with PROs are reflective of those of the taxpaying public
    as a whole. This is not to say that the Office of Taxpayer Advocate or
    the Problem Resolution Program cannot or should not be improved. As
    Commissioner Rossotti has acknowledged, all IRS employees should become
    taxpayer advocates. We do not believe, however, that the Taxpayer
    Advocate and PROs should be wholly independent of the IRS. Indeed, the
    Taxpayer Advocate and PROs need to be intimately familiar with the IRS
    and its functions. Yes, they need to exercise independent judgment, but
    they also need to know how to cut through the procedures and protocols
    that might otherwise hinder their ability to resolve particular
    problems. We believe the necessary knowledge and experience will only
    come if the Taxpayer Advocate and PROs are part of the agency. If the
    Taxpayer Advocate were separated from the IRS, his or her ability to do
    the job could well be imperiled. Finally, although we believe that the
    Taxpayer Advocate should be appointed by, and report to, the
    Commissioner, we believe it would be appropriate for the Oversight
    Board to play a role in the Taxpayer Advocate's selection.
        Question 5(a). The current offer in compromise program does not
    seem to work. In too many instances, people go into the program,
    nothing gets resolved, and by the time they, get out they are socked
    with horrendous interest and penalties. Is this program broken ? How
    would you improve it?
        Answer. As an organization whose members work for large
    corporations. TEI does not have significant experience with the offer-
    in-compromise program, which is intended to give taxpayers who fail to
    meet their obligations to the tax system (through inadvertence,
    volitional noncompliance, or pure happenstance) a second chance. Based
    on our limited experience, we believe it is inaccurate to conclude that
    the program ``does not work'' or is ``broken'' and that nothing gets
    resolved.'' To be sure, improvements are possible (and TEI is pleased
    that efforts are underway to improve the program), but not all the
    complaints that have been lodged against the program are well founded.
        Question 5(b). The IRS has the power to label a taxpayer as an
    ``illegal tax protester.'' Such a label is important for the IRS in its
    efforts to protect its agents. But such a label also brings serious
    consequences for the labeled taxpayer. It is important to protect IRS
    employees. However, our investigation has revealed that some taxpayers
    may have been labeled as illegal tax protectors merely because they
    wrote an article in a newspaper. Should there be a review of such
    labeling to prevent abuse of the labeling system to the detriment of
    law-abiding taxpayers?
        Answer. TEI agrees that care must be taken in labeling a taxpayer
    an ``illegal protester'' or as ``noncooperative.'' Clearly, the IRS
    must respect taxpayers' right to free speech and not unfairly impugn
    the integrity of particular taxpayers while striving to safeguard its
    own employees. This is an area where there must be a balancing of
    competing interests. Accordingly, we recommend that the Taxpayer
    Advocate be charged with reviewing the IRS's procedures for labeling
    taxpayers as ``illegal tax protesters'' or ``noncooperative'' and
    establishing a mechanism to guard against abuses. This subject would be
    an appropriate one for the Taxpayer Advocate to report on in his or her
    annual report to Congress.
        Question 5(c). In our September hearings, we heard from Father
    Ballweg who indicated to all of us the importance of a system that is
    customer friendly. Shouldn't most correspondence be signed so that
    agency personnel are accountable? At some stage in the process, where a
    problem arises, should the taxpayer be given an employee to whom the
    taxpayer may turn to resolve the case?
        Answer. TEI agrees that the IRS must be more taxpayer friendly, and
    we applaud efforts by Commissioner Rossotti and others to move the
    agency in that direction. We also agree that IRS correspondence should
    generally contain the name and telephone number of a person who can be
    contacted about the taxpayer's situation. It should be recognized,
    however, that given the broad range of topics that IRS correspondence
    might address, the high volume of correspondence, varying work hours,
    and myriad other issues, it may not always be possible for each notice
    (especially computer-generated notices or math errors) to contain the
    name of a specific individual to be contacted. The key is to ensure
    that whomever the taxpayer contacts is able to access the pertinent
    information and either handle the taxpayer's case or immediately refer
    the taxpayer to someone who can.
                           oversight board questions
        Question 6. The House bill establishes a board ``to oversee'' the
    IRS in its ``administration, management, conduct, direction, and
    supervision'' of the administration of the tax laws. What does
    ``oversee'' mean to you? What should be the relationship between the
    Commissioner and the board?

        Answer. See response to Question 1.

        Question 7. I am troubled that the bill prohibits the board from
    exercising any authority over ``law enforcement activities'' such as
    collections--an area which our hearings have shown to be rife with
    taxpayer abuse. Should the Board have oversight authority over law
    enforcement activities to prevent taxpayer abuse?
        Answer. Although TEI agrees that one case of abuse (in the
    collection function or elsewhere) is one too many, we caution against
    overreaction in respect of involving the Oversight Board in law
    enforcement activities. To be sure, if the Inspection function
    identifies an area of systemic concern relating to the IRS's collection
    activities or other law enforcement activities, the Board should likely
    be informed of the problem and become involved for both oversight and
    strategic planning purposes. In our view, however, the Board should not
    become involved in individual cases, which could distract the Board
    from its primary mission-strategic oversight and long-term planning. In
    addition, we believe that providing members of the Board with access to
    confidential taxpayer information (especially on a non-aggregated
    basis) is fraught with danger, not only to the privacy interests of
    particular taxpayers but also the members of the Board, who may find
    themselves confronting conflicts of interests.
        Question 8. If an IRS Oversight Board is established with Treasury,
    should board members be part-time or full-time employees?
        Answer. TEI believes that members of the Board should be considered
    as part-time employees of the government. We also believe that the
    majority of the Board should come from outside the Treasury Department
    and the IRS.
                              changing the culture
        Question 9. Improving oversight and protecting the taxpayer are not
    the only things we need to be doing to respond to the problems
    uncovered at the IRS. We need to change the very culture of the agency
    itself. That will require a complete new look at its organizational
    structure, its managerial rules, its performance measures, and its
    training programs.
              (a). One of the surprises of the Committee's investigation
            into the IRS is how fearful many employees are at how they are
            managed. They paint a picture of the IRS as a vindictive and
            unhappy place to work. What changes would you like to see in
            personnel rules and other procedures to change the culture of
            this organization?
              (b). There are a considerable number of people who feel that
            it is not possible to reform the culture of the IRS without
            dismantling the agency. For these people a whole new tax system
            that isn't dependent on a collection agency is the way to go.
            What is your response to people who, because of their
            experiences with IRS, believe this agency beyond saving?
              (c). During the September hearings employee witnesses
            testified that many IRS employees ignore the Internal Revenue
            Manual and other official procedures with impunity. Should IRS
            employees be required to follow the Internal Revenue Manual and
            other official procedures?
        Answer. The task confronting the IRS is a daunting one--enforcing
    the tax laws, processing 200 million tax returns annual, and collecting
    the $1.5 trillion revenues necessary to run the federal government in
    an efficient, fair, and evenhanded manner. Most people pay their fair
    share of taxes voluntarily, without problems--indeed, without even
    coming into contact with an IRS employee. Other taxpayers, however, for
    a variety of reasons do not. The Senate Finance Committee's hearings
    last fall demonstrated that the IRS has not always succeeded in its
    dealings with those other taxpayers. Although TEI and its members have
    experienced the same frustration that has prompted calls to ``abolish
    the IRS'' or ``tear the tax system out by the roots,'' we regret that
    the ``easy'' solution to what ails the IRS--dismantling the agency--
    would likely be the wrong one. Some type of organization is necessary
    to collect the taxes Congress imposes, and it would be unwise to assume
    that a new agency could avoid all the shortcomings of the IRS simply
    because it is a new agency. The key, again, is to focus on particular
    problems, to attack and resolve them, and to move forward.
        There is no magic cure for what troubles the IRS, no panacea. For
    IRS reform to be successful, the agency must address training,
    operations, technology, culture, and taxpayer education. These issues
    are interrelated. TEI agrees that the culture of the IRS must be
    changed. Granting the Commissioner greater discretion in recruiting,
    rewarding, and retaining the agency's top managers is critical to
    fulfilling one of the objectives of IRS restructuring and reform--
    ensuring that taxpayers deal only with IRS employees who are trained
    adequately and possess the skills and tools necessary to do their jobs
    well. Continuity among the IRS's senior managers--assuming they are
    qualified to do their jobs--is essential if the IRS is to operate
    efficiently and regain the trust of Congress and the American people.
    Stated simply, employees must be given the training, tools, and
    resources necessary to do their job, they must be rewarded for doing it
    well, and they should be held accountable for failing to do so.
        In any large organization, there will likely be disenchanted
    employees and their legitimate concerns must be addressed (and not
    blithely dismissed as coming from malcontents). At the same time, the
    agency's organizational standards--whether set forth in the Internal
    Revenue Code, the Internal Revenue Manual, or elsewhere--should not be
    compromised. In this regard, we note that the type of guidance provided
    in the Internal Revenue Manual is varied: some provisions are mandatory
    in nature, and others are intended only to be advisory, with the
    affected employees having discretion to use their own judgment in
    applying general standards to particular situations. Clearly, mandatory
    procedures should be followed, and employees should be held accountable
    for violating the Manual's dictates. We also believe that in
    appropriate cases, Congress should consider codifying certain
    provisions in the Manual (as it has in the past).
                              simplifying the code
        Question 10. I think that we would probably all agree that a
    significant part of taxpayers' problems with the IRS stem from the
    complexity of the code. What parts of the code do you think are prime
    candidates for simplification?
        Answer. Congress itself bears a full measure of responsibility for
    the problems that plague the tax law and its administration. TEI
    respectfully submits that the biggest steps Congress can take toward
    meaningful reform are, first, to resist the temptation to use the tax
    system to address every social or economic ill that confronts the
    Nation and, second, to work to simplify the tax laws already on the
    books. Without a doubt, the taxpayer rights title of the IRS
    Restructuring Bill is important and TEI agrees that many of the
    proposed protections are laudable and merit enactment. We submit,
    however, that the biggest abuses come not from excessive actions by IRS
    personnel but from the highly complicated laws and onerous
    administrative procedures that Congress enacts and the President signs
    into law.
        TEI believes that the complexity of current law is a primary
    impediment to the effective operation of the tax system and the
    efficient management of the Internal Revenue Service. Stated simply, if
    the law is unadministrable, how can the IRS be expected to administer
    it in an efficient manner? Accordingly, TEI supports the provisions of
    the bill that would require Congress to focus more finely on the
    complexity of tax law proposals, for example, by requiring the Joint
    Committee on Taxation to prepare a ``tax complexity analysis'' for
    legislation reported out of the tax-writing committees and for all
    conference reports that would amend the Internal Revenue Code. By
    requiring that some attention be paid to exploring the relative
    complexity of tax law proposals and less complex alternatives, the IRS
    Restructuring Bill may enable Congress to make meaningful incremental
    changes. Among the areas of the law that we believe deserve attention
    are the following: the alternative minimum tax, the provisions dealing
    with the taxation of international operations, and the employee benefit
    provisions. In addressing these provisions, we believe it important for
    Congress to receive testimony from front-line IRS technical experts on
    the administrability of pending changes.
                                 *   *   *   *
        Tax Executives Institute appreciates this opportunity to respond to
    Chairman Roth's questions. We should be pleased to respond to
    additional requests for assistance.

                                   __________

                    Prepared Statement of Elizabeth Cockrell

        Mr. Chairman and Members of the Committee: My name is Elizabeth
    Cockrell. I am a single mother of two living in New York City. I moved
    there over eighteen years ago, from Canada, when I married John
    Crowley. The marriage lasted less than three years. The tax problem
    that arose from it has continued for almost two decades. I have been
    hounded by the IRS to pay a $650,000 tax bill and may yet have to file
    for bankruptcy.
        I was a young woman of 23, recently graduated from a Canadian
    college with a degree in English Literature. When I married and moved
    to America in 1979, I had been selling life insurance in Canada. My
    husband was a commodities broker. He and his company invested in the
    most complicated of business deals, like extremely complex limited
    partnerships containing leveraged straddle positions. I worked a few
    part-time jobs, then took an entry-level job that provided the training
    and experience for my eventual career as a stockbroker.
        Before my marriage, I knew nothing of American tax laws. Especially
    foreign to me was the concept of a ``joint return''--Canada does not
    have those. When my husband told me that married people in the United
    States file joint returns and instructed me to sign them, I did as he
    asked. I trusted him. A federal judge later told me that I should not
    have.
        In 1982 we separated, and I moved out of our apartment, taking only
    $2000 for the security deposit on a one-room apartment and the pots and
    pans that I brought into the marriage. I was proud I took no alimony,
    even though I was entitled to it. Many years after our divorce, in
    1987, John called me and told me that he had been receiving mail for
    years from the IRS addressed to us both. Since our separation, I had
    been filing separate and unmarried for years from another address. He
    told me that he would take care of dealing with the IRS if I would just
    sign something he was mailing to me. He even gave me a letter saying
    that I knew nothing about the partnerships and that he was responsible
    for them and I should in no way incur any tax liability. Thinking I was
    protected by the letter, I signed the papers. After all, he had been
    investing in these extremely complex tax shelters before he had even
    met me! I found out later that he had been taking the deductions from
    these partnerships during the years I had signed joint returns with
    him, and that the paper I had just signed was for the IRS to waive the
    statute of limitations which let them pursue me indefinitely.
        Nine years after my divorce I learned that the IRS was after me for
    over half a million dollars in back taxes because of a brief marriage I
    had had over a decade ago. I had to hire a lawyer. He told me that the
    law sometimes makes an exception for cases like mine. It's called the
    ``innocent spouse'' rule--when a joint return is audited and the
    changes apply to the income and deductions of ONE spouse, the other may
    be excused from paying the additional tax.
        I went to Tax Court, convinced that the judge would see that I had
    nothing to do with these tax shelters. One of the four things I had to
    prove to win my case, was to show that the tax shelters my ex-husband
    invested in were shams. But the judge ruled against me, because he said
    I didn't give him any evidence the tax shelters were shams.
    Subsequently, I found out that the IRS withheld evidence from the
    Court. They knew all along that these tax shelters were shams, because
    the very same two IRS attorneys who tried my case had helped to send
    the men who had peddled the shelters to jail, a fact they kept from the
    judge and me. One of the men convicted of criminal tax fraud is now out
    of prison and the other due to be released soon. Their sentences are
    completed. However, I do not know when my ordeal with the IRS will ever
    be over.
        Not only did the IRS withhold crucial evidence, which any other
    lawyers would be disbarred for doing, they also produced an expert
    witness to testify against me. He said under oath that he had a law
    degree from Georgetown University. We later found out that this was not
    true and still suspect that the IRS knew all along that he was
    testifying falsely. After we found out he lied to the court, I had to
    request a new trial at my own expense because the witness had perjured
    himself. At no time did the judge ever once admonish the IRS attorneys
    for their outrageous misconduct.
        The judge agreed that I did not know anything about the tax
    shelters, but ruled against me because he said I should have known.
    It's called ``constructive knowledge.'' That's when you don't know
    something but the IRS thinks you should know. I was a young Canadian
    immigrant wife who trusted her experienced American commodity-broker
    husband: the judge told me that ``trust alone . . . does not eliminate
    a spouse's duty to inquire when a perusal of the return would indicate
    that further inquiry is necessary.'' What does that mean?
        When I appeared on Connie Chung's news program a few years ago, it
    took her producers (with a much smaller staff than the IRS) only a day
    to find seven-figure Swiss bank accounts belonging to my ex-husband. I
    have written the IRS with this information, yet to my knowledge they
    have done nothing to collect the taxes from him.
        I appealed to the Second Circuit Court of Appeals and lost there
    too. I have appealed to the Supreme Court and I am waiting to hear if
    they will review my case. In other cases, other judges have looked at
    the facts more favorably for the ex-wife who claims ``innocent spouse''
    status.
        To pay the tremendous legal fees, I had to cash in my IRA, 401K and
    pensions. To add insult to injury, I had to pay taxes and penalties
    when I withdrew that money. Today, the IRS wants to collect over
    $650,000 from me for my ex-husband's tax avoidance schemes.
        I don't know when this will ever be resolved. If I file bankruptcy,
    it will be on my credit report until I am 50 years old, more than twice
    the age I was when I signed the first tax return at 24.
        I am lucky. I fought my way back and was able to earn the resources
    to combat the IRS. I would like to be a voice for those women who are
    not so fortunate.
        I appeared on several news shows during the hearings held by this
    Committee last September. I spoke about my case and received letters
    from women who were going through similar experiences with the IRS
    because of a former marriage. These letters are painful to read. These
    women are truly forgotten Americans. No one speaks for them; they are
    voiceless. Most of them are struggling to raise children and are
    receiving no child support. They have lost their money, their hope and
    their visibility. Because these women cannot be ignored, I have started
    an organization called W.I.F.E.--Women for IRS Financial Equity. The
    Wall Street Journal printed our address and during the last month I
    received numerous letters from women whose cases are heartbreaking. I
    have even cried while reading many of them. These are women who have
    lost everything.
        One elderly woman wrote that she was afraid she would soon resort
    to eating dog food. Another, an accomplished pianist whose husband left
    her, was forced to sell her home and her beloved piano to pay back
    taxes from things her ex-husband had done without her knowledge. She is
    now in a poor folks home in Florida.
        Many were forced to sign returns at the hands of an abusive
    husband. Some of their signatures were forged by their husbands or
    their husbands secretaries.
        The single mother of four small boys who gets no child support and
    whose meager earnings are being garnished. There are women whose
    husbands have bankrupted out of the tax liability, leaving their former
    wives stuck with the whole tax bill.
        There are women who are on welfare, who are ashamed to be on public
    assistance, who want to work but are told by the IRS that if they go to
    work their pay will be garnished. One woman had to beg for money for
    diapers for her baby after her husband was long gone. How can a single
    mother raise emotionally healthy children when she herself is
    suffering, having had the IRS on her back for years with NO END IN
    SIGHT!! These women have the most important and critical job in the
    United States--raising the next generation. It is the children who are
    being hurt the most under this inequitable law. Give these women their
    lives back. Give them their dignity!
        I can attest to the anger, depression, anxiety and weight of
    helplessness that accompany being at the mercy of the IRS. It is an
    overwhelming impediment to a happy and normal life. Every New Year's
    Eve, I pray that the coming year will be the one in which I finally
    resolve this IRS nightmare.
        Many of these cases are SO old, that they stem from a time when men
    were the primary breadwinners. These are women who raised children
    while their husbands handled the finances. All they are guilty of is
    trusting their husbands and signing a joint tax return with him. Now,
    years later, they are suffering in great numbers. The GAO estimates
    that there are 75,000--80,000 instances per year of the IRS potentially
    pursuing the wrong spouse. Over ninety-percent of the victims are
    women. After I read several letters I started to see patterns and
    problems emerging from this joint liability law. I would now like to
    share these with you.
        I noticed that the kind of man who would stick his ex-wife with a
    horrible tax burden also shirked his responsibility to his children and
    paid no child support. Many desperate single mothers wrote to the IRS
    and gave the IRS their ex-husband's address after the IRS claimed they
    were unable to locate the ex-husband. These women begged the IRS to
    stop garnishing their own well-needed pay and to collect from their ex-
    spouses. Some women even asked the IRS for assistance to enforce their
    ex-husband to honor his child support payments. The IRS ignored these
    requests. They seem to arbitrarily decide which spouse to go after. I
    found no consistent policy in these cases. The law should be changed so
    that the IRS collects the taxes from the person who rightfully owes
    them.
        One of the most common problems is that women feel falsely
    protected from any IRS liability if the judge in their divorce ruled
    that the husband is responsible for any back taxes owed. All of a
    sudden the woman gets a lien slapped on her home and her pay garnished.
    Stunned, she writes to the IRS, enclosing a copy of her divorce decree
    that clearly shows her ex is liable for these taxes and there must be a
    mistake, because after all, a JUDGE ordered it. Here is what the IRS
    told one woman: ``Civil agreements, such a divorce agreement do not
    dictate tax law.'' In other words, a court order means nothing to the
    IRS One woman asked me, ``Why do we even need divorce agreements if the
    IRS doesn't honor them?''
        Many women find that a well-needed tax refund she is expecting,
    ends up getting applied to her husband's old taxes. Also, the IRS
    continues to send mail to both parties at the old marital address, even
    though the individuals have been filing separately and unmarried from
    different addresses for years. As a consequence, penalties and interest
    accrue at an alarming rate without notice to the woman.
        Additionally, under the Taxpayer Bill of Rights II, the IRS is
    required to tell one spouse what actions they have taken to collect
    from their ex-spouse. However, the IRS has recently denied such
    requests citing that they are unable to do so because of the Privacy
    Act. In my own case, I have inquired for over a year-and-a-half about
    my ex-husband's payments to the IRS and yet have received no response.
        While I appreciate the opportunity to tell you my story, the
    message I want to leave you with today is that the American tax system
    mistreats divorced women. In some cases, women have been living through
    these ordeals for decades. The IRS drags out many of the cases over the
    course of years, filing brief after brief, executing liens' garnishing
    wages, ad nauseum, at your expense and that of all American Taxpayers.
    I believe that if the taxpayers had their say, I am sure they would
    want these women back in the work force, paying taxes and contributing
    to society. Shouldn't there be some time limit placed on resolving the
    struggle for these honest citizens? There must certainly be many fair
    solutions. Fairness begs that such equitable solutions be enacted
    immediately--and made retroactive! Mr. Chairman, we hope that you and
    your Committee will seek out a resolution to this atrocious practice of
    the IRS.
        Senators, thank you for listening to all of us, and for giving us
    the opportunity to address such a critical issue.

                                   __________

                     Prepared Statement of Sheldon S. Cohen

         Mr. Chairman and Members of the Finance Committee: I am pleased to
    appear before you today at your request. I have been asked to give you
    my views on the recent Report of the Restructuring Commission on the
    Internal Revenue Service and the Treasury Department's proposals as
    well as HR2676 which has been passed by the House of Representatives
    and S. 2676. My testimony represents my own personal views and is not
    on behalf of any client nor of my law firm.
         My experience is as a practitioner who has worked at the Internal
    Revenue Service on two different occasions; once in the early 1950's as
    a legislative draftsman (1952-1956) in the Eisenhower era and later as
    Chief Counsel (1964-65) and Commissioner (1965-69). I have also been a
    member and officer of the National Academy of Public Administration and
    in that role I have been on several panels which have studied various
    aspects of tax administration. I have served as a consultant to the
    Comptroller General and his staff. Likewise I taught tax and accounting
    subjects at The George Washington University Law School and several
    other universities over the years and have provided services as a
    consultant to the United Nations Development Program on tax
    administration issues in developing countries. I recently served as a
    consultant to the U.N. Ad Hoc Group of Experts on International
    Cooperation in Tax Matters, held in Geneva in December 1997.
         The Introduction to the Commission Report suggests that the
    President, Congress, Treasury and IRS must:
       develop and maintain a shared vision with continuity;
       set and maintain consistent priorities and strategic
            direction;
       improve accountability of senior management;
       develop appropriate measures of success;
       ensure that budget and technology support and strategic
            direction; and
       coordinate oversight and identify problems at an early
            stage.
         On these ideas just about everyone can agree. Thus, the goals are
    fine. My problem with the Commission's report and the House and Senate
    bills in some respects is in the means of achieving these goals. It
    seems to me that they have chosen inappropriate means in at least the
    governance structure.
         I would discuss the House bill alone, but I have heard that
    several members of the Senate have suggested moving back to the
    Commission's report, or in some instances going even further to
    ``privatize'' the IRS function. Therefore, I have discussed both the
    House bill in some respects as well as the Commission report.
         The Commission leadership has stated that its central
    recommendation is the creation of an outside board of directors that
    would select the Commissioner and other key officials and oversee the
    budget and direction of the IRS. This board would determine the pay and
    working conditions in the IRS and set its strategic goals. These are
    all inherently Executive Branch functions. In order to overcome
    Constitutional separation-of-power objections, the Commission would
    give the President, as head of the Executive Branch, the right to
    remove those appointed by the board or to overrule its budget
    determinations. This is inefficient at best and an invitation to
    political firestorms at worst. No other agency is so managed, and there
    is no precedent to suggest that such an approach would enhance rather
    than detract from sound tax administration. I noted a long legal
    discussion of the constitutionality of this in the Joint Committee's
    Staff Report for this Hearing. Do you want to raise serious
    constitutional issues involving the agency which collects the vast
    majority of our taxes? I would think not. The director of the Brooks
    Institution's Center for Public Management has strongly recommended
    against such a board. He feels it will degrade accountability and
    create new conflict of interest problems. The IRS is the major fund-
    raising entity in the federal government; we cannot risk making its
    operation worse. The first rule in making any changes should be ``first
    do no harm.''
         The House bill has the Board recommend the appointment of the
    Commissioner, but the selection is up to the President. The Senate bill
    seems to leave it to the Board, what I feel is a mistake.
         If the Commissioner and board were to have sharp policy
    differences on collections, audits or criminal investigations or any
    detail which may be at odds with the President, or the Secretary, what
    happens? There is no explanation of this possible issue. In the first
    year of a new President's term (of whichever party), he will have
    control over only two (or possibly three) votes on the board: the
    Secretary or Deputy Secretary, the Commissioner, and one appointee (in
    fact, on the first day he will have only the Secretary). Thus, the
    board could be moving in completely different management directions
    from that which the President and Secretary may wish: more corporate
    audits; less corporate audits; more collection activity or less
    collection activity; more criminal enforcement or less; more concern
    for foreign corporations doing business here or less; and so on. This
    is not the recipe for a smooth working IRS and Executive Department.
         The IRS is responsible for carrying out one of the two most
    essential government functions--the collection of taxes and the
    enforcement of internal revenue laws. (The other being defense, which
    is paid for by the funds collected by the tax system.) The Congress
    cannot and should not allow privatization of such an integral part of
    the government. The Commission and the Senate bill adopt a
    schizophrenic approach which looks to corporate America and yet creates
    something that is neither a private corporate model, nor a government
    model. The House has modified this a little, made it better but still
    not as smooth as it should be. In my view, such a Board would serve the
    system better if it were advisory. Even with this structure it would
    have a reforming effect since it would report to the Congress
    periodically in an open and public way.
         The board will have many inherent conflicts, both real and
    perceived, and the Commission and the House and Senate bills fail to
    recognize how these may undermine the credibility of the Internal
    Revenue Service. How do a board member and the President of Y
    corporation handle himself when an issue which affects Y corporation
    arises, or when an issue affects his or her industry, or indeed when
    the issue affects a competitor? Some conflicts will be so obvious that
    recusal may work, but some will be so subtle that they may not be
    recognized until it's too late. The Commission attempts to address this
    concern by stating that the new board will deal only with budgetary and
    strategic planning and not be involved with tax policy, audits or
    enforcement. Both the House and Senate bills follow this line also.
    Will the public really believe that, and even more important, will it
    be true? The power to set budgets is the power to set priorities and
    policies. Budgets have a direct role in tax policy and law enforcement.
    How the IRS spends money determines tax policy. What it is willing to
    enforce is the real policy, not what is said.
         Moreover, the appearance of conflicts may be almost as damaging as
    the conflicts themselves. Even if each board member comports him or
    herself perfectly, the inevitable coincidence of issues will raise
    perception problems with the public and will drive the press and
    Congress to a frenzy on occasion. An example will illuminate this.
    Suppose the audit of the company employing one of the board members
    ends fantastically well. Suppose further that the board member comports
    himself perfectly and never mentions it at any meeting. Who will
    believe it when the great result comes out and the news-making
    journalist draws the coincidence to its illogical conclusion?
         As a safety valve the Commission says that the Treasury or the
    President could overrule the new board on budget. Look at how
    complicated this could be for a new management strategy and think of
    the extra time consumed in this negotiating process. There are
    presently four sets of negotiations to make a budget after those within
    the Service itself: first at the Treasury, then at OMB, then two on the
    Hill (or perhaps three with the Conference Committee). We would add
    another, fifth, at the beginning of this process, and it would be in
    public so we can fight about the details in public. This process can
    add months to an already arduous process. All this would make for less
    efficiency, not more.
         We recently saw criticism of Commissioner Richardson because she
    had worked on the Clinton Campaign in 1992. Now we are to have a large
    board, each of whom will have potential soft spots in his or her
    career, each of whom have political friends or enemies, and each of
    whom will be criticized for one reason or another. And so each will put
    a blemish on everyone's perception of IRS management at some time
    during his or her term. This will be so regardless of the realities. We
    need better IRS management, but in my view decentralizing it to a board
    does not make it better. The present system has the advantage; it has
    worked well over the years because it centralizes responsibility. If we
    are unhappy at the moment, we can appoint a new manager (which has
    recently been done), and let him move forward with bringing better
    management to the IRS. The very issue which gives rise to the creation
    of the Commission, the failure of the new computer system, seems to be
    fading. The appointment of a new person, Arthur Gross, to manage the
    computer system and now with the appointment of a new Commissioner,
    Charles Rossotti, with fine management experience we are seeing new
    confidence in the IRS' ability to develop a workable and advanced
    computer system.
         The Commission recommended and the House and Senate bills set a
    fixed five-year term for Commissioner. I am in favor of a four to five-
    year term. The Commissioner provides a fresh voice from outside with
    new and different ideas. It is good to have a new perspective every
    four or five years so that new ideas and views are introduced. However,
    I should point out that only three of the last 15 Commissioners (since
    the Reorganization in 1952) have served four years. (I am one of them.)
    Fixed terms do not bring long service. Many agency heads have five, ten
    or even longer terms; very few people actually serve that long. Since
    Mr. Hoover's death, the FBI Director has had a fixed 10-year term,
    however, no one has yet served the full term.\1\
    ---------------------------------------------------------------------------
        \1\ Mr. Hoover served over 48 years, although he had no fixed term.
    ---------------------------------------------------------------------------
         I found that four to five years was about all my blood pressure
    would take; I served a year as Chief Counsel and four as Commissioner.
    My experience tells me that few people serve five years now, so
    pretending they are going to do it will not make it so. I too favor
    longer terms and more continuity, but I would do so by making the
    request come from the President and by the Congress having a more
    understanding and cooperative attitude. Too many combative hearings and
    heavy criticism of minor items will not be good for one's digestion,
    and my wife for one was happy to have me out of the meat grinder.\2\
    ---------------------------------------------------------------------------
        \2\ The Commissioner has a five-year term, except if he is
    appointed to fill a vacancy, then he/she has the remainder of the old
    term. While I think the five-year term serves no real purpose, if you
    are going to have it, why not give it to all who serve, even as
    replacement for someone else. This remainder of someone else's term
    seems to conflict with the House's stated purpose to have a longer
    term. Suppose someone is appointed with only six months to run on an
    existing term. Does he need a new appointment and confirmation at the
    end of six months? This seems odd in light of the stated purpose of
    longevity.
    ---------------------------------------------------------------------------
         It is more important that the top career staff have long
    continuity. I disagree strongly with the Commission on this point. They
    seem to feel that the career service of the IRS has too much longevity.
    During my term as Commissioner, there were 15 top staff members: a
    Deputy Commissioner, seven Assistant Commissioners in charge of
    functional areas and seven Regional Commissioners. In my four years in
    office there were only two changes in this group, the Deputy
    Commissioner was appointed as Deputy in another agency and was replaced
    by an Assistant Commissioner, and one Regional Commissioner retired.
    Thus, the people who planned the installation of the IRS's first
    computer system were the people who installed it and made it
    operational and that is why it was a success.
         Pay in the 1960's was better in comparison to private industry,
    and more important, government workers were respected. A beginning
    lawyer in my day received about 80% of outside pay (now it less than
    50%), that difference, considering the opportunity to develop expertise
    and work on cutting edge issues encouraged the best people to come to
    the government to work. It was that respect and the opportunity to do
    new and important things which kept the workforce steady and refreshed.
    The continuity of the career staff is important in accomplishing long
    term projects and providing a history of what works and what has
    failed. I would agree with the Commission that introducing career
    officials from other agencies is a healthy objective. It adds new
    points of view and ways of doing things.
         Statements of the respect and honor we ought to give to our public
    servants will not help, if we do not really follow through with that
    respect. The current climate of suspicion and nit-picking is conducive
    to rapid turnover and consequently lower levels of service. No one
    wants to work for a boss (the Congress) which never compliments you,
    but always finds a career person to target as the cause of the
    problems.
         A few comments on the House bill's views of the board.
         The board may not have a practicing lawyer, or accountant. The
    bill says that such a practitioner may not serve. Likewise, anyone who
    has served may not represent anyone before the IRS for one year after
    leaving the board. Thus, for example, none of us who are on this Panel
    could serve on the board unless we are willing to give up our active
    practice. I don't know if that is what you want, but it is in the
    bills.
         There is a two-term limit on the board membership. However, if
    someone is appointed to a remaining term of one year and then
    reappointed for a full 5-year term, I assume that he or she could not
    be appointed to a second full term. At least this is unclear at best.
         The board, according to the House bill, elects its own chair every
    second year. In most board structures, the President selects the chair.
    Thus, the President selects the chair of the SEC, the Federal Reserve
    and of the commissions he appoints.
         My own view is that the oversight board suggested by the
    Commission and the House should be advisory.
         When the Advisory Group of the IRS first started it was a valuable
    asset, ten to twelve well-known persons with tax, business, computer
    and other valuable experience met with the IRS Commissioner and top
    staff four times per year for one or two days at a time. The meetings
    were private and confidential. Then came the Advisory Committee Act and
    government in the sunshine, which required that such meetings be held
    in public with the press in the back of the room. These meetings became
    ``Show and Tell.'' No more candid discussion, only remarks intended for
    the press in the back of the room. So the value of this group declined.
    I don't know what the rules are with the board you are considering, but
    I suspect the board that the Commission and the House suggest would
    both have this defect. It appears that the House bill makes all the
    Board members special government employees, so perhaps the meeting will
    be private. That is the only way they will be productive.
         Serious discussions of flaws in the tax system cannot be held in
    public, unless you want to alert every tax cheat of how to do it
    better. I would applaud something like the advisory board if its
    meetings were closed, or at least if portions could be closed to
    accomplish real reform of the tax system. Perhaps appointment by the
    Secretary or even the President would enhance the prestige of the group
    and help get the very best people to participate.
         I applaud more participation by the Secretary and Deputy
    Secretary. Secretary C. Douglas Dillon and later Henry H. Fowler were
    very much involved in my time. I found this advice and support very
    helpful. Secretary Rubin has indicated that he and the Deputy Secretary
    intend to be more involved. That is good.
         An interesting alternative comes to mind here. The Comptroller
    General of the United States has a consultants group. I have served on
    this group for over 15 years. The group meets as a group with the
    Comptroller General and his top staff for two days at least twice a
    year. The Comptroller tries out on this group new ideas or tough
    problems he faces. The group is composed of corporate presidents,
    investment bankers, lawyers, accountants, retired military types and
    former government officials. A broad range of experience is
    represented. Subsets of this group meet periodically within various
    divisions of the GAO to assist them in developing work plans or in
    evaluating their work product. A small subset of this group acts as the
    Audit Committee of the GAO. (I am privileged to Chair that Committee.)
    This group meets periodically over the year with the Comptroller
    General and his staff and also meets privately with the outside
    accounting firm which audits the GAO. This process allows the GAO the
    benefit of fresh outside ideas and reviews on a regular and ongoing
    basis. Another example is the trustees of the Social Security system.
    They likewise exercise an oversight function.
         The board, as suggested by the House and Senate bills, is required
    to have a union leader as one of its members. This creates an
    additional conflict. Is he serving as an officer of the union or a
    board member? How does he comport himself when he negotiates with lower
    level IRS officials?
         I serve on the board of a university. It was determined many years
    ago that the current students and current faculty have a conflict of
    interest and may not serve on the board, although former students and
    retired faculty members have served. In that situation, the current
    Student President and Chair of the Faculty Senate are invited to sit in
    on board meetings and are often asked for their views. They don't vote,
    nor do they sit in on executive sessions which establish tenure rules,
    or makes salary or tuition decisions when the conflict is obvious, just
    as in the union leaders' case.
         The Commissioner and Secretary serve on the board only so long as
    they hold office. The union leader serves as long as he/she is employed
    as a member of the union. Suppose he/she is no longer the union leader,
    they seem to continue as a board member. This should be clarified.
         Likewise the union seems to be given extraordinary powers when it
    comes to apply the employee flexibility rules in Chapter 93 of the bill
    to a unit where the union has exclusive bargaining rights. The bill
    seems to give the union absolute veto over such changes. This is an odd
    way to modernize the IRS. I am a person whose grandfather was a co-
    worker with Samuel Gompers, I am sympathetic to union needs. However, I
    understand that it is tough enough to run the IRS without giving union
    veto power over certain changes.
         The board is required by the House bill to meet once each month.
    This seems odd. There may be reason to have two or more meetings in one
    month and not have a meeting in another month. Such a statutory rule
    seems out of place. Too much direction by statute is stifling.
         Many of the problems in our tax system are created in the
    legislative process. Last year was not much different from other years.
    The Ways and Means Committee worked up its draft legislation and
    revealed it on June 9th and 10th. The bill passed the House less than a
    month later. No hearings were held on the actual bill. It was funny (if
    that is the proper word) to watch the Chief of Staff of the Joint Tax
    Committee on June 12 describe the bill to the members. He was speaking
    at a rapid pace, so fast that most of the members could not possibly
    have understood him. I, as a tax expert, had a very tough time in
    following his rapid explanation. He answered questions very narrowly,
    and there was a vote. A few good lobbyists got advanced word and were
    able to change a few things, but most of us only watched in awe or
    disbelief that this was the way to make a law. The Senate followed
    suit. We are only now, a few months later, coming to know what is
    really in the House or Senate bills as passed. The President has now
    signed a bill which adds more, not less, complexity to tax
    administration. Indeed, we are now learning of errors in this bill and
    a bill will soon be introduced to correct obvious errors.
         Thus, the Congress which promised us simplification has produced a
    bill and explanation of about 1200 pages. The Commission wants a
    simpler tax law; the Congress says it wants simplification. If this is
    the Congress that will bring us simplification, I will be shocked. We
    can have a simple law only when the Congress has the discipline to say
    that every problem in America does not have a solution which must be in
    the Tax Code. This Congress, like those that have gone before it,
    clearly does not have that discipline. Incidentally, the Administration
    is no better than the Congress in this respect. In the Eisenhower days,
    the planning for the 1954 Code began in January 1953. There was a one-
    year study period, the bill was then introduced in January 1954.
    Hearings on an actual bill were held in both Houses and the law passed
    in August 1954, twenty months from start to finish. There were fewer
    errors or corrections needed, people had a chance to comment and think
    about the legislation and its consequences. I don't believe quick
    legislation is the way to go.
         The Commission believes that the oversight function of the IRS
    should be better coordinated by creating a new entity to handle this
    oversight function. I suspect that everyone at the IRS and Treasury
    would applaud this recommendation if it were to occur. Back in 1926 the
    Congress created the Joint Committee on Taxation (``JCT'') for this
    express purpose. However, oversight has not been as ``sexy'' as
    legislation, so the oversight function at the JCT has withered until it
    is almost nonexistent. Instead of recommending the abolition of a
    committee or the reinvigoration of a committee, the Commission does
    what commissions usually do, it wants to create a new entity. How will
    this mesh with the existing oversight function of the Congress?
         I do not see the substantive committees, House Ways and Means and
    Senate Finance, giving up their right to ask the IRS probing questions
    on its functioning under a statute which those committees drafted.
    Likewise, does anyone believe that the Appropriations Committee will
    not probe into how the money they appropriated is being spent or worse
    yet as they occasionally do, delve into changes into substantive tax
    provisions, or for that matter the Governmental Affairs Committees of
    each House when they are moved to examine an area. Thus, the suggestion
    about the need for one oversight group is good. The Congress ought to
    have one committee to oversee the IRS and it should be bipartisan and
    coordinated by the House and Senate. That is easier said than done and
    the report gives us little reason to believe it would succeed. The
    Congress is great at criticizing the Executive Department for
    redundancy or overlapping jurisdiction. While the idea is good, the
    implementation would require a kind of coordination in Congressional
    committees that I have not seen before. The House bill merely requires
    coordination of GAO audits with the Joint Tax Committee staff. There is
    also a schedule of Joint Oversight hearings set for each Spring. That
    is a far cry from one effective oversight function.
         The Commission wants stable funding for the IRS; three years is
    its goal. The IRS wants stable funding; the President wants it. What
    stands in the way is the appropriations process. What fun is it to be
    on the Appropriations Committee if you cannot hold hearings on how the
    IRS is doing on this or that sexy item, and give line item instructions
    to the Service to do this, or not do that? A large IRS initiative is
    like a large aircraft carrier; it may take several years to recruit and
    train the people needed to do the job. It is only then that you get the
    payback. So stable funding is a necessity. I see that the current
    legislation ignored this recommendation.
         What happened to the Hoover Commission recommendation for
    performance-type budgeting? The Congress tried it for a few years in
    the 1960's and it worked very well. Under such a budget, the agency is
    given a budget and an agreed mission. It is up to the Commissioner then
    to accomplish the mission within the agreed budget. However, new people
    came and did not remember Herbert Hoover and detail budgeting came back
    with all its inefficiencies. See what some of your sisters and brothers
    up here do annually to the issue of ``employee'' versus ``independent
    contractor'' or with electronic tax payments. The Congress is unhappy
    with the IRS' position but cannot decide what its role will be.
         The Commission seems to want the IRS to have more political
    appointments in the management of the IRS. I am pleased to see that the
    House bill does not take this position. I was happy with only two. It
    was great to be able to say that only the Chief Counsel and the
    Commissioner are political appointees. The last thing we need is a
    return to the 1950's when every collector (there were over 60) was
    appointed through the political process. I believe we want our tax
    system to be run in an apolitical manner. Thus, we do not need to
    return to the days when politics regularly entered the decision-making
    process. This type of change can lead to less respect for the IRS, not
    more.
         Section 7217 of the House bill prohibits Executive Branch
    influence over audits or other investigations. I suspect this is
    superfluous but if you are going to do this, I suggest that you cover
    yourselves. I had no problem with the President, Vice President,
    Secretary of the Treasury, but I had many requests in writing and
    orally from various members of Congress. If you are going to do this by
    statute, which I believe is inappropriate, then I suggest you make it
    unlawful for anyone in Government, including yourselves, whose official
    role does not encompass law enforcement to become involved in audits,
    collections and investigations.
         As to flexibility of pay for the top staff, this is a good idea
    that I would applaud. However, there is no discussion of the fact that
    this type of decision has been rejected by the Congress time after
    time. Each member of Congress feels that the problems in his or her
    state and in other agencies are just as important as those in the IRS,
    so Congress has refused this idea many times, both for the IRS and
    other agencies. Also performance-type pay is usually a ``no-no'' in a
    tax-raising agency. You want the staff to do the right thing, not
    necessarily the thing which brings in the most revenue. If you set the
    incentive system it will change behavior, not always for the good. That
    is why the IRS should never operate on a quota system for revenue
    agents or collections personnel. (Although occasionally some supervisor
    will do this, because it seems to them to be clear and does not require
    careful thought.) I know the House suggestion says that revenue
    production is not to be considered in setting bonuses, but sometimes it
    is the most important factor. Suppose someone is able to make his group
    more effective, at the same time being more fair, but also raising more
    revenue on less manpower. They should get a bonus, it won't be solely
    on the revenue production, but it will be partially. I am not sure how
    the House language works. You should also be careful about the law of
    unexpected results. The Congress a few years ago passed the
    ``Government Performance and Results Act.'' This requires agencies to
    keep data and statistics and show you how well they do with the money
    you give them. Sometimes requiring that data allows lazy supervisors to
    use it as the ``only'' criteria for advancement. That is wrong, of
    course, but asking for the data seems to encourage such behavior.
         The Commission feels that Customer Service is a vital element of a
    good tax system. So do I, and most of those who have served as
    Commissioner agree. Yet past Administrations have cut the funds for
    taxpayer service, and the Congress went along with those cuts. The
    Congress vacillates; one year it wants enforcement and collections, the
    next it wants niceness and service. The IRS gets into trouble when the
    Congressional pendulum swings.
         The IRS used to have a rule that they would be nice to the
    taxpayer (but strict); the nice people deserved it and the nasty ones
    would not be able to complain. Then came years of low budgets and cuts
    in training and the taxpayer services got cut. Congress often decrees
    cuts in training, believing that this will save money. It does not; in
    fact, it may cost money by making the IRS less effective. The public
    may judge the IRS by the service they get from the best customer
    services organization as is stated in the Commission's report, and
    indeed the IRS should give that kind of service. However, we all
    realize that sometimes we get shunted on the phone line from one number
    to another in a commercial outfit without the ability to talk to a
    human. Even private enterprise has these problems. Just last week my
    wife gave up trying to reach someone in a large department store
    because the computerized phone system kept shunting her around and back
    again.
         The Commission seems to feel that customer service comes first
    before compliance and efficiency. The House seems sympathetic to that
    view. Most IRS employees I deal with are courteous and respectful.
    However, they are often doing things which many of my clients don't
    like. They are questioning how taxpayers treat an item. Thus, this is
    not like dealing with a bank or credit card company. Banks are
    assisting me in financing my purchases; they are not questioning my
    purchases, or my motives. Thus, I suspect the Commission was comparing
    peaches with pears. They are both fruit, but they are different.
         The report talks constructively about improving compliance through
    research and preventive measures. The integration of research and
    compliance efforts is a worthy goal. However, recently Congress has not
    shown proper appreciation of TCMP. TCMP is the test audit program which
    provides data from which returns are selected for audit. Some in
    Congress discourage this program. If the IRS is to undertake adequate
    research it will need larger appropriations, which the Commission and
    the House did not address. If the IRS gets the test data, it will audit
    the returns which really deserve an audit; without that data it is
    guessing and will audit nonproductive returns. This means more bother
    to taxpayers who should not be audited.
         While there are some good ideas in the Commission's report and the
    House bill, much of it is a rehash of old ideas, some good, some bad.
    The Commission could have suggested that the Congress and others stop
    some of its IRS bashing. The IRS gets the blame when it enforces the
    rules which Congress writes. Individual members of Congress make
    gleeful exercises in blaming the IRS for trying to enforce tax rules
    they write. I suspect this IRS bashing has more to do with IRS morale
    and improvement than any of the other ideas.
                                 taxpayer rights
         I am concerned that the Congress may go overboard in the taxpayer
    rights area. First, I should say that the IRS should turn square
    corners with all taxpayers. It should do so with the honest and
    cooperative taxpayers, because they deserve courteous treatment; the
    nasty or dishonest ones should also receive fair attention because that
    is their right and also it will give them nothing to complain about.
    Being fair does not mean you need to be a wimp. Tax collection is not
    always a gentle sport so the IRS needs to be prepared for tough
    treatment. On occasion I authorized special agents to accompany revenue
    officers in collection cases where there was violence threatened. You
    cannot walk away just because the taxpayer is not a nice person.
         In collection matters, remember the debt is usually acknowledged.
    The taxpayer owes the money. Most other taxpayers have paid and paid on
    time. Any extension of time is a privilege, not a right. Hence, much of
    this is a judgment call as to what is a ``serious hardship'' or
    whatever standard you wish to apply. If you want the agency to be
    liberal, take a position and tell them the standard you want applied.
    Remember when you give relief to someone who is late in filing or
    paying, your act may cause a decline in compliance. It is tough to
    judge when you can be gentle, and when such action will encourage more
    people to slow up their payments.
         The Commission recommends that the IRS be required to pay damages
    after it has lost in three Circuits . That may look reasonable but you
    must remember that these Circuits are not the Supreme Court. We don't
    know for sure what the law is until the Supreme Court speaks. I can
    recall at least one case where seven or eight Circuits were adverse to
    the government's position, but the Supreme Court decided the case in
    the government's favor.\3\ It is your prerogative to do what you think
    is right since you are writing the law, I am just saying go a little
    slow and think it through, unemotionally.
    ---------------------------------------------------------------------------
        \3\ Comm'r of IRS v. LoBue, 351 U.S. 243 (1956).
    ---------------------------------------------------------------------------
         The House bill continues the present Code's designation of an
    Assistant Commissioner for Employee Plans and Exempt Organizations. I
    do not understand why the Congress needs to single out one Assistant
    Commissioner over all the others and provide for it in the statute.
    Originally the designation came out of the ERISA statute in 1974 when
    the Commissioner was required to institute such an Assistant
    Commissioner. It has now been in place for over 20 years and it seems
    odd for the Congress to be concerned with one Assistant Commissioner
    and not any of the others. I think the Assistant Commissioner for
    Employee Plans and Exempt Organizations is important, but not more than
    others.
         The Office of Taxpayer Advocates is created by statute in both
    bills. The House bill makes the salary of the Taxpayer Advocate equal
    to that of the highest level official reporting directly to the
    Commissioner. That official is the Deputy Commissioner of IRS who is
    currently paid at the level V of the Executive Pay Scale. I believe
    they should designate the Taxpayer Advocate at this as the highest
    level after the deputy, which is an SES rating.
         The House bill seems to try to make the Taxpayers Advocates staff
    a self-contained group with no interchange with others in the IRS. I
    don't think that is healthy or wise.
         If you want everyone in the Service to be cognizant of taxpayer
    service issues, then you want people moving in and out of this activity
    as they do with other activities, particularly at the supervisory
    level. You also should be concerned that a small self-contained unit
    will have little means of promoting and using its best people. Hence, I
    don't believe it is wise to put in the rule that House has on page 20
    of its bill which does not let taxpayer advocates move to other
    positions in the IRS. Suppose you have a super taxpayer advocate and
    the Commissioner wants to make him Deputy Commissioner under Section
    7803(c)(1)(B) he could not take the job until after five years of
    leaving the Taxpayer Advocate's position.
         The House bill sets very tight schedules for reports by the
    Taxpayer Advocates. I am not sure that three months is sufficient time
    to gather the data, check it and get a written report prepared. Again,
    someone has put in statutory language with very tight rules which may
    make it worse, not better.
         The House bill wants to know about the 20 most serious problems as
    seen by the Taxpayer Advocates. Twenty is a large number, I suspect
    five or ten would be sufficient. That is about all you could deal with
    in trying to remedy in a year or so in any event.
         Regarding the House's mandate that electronic filing is the
    ``thing.'' It probably is, or should be. However, passing a law which
    requires reports and in great detail won't make it happen. The IRS and
    Treasury want electronic filing too; give them a little credit for
    intelligence. If it is more efficient and cost effective, then everyone
    gains. So encourage it, but don't mandate it. It will come as soon as
    technology and cost allows it to come.
         Giving someone an extra month to file electronically seems
    overkill. It is more cost effective for the taxpayer to file
    electronically, so why delay the movement of information. If a paper
    information document is required on February 28, why should electronic
    information have an extra month? I see no purpose to this.
         It would be nice to have a paperless system. But don't count on it
    so soon. I can remember when someone had the brilliant idea about the
    W-2. They suggested back in the 1950's that the back of the W-2, Wage
    Report be used as a 1040A. It was virtually a painless return. However,
    the system broke down because taxpayers often have two or more jobs in
    a year, so they erroneously filed multiple returns which were not
    correct. They filed the W-2 form and a regular form and made a variety
    of other errors. Therefore, the system was abandoned because of the
    confusion it caused. It would be great if we could work out such a
    system, or a similar system. However, you must not anticipate what has
    not yet been developed. We don't yet have a return-free system. We
    don't yet have a computer system sophisticated enough to handle such a
    system. In this case, wishing will not make it so. A great deal of hard
    work is necessary to make it work.
         The burden of proof idea in the House bill is a mistake. It won't
    help taxpayers and it will confuse the tax system. Everyone
    knowledgeable about the tax system will tell you that the taxpayer has
    control of the necessary information so he should have the obligation
    to produce the required information to justify his deduction. If the
    IRS gets concerned about the burden it will have, then it will
    intensify the audit in order to avoid the burden of proof issues; that
    is not what you want.
         Taxpayers will misunderstand these provisions and will sit back
    and say to the IRS: ``prove I am wrong,'' without cooperating in the
    audit. Thus, they will think they have new rights which may well prove
    illusionary. It seems to be a bad idea.
         Innocent spouse relief is a nice idea. I am the originator of the
    innocent spouse concept in the Code today. It came because we had a
    hard case which I felt was unfair. A woman in Texas who was a school
    teacher with two children was married and filed a joint return with her
    husband who ran a gasoline station. Unknown to her, her husband had a
    second family in another town a few miles away and had a second job
    there repairing cars. He did not report the income from the second job
    on the joint return. The revenue agent found the extra income and set
    up a deficiency on the joint return. The husband ran and could not be
    found. The tax deficiency was set up against the joint return and under
    the law then in effect the wife was liable. I was faced with a revenue
    officer threatening to seize the teacher's house to pay the tax of her
    deadbeat husband for income which she never knew of. I held the case in
    abeyance and sought legislation to give her relief. That legislation is
    the present statute. If it does not work as you believe it should, then
    change it, but be careful you are not too liberal. You have the choice
    as you write the laws, but you need to take into account that other
    taxpayers bear the burden when you relieve one group or another.
         The House rule relies on someone's judgment about ``equity'' or
    ``inequity.'' These are not rules which can be uniformly applied. I was
    once asked by a member of the Appropriations Committee if I didn't
    agree that the Commissioner should have ``equity'' powers to forego, or
    forgive a tax. I immediately answered ``yes,'' since I said I had
    confidence in my judgment. I quickly added that I might not have such
    absolute confidence in the judgment of those who followed me, so
    perhaps you ought not give me the power, as they might not have
    confidence in my judgment. The collection of taxes should not depend on
    judgment as to what is reasonable. This is not the imposition of a
    penalty but the relief of tax.
         The House has a provision to grant relief by suspending the
    statute of limitations in situations where the taxpayer is incompetent.
    While such situations are trying and raise all types of personal
    problems, it is difficult to gear the tax system to save the records
    for many years after the event, to find that someone 10 or more years
    later with a refund claim which they attempt to sustain by saying the
    person was incompetent. You then go through the proof, 10 years after
    the fact. Many claims will be made, few will be sustained. It is a very
    tough area to make a judgment as to what policy is best.
         The House has a provision which grants a privilege of
    confidentiality to nonattorneys for the first time. I am again
    concerned about people thinking this is more than it is. Taxpayers who
    go to accountants or tax preparers or even lawyers for the preparation
    of a tax return, do not get confidentiality. Anything which is done in
    preparation of a return is discloseable to the IRS or in a court of
    law. This will not be clear to most taxpayers seeking advice and I
    suspect many preparers will use the provision to say they have
    privileges when that may not be so. I believe the courts have been
    curtailing privilege; I don't like to see the Congress granting more
    confidentiality. Tax returns ought to be open, and what goes on behind
    them should likewise be open.
         Seeking legal counsel is different than seeking tax return
    information or accounting advice. They have been different for
    centuries; I do not see a good reason to change now. Accountants have a
    general duty of disclosure and are often in a conflict position when
    they are certifying to the public the financial records of a business
    and at the same time trying for privilege in dealing with the IRS.
         The House bill also has a provision which attempts to deny the IRS
    the right to ``Computer Source Codes.'' This is an attempt by the
    accountants, some computer people and some in the business community to
    play by rules foreign to the United States. We go around the world
    lecturing foreign governments on tax, banking and financial systems
    which have ``transparency'' and openness. All of our treaties require
    full open exchanges of information. Today most information in the
    business world is kept on computers. Full access to such information
    and how it was manipulated to get to their tax return is necessary for
    an efficient revenue service. If the IRS needs to go through and
    replicate the computer program, that would be outlandishly expensive
    and frustrating. Thus, I do not see the equities on this issue at all.
         If the information is run through a computer system to produce
    numbers which are reflected on a tax return, the IRS ought to have
    access to how the material is produced, hence the complete computer
    program. Are we going to be a tax haven? The House version puts
    unreasonable burdens on the IRS.
         The House seems to believe that financial status audit techniques
    should not be used unless their is an indication of the existence of
    unreported income. If I am being audited and the agent sees I live in a
    $500,000 home, drive a $50,000 automobile, and have a similar living
    style, yet report an income of only $50,000, I believe he should have
    the right, and duty to use financial data to show what my standard of
    living costs are likely to be. I would hope the Congress would not
    champion tax cheats. A look at the recent GAO audit of financial status
    audits shows no increase in their use.
         The House bill has a provision dealing with complexity analysis. I
    commented earlier on our complex law. Having the IRS comment to you on
    the difficulties of administration or enforcement would be useful. But
    you have to take their concerns seriously.
         Likewise, there is now a delegation order, see Footnote 14 of the
    House report on its Restructuring bill which forbids the IRS from
    issuing rulings, revenue procedures, forms and other guidance without
    Treasury approval. This provision commencing in 1981 has cut off much
    guidance to the IRS field as well as taxpayers in general. It was not
    the rule when I was either Chief Counsel or Commissioner. This requires
    all rulings and similar material to flow through the Office of the
    Assistant Secretary for Tax Policy. That is a relatively small
    organization and it cannot put out sufficient guidance to meet the
    public's needs. I would suggest the Secretary change this delegation
    order, or the Congress ask him to do so.
         In closing I would like to thank the Committee and its staff for
    allowing me to give you my views on IRS management issues. We all want
    to make the tax system work better. A good system poorly administered
    will not work properly. A poor system well administered will succeed.
         Heretofore we have had a pretty good system and excellent
    administration. One of the IRS's burdens has been its ability to make a
    complex system work. Unfortunately that has encouraged various
    Administrations and the Congress not to the be concerned about the
    complications they have added to the Code. Like the straw which breaks
    the camel's back, all this catches up to you after a while. My own view
    is that we still have very good tax administration. I say that from my
    experience working in the system, working with clients caught up in
    audits, collection issues and the like, and viewing it from outside the
    U.S., we are still the model for most countries around the world. It
    can be better, and I believe Secretary Rubin and the new Commissioner,
    Charles Rossotti will address the issues of concern to the Congress and
    the rests of us. Radical solutions may kill the patient; I am in favor
    of incremental and significant improvements.

                    Responses to Questions From Senator Roth

    Strengthening Oversight
        Question 1. Should the Inspection Division be more independent?
    Should the IRS Inspections Division be transferred to the Treasury IG?
        Answer 1. The Commissioner needs an inspection group. I believe it
    is a necessary part of his management oversight of the agency that he
    have the capacity to look into internal audit matters as well as
    internal security. I found it very useful, in fact the Assistant
    Commissioner who I saw most often was probably what is now called the
    Chief Inspector. The inspection group needs to be independent of the
    rest of the IRS, but it should be responsive to the Commissioner.
        Question 2. One of the most important lessons learned from the
    Committee's oversight hearings last September is the need for greater
    oversight of the IRS. The Congress needs to do more oversight--which we
    intend to do. But also there must be more oversight of the IRS in the
    Executive Branch. There are, at least, two ways we can improve that
    oversight. The first is to vest significant oversight responsibility
    with the Oversight Board that is created in the House-passed bill. The
    second way is to substantially increase the power of the Treasury
    Inspector General. What are your views on both of these ideas?
        Answer 2. Yes, Congress and OMB ought to exercise more oversight,
    and more regularly. Sporadic looks at the political hot buttons is not
    good oversight. It has to be regular and organized. The Oversight Board
    can be helpful in oversight, but it should be advisory. See the
    testimony of NAPA with which I agree.
        The Treasury Inspector General should have the necessary people and
    money to do a competent job when needed. This is not to the exclusion
    of the Commissioner having his own staff; there are separate functions.
        Question 3. Is the Oversight Board created in the House bill an
    executive board, or merely advisory? Does the Board have legal
    authority to direct actions taken by the Commissioner?
        Answer 3. The Oversight Board is not designed to be the day-to-day
    manager of the IRS. As you know, I prefer it to be advisory capacity,
    but advisory or not, it is not the manager to which the IG or Chief
    Inspector reports.
        I didn't think the Board was designed to direct the Commissioner in
    law enforcement functions. Much of what the Chief Inspector does is a
    law enforcement function.
        Question 4. If the Oversight Board is created and Commissioner
    Rossotti is able to turn the agency around, should the Board be
    sunsetted?
        Answer 4. Yes, I believe the Board should be sunsetted. I say this
    because you don't know if it will make life better or worse. If
    Commissioner Rossotti achieves managerial success, the Board may prove
    superfluous, it may be a failure in any event. If it appears to succeed
    and needs more time, I am sure you could extend its life.
    Protecting the Taxpayer
        Question 5. Our hearings have also indicated a need for the
    Committee to consider protection for the taxpayer in a number of very
    specific areas.
        (a). What are your thoughts on changes the Committee ought to
    consider in the penalty and interest area?
        Answer 5(a). Penalties: The Congress in recent years has used
    penalty provisions as fund raisers. I thought this to be a mistake and
    I would go through the Code to remove overbearing and redundant
    penalties. I would be glad to work with your staff to try to identify
    overkill.
        (b). The Committee's oversight hearings showed considerable
    problems with the IRS's exercise of its lien, levy, and seizure
    authority. This has to be fixed. I'm concerned about taxpayers who do
    not receive real notice and wake up in the morning only to find that
    the IRS has taken their bank account, business or other assets. Should
    the taxpayer have a right to judicial hearing before seizure?
        Answer 5(b). Judicial hearing before seizure: This is a dangerous
    suggestion. You must consider that it would stop all enforcement for
    ``x'' days (the period you set to bring the action, plus the time for
    the Court to decide). This would raise the cost by requiring more
    lawyers at IRS and Justice, at a large cost. And, it would accomplish
    little. The overwhelming majority of seizures were proper, and would go
    through anyway. You would raise the cost of both sides, reduce revenue,
    in order to try to rectify a very few tough cases. I suspect the cost
    is too high for any possible benefit.
        The true test of sovereignty of any country is running and
    operating an effective tax system. If you put in too many road blocks
    to collection, you will allow deadbeats to bend the system and transfer
    the cost to the compliant taxpayer. I doubt that is what you desire.
        (c). The current Offer in Compromise program doesn't seem to work.
    In too many instances, people go into the program, nothing gets
    resolved, and by the time they get out they are socked with horrendous
    interest and penalties. Is this program broken? How would you improve
    it?
        Answer 5(c). The Offer in Compromise system works, but it could be
    better. I suspect you need to let the IRS work out better direction for
    its people governing the program. My recent experience is that it is
    getting better. This is a management problem, not a problem with the
    law.
        (d). The IRS has the power to label a taxpayer as an ``illegal tax
    protester.'' Such a label is important for the IRS in its efforts to
    protect its agent. But such a label also brings serious consequences
    for the labeled taxpayer. It is important to protect IRS employees.
    However, our investigation has revealed that some taxpayers may have
    been labeled as illegal tax protesters merely because they wrote an
    article in a newspaper. Should there be a review of such labeling to
    prevent abuse of the labeling system to the detriment of law abiding
    taxpayers?
        Answer 5(d). Illegal tax protester: Yes, there should be a review.
    I don't believe legislation is needed to accomplish that. A single
    discussion with Commissioner Rossotti should resolve this.
        Question 6. Should the Taxpayer Advocate and problems resolution
    officers be independent from the IRS?
        Answer 6. Taxpayer advocate independence: No, I don't think you
    want to set up another government agency with all the complications
    that go with that. If you isolate the taxpayer advocate so much you
    will breed suspicions and lose cooperation. Appeals now operates as an
    independent group, but it is not a separate group. I suspect that is a
    good model.
        Question 7. Are you aware of any instances of IRS employees who
    were abusive to taxpayers or retaliate against other employees who were
    not disciplined because management believed the disciplinary process is
    too burdensome?
        Answer 7. Employee Disciplinary System: I believe effective
    management takes care of this problem.
        Question 8. The Committee's hearings last September dramatically
    demonstrated the need to institute greater taxpayer protection. I think
    we were all very disappointed by the poor performance of the taxpayer
    advocate's office. The idea, though, of a tax ombudsman--someone who
    has the knowledge to guide taxpayers and the power to resolve snafus--
    seems to me to be a good one. On the other hand we should be striving
    for an IRS where problems are solved right for the first time by the
    front line agency personnel that deal with the public.
        Until we achieve such a happy state, one avenue open to the
    Committee is to increase the resources devoted to the advocate's
    office, develop a separate professional career path for the people who
    work in it, and have the office report to both the Commissioner and the
    Oversight Board. What is your reaction to that?
        Answer 8. Taxpayer Protection: (See 7). Yes, you should strive for
    the right answer the first time, but you have to know that will not
    always occur, so you need a sensitive supervisory system. The first
    level supervisor is a key to this problem. Commissioner Rossotti is
    aware of this.
    Changing the Culture
        Question 9. Improving oversight and protecting the taxpayer are not
    the only things we need to be doing to respond to the problems
    uncovered by the IRS. We need to change the very culture of the agency
    itself. That will require a complete new look at its organizational
    structure, its managerial rules, its performance measures, and its
    training programs.
        (a). One of the surprises of the Committee's investigation into the
    IRS is how fearful many employees are at how they are managed. They
    paint a picture of the IRS as a vindictive and unhappy place to work.
    What changes would you like to see in personnel rules and other
    procedures to change the culture of this organization?
        Answer 9(a). I don't believe the ability to change the culture lies
    in writing new or expanded rules. This is a management problem, in a
    few places, not in the entire agency. It starts with better training
    for first-level supervisors. It is easier to manage by the numbers, so
    the weak or lazy supervisor will do that. The better ones maintain
    balance between quality of work, attitude toward taxpayers and
    production. Thus a better training program for first-level supervisors
    would be my suggestion for a start. Most of the employees I have dealt
    with over the years have been competent and effective.
        (b). There are a considerable number of people who feel that it is
    not possible to reform the culture of the IRS without dismantling the
    agency. For these people, a whole new tax system that isn't dependent
    on a collection agency is the way to go. What is your response to
    people who, because of their experiences with the IRS, believe this is
    an agency beyond saving?
        Answer 9(b). I believe that people who say the agency is not worth
    saving are speaking nonsense. I travel all over the world working with
    the U.N. to train developing country tax administrators in the
    principles of good administration. Wherever I go the IRS is well
    respected and emulated. If you recreated a new agency you would do it
    just about as it is now, only with small changes.
        My major suggestion for making the system better is for the
    Congress and the Administration to resist the urge to use the Tax Code
    to do everything from educational programs to encouraging R&D. Each
    provision begets another and thus we have a complex Code which is
    difficult to administer.
        (c). In 1994, Congress passed the Government Performance and
    Results Act (GPRA). This was an effort to get the Congress and the
    Executive Branch to focus on performance standards. Do you support such
    standards for the IRS? If you do, what do you think the performance
    standards should be?
        Answer 9(c). The Government Reform and Performance Act is partially
    to blame for the results-oriented performance you are hearing revealed.
    If you ask for quantification, people think you are judging them on
    quantity. Both modes of operation and quality need to be judged. Good
    employees will perform well in both areas, but you need to enunciate
    your goals. Employees will try to meet the standards expected, at least
    that is my experience.
        (d). During the September hearings employee witnesses testified
    that many IRS employees ignore the Internal Revenue Manual and other
    official procedures with impunity. Should IRS employees be required to
    follow the Internal Revenue Manual and other official procedures?
        Answer 9(d). Writing more rules will only make the system more
    complicated. This issue is again one of management. Good supervisors
    will hold their employees to following the rules. I find that most of
    them do, and when they don't, calling attention to the manual
    instructions will usually bring them into line.
    Oversight Board Questions
        Question 10. The House bill establishes a board ``to oversee'' the
    IRS in its ``administration, management, conduct, direction, and
    supervision'' of the administration of the tax laws What does
    ``oversee'' mean to you? What should be the relationship between the
    Commissioner and the Board?
        Answer 10. I recommended in my testimony that the Board be
    advisory. If it is a Board composed of important and knowledgeable
    people, it will have a tremendous influence on the Commissioner's
    thinking. See particularly the testimony of NAPA with which I agree.
        Question 11. I am troubled that the bill prohibits the board from
    exercising any authority over ``law enforcement activities'' such as
    collections--an area which our hearings have shown to be rife with
    taxpayer abuse.
        Answer 11.  See my testimony, re: possible conflicts, real and
    apparent. If the Board gets into casework, it will push one direction
    or the other, then conflicts will be real.
        Question 12. If an IRS Oversight Board is established within
    Treasury, should Board members be part-time or full-time employees?
        Answer 12.  Part-time or Full-time Employees: Nature abhors a
    vacuum. The work will fill the existing time. If they are full-time,
    they will get into minutiae. This Board should meet six to eight times
    per year or more, if needed, but not every day. It is not the
    Commissioner, unless you mean to defy every rule of good management. No
    Board of Directors of a corporation has all full-time members.
        Question 13. What is your opinion regarding who should serve on the
    proposed IRS Oversight Board? Should a union representative be
    guaranteed a slot on the Board? Should the Commissioner and Secretary
    of Treasury be on the Board?
        Answer 13.  Who Should Serve on the IRS Oversight Board: I do not
    believe a Union President should serve. He has access to management now
    on all important issues; he could be an observer at meetings when
    needed, but he has a conflict on management changes. See my testimony
    and the NAPA testimony on this subject. Yes, the Commissioner and
    Secretary of Treasury should serve. The Commissioner is the CEO of the
    IRS. If you are to have an effective Board, the Commissioner should be
    a part of it since he/she will be the one who will execute the
    direction to change the management focus.
        Question 14. I think that we would probably all agree that a
    significant part of taxpayers' problems with the IRS stem from the
    complexity of the Code. What parts of the Code do you think are prime
    candidates for simplification?
        Answer 14.  See my testimony of January 29 and also my Griswold
    Lecture, pages 7-15.
        Congress often puts in restrictions on various provisions, not on
    the merits, but to save revenue. This is one of the most frequent
    causes of complication. I would be pleased to assist your staff with
    Code provisions which could be simplified.

                                   __________

                 Prepared Statements of Hon. Alfonse M. D'Amato

                               [january 28, 1998]
        Mr. Chairman, I commend you for quickly beginning a series of
    important and necessary hearings on restructuring and reforming the
    Internal Revenue Service (IRS). I want to welcome Secretary Rubin and
    Commissioner Rossotti today and look forward to their comments on how
    to go about successfully restoring taxpayer confidence in our tax
    system.
        The IRS is one of the few federal agencies which interacts on a
    daily basis with tens of thousands of Americans, and is charged with
    the management and enforcement of the tax laws enacted by Congress. The
    American people expect and deserve a tax system that ensures their
    rights under the laws, and an IRS that is not abusive in enforcing
    those laws.
        Our hearings last Fall made it very clear that too many taxpayers
    are being denied their fundamental rights, and too many are paying
    money they do not owe. In fact, a recent Internal Audit initiated by
    the IRS as a result of those hearings, which reviewed the use of
    enforcement goals and statistics in the Collection function of a number
    of IRS District Offices, supports the findings of those hearings.
        Mr. Chairman, in drafting IRS reform legislation it is imperative
    that this Committee not only establish an oversight board and increase
    taxpayer protections within the Taxpayer Bill of Rights, but also
    strengthen and expand the authority of the Taxpayer Advocate, whose
    office is currently the sole defender of taxpayers within the IRS. As
    such, the Advocate should not just get involved with problems after the
    fact, his or her office should be part of the policy making process up
    front.
        That is the only way to change the current culture within the IRS,
    and assure a balance between fair treatment of taxpayers and enforcing
    compliance with the tax laws. Transforming the IRS into a customer
    service organization will restore confidence in our tax system.
        Thank you, Mr. Chairman.
                               [february 5, 1998]
        Mr. Chairman, this hearing will focus on what I believe to be the
    most important task in reforming the Internal Revenue Service (IRS)--
    ensuring taxpayer rights. I want to commend you for continuing these
    hearings into IRS abuses of taxpayers' because it is important that the
    American people know unequivocally that Congress has gotten their
    message and will no longer tolerate it.
        I still shudder at the thought of what we heard in the first
    hearings last Fall. The incredible tales of taxpayers spending ten and
    fifteen years trying to resolve disputes with IRS employees who didn't
    want to be bothered with collecting the correct tax. They just wanted
    to collect any tax even though? in some cases, it wasn't actually owed.
        I continue to receive phone calls from constituents who tell me
    about coercive tactics used by IRS agents during audits. For example,
    an agent telling a taxpayer that he will audit other tax years, or
    assess a higher tax if they don't extend the statute of limitations. No
    wonder a 90 percent of Americans surveyed want Congress to make IRS
    reform a top priority. And 86 percent want additional protections for
    taxpayers during an audit or a tax collection action.
        I commend Commissioner Rossotti for recognizing the importance of
    fundamental reorganization within the IRS--a recommendation made by the
    National Commission on Restructuring the IRS. His quick and forceful
    efforts to refocus IRS operations around the needs of taxpayers instead
    of the needs of the bureaucracy are noteworthy. I trust he will
    continue to incorporate new ideas and find inventive ways to put a
    better face on the IRS. One suggestion I believe will help accomplish
    that goal would be to ensure that when upgrading the IRS computers a
    ``tracking system'' be included that would track payroll deposits and
    warn the IRS that a particular business had stopped making its
    deposits.
        Mr. Chairman, as you know? most taxpayers, both individuals and
    businesses, pay their taxes in full and on time. However, when
    businesses have cash flow problems the owner has to make a choice
    between paying the creditor who's immediately on his back (i.e.,
    suppliers, electricity, etc.), or paying the IRS. Mr. Rossotti told us
    last week that IRS probably won't contact him for six months or more.
    By then the payroll debt, including interest and penalty, is more than
    the business can handle and the result is that the taxes don't get
    paid. Having this type of preventative measure will cost the IRS less
    in the long run, keep businesses operating, and help to eliminate the
    almost $100 billion tax gap we currently have.
        I welcome our distinguished witnesses today, and look forward to
    their testimony on this very important issue.
                              [february 11, 1998]
        Mr. Chairman, I commend you again for taking the lead in holding
    hearings on issues that should and do concern us about the tax laws in
    general, and the IRS's practices in particular, especially as it
    relates to ``innocent spouses''--mostly women--who are powerless to put
    up a winning fight. I am outraged and, frankly, growing very weary of
    all the issues that keep coming out about the IRS and its unfair and
    unethical behavior towards law-abiding Americans.
        Today, two of my constituents, Elizabeth Cockrell and Svetlana
    Pejanovic, will tell similar stories about their contact with the IRS
    and their losing battle in trying to prove that they are innocent
    spouses and should be entitled to relief from tax assessments
    perpetrated by the actions of their spouses.
        Both came to this country and married American citizens.
    Unfortunately, their marriages ended after three or four years, but
    both were able to find jobs and get on with their lives, even though
    they received no financial support from their ex-husbands. Then bang,
    years later the IRS is on their doorstep demanding payment for taxes
    they never knew were owed. They never knew about these back taxes
    because the IRS only made contact with their ex-husbands.
        Here we have two women who have been filing their own tax returns
    for over five years, noting their social security numbers on those
    returns--the same ones used on the joint returns they filed--and the
    IRS doesn't even bother to contact them. No, the IRS considers that it
    has satisfied its obligation by sending a letter to the deadbeat who
    caused the problem in the first place. It's beyond me that the IRS does
    not do a current check on both parties, especially when they are trying
    to collect a tax assessment that is five years old or more. You'd think
    that would be standard procedure.
        Mr. Chairman, we must do more to protect our lawabiding taxpayers.
    The innocent spouse provisions we currently have are totally inadequate
    and very difficult, if not impossible, to meet. As Mr. Keating stated
    in his testimony . . . . ``its provisions are so complicated and
    arduous that it should be known as the `lucky spouse' rule for the few
    people who can meet all of its tests.'' That is why I fully support the
    Senate bill going much further than the House on the innocent spouse
    issue. I have reviewed the American Bar Association (ABA) proposal,
    which advocates repeal of the joint and several liability provision. I
    support that also.
        I trust that the testimony we are about to hear today will convince
    Members of this Committee that a drastic change is needed. We have the
    opportunity to do that this year.
        Thank you, Mr. Chairman.

                                   __________

                      Prepared Statement of Bryan E. Gates

        Chairman Roth, Ranking Member Moynihan, and Members of the
    Committee, my name is Bryan Gates and I am an Enrolled Agent in private
    practice in Clearwater, Florida. I am pleased to have this opportunity
    to present testimony on behalf of the Members 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 subscribe 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 millions of individual and small
    business taxpayers at all administrative levels of the IRS, in addition
    to preparing their tax returns.
        By way of background, I am a third generation Floridian and a
    graduate of Florida State University where I received my degree in
    business administration in 1963. I joined the IRS shortly after
    graduation and for five years served in various field positions. In
    1968 I was selected for senior staff development in the IRS National
    Office in Washington where I was assigned to the Assistant Commissioner
    for Compliance. My duties included IRS operations analysis and editing
    portions of the Internal Revenue Manual which, as you know, is the
    definitive procedure reference book for IRS field personnel. During my
    service with the IRS, I received a number of superior work performance
    awards and a Commissioner's Letter of Commendation. Since leaving the
    Service in 1973, I have become, in addition to representing hundreds of
    taxpayers, an authority on IRS practice and procedure, a frequent
    lecturer, and author of several books and numerous articles on IRS
    representation. As originator of NAEA's National Tax Practice Institute
    (NTPI) I have educated over a thousand graduates in representation.
        My testimony this morning will be divided into several parts.
    First, I would like to comment on the IRS reform legislation pending
    before the Committee. Secondly, I would like to propose additional
    taxpayer safeguards which should be considered by the Committee.
    Finally, I will discuss the role of the Taxpayer Advocate.
                              1. governance issues
        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 have praised the work done by the
    Commission in focusing on constructive ways of improving our tax
    administration system and making the IRS more responsive to taxpayer
    input. We support the Commission's recommendations which have been
    incorporated into the pending legislation as we believe the true
    bipartisan nature of the Commission's deliberations and the earnest
    give and take of the democratic process have produced a set of
    recommendations which are carefully woven together and interdependent
    upon each other to bring about the change all agree is necessary in the
    way our tax administration system works.
    A. IRS Oversight Board
        We strongly endorse the concept of establishing an IRS Oversight
    Board. It became clear to everyone who attended the hearings and
    deliberations of the Commission over the past year that the IRS had
    significant lapses in the skills sets needed to manage the technology
    conversion process they have underway; to guide the enhancements needed
    in expanding their customer service focus; and to steer the marketing
    of their new initiatives. We have often expressed our concern about a
    trend toward greater centralization of decision making authority into
    the IRS National Office and believe this contributed to a major degree
    to the problems the Service has encountered in recent years. The
    Commission's contribution has been to force the Service to consider
    outside input on a far greater scale than at any previous time. Healthy
    developments have already occurred as a result. We have the first IRS
    Commissioner with significant technology integration experience now in
    that post. We have seen the Service select a new Assistant Commissioner
    for Electronic Tax Administration from private industry who has
    extensive experience with marketing electronic tax services, and we
    have seen the issuance of a request for proposals from the private
    sector for ways the IRS could improve its overall systems.
        Many organizations spent considerable time and resources to help
    the Commission in its deliberations to insure that the recommendations
    were going to improve the tax administration system and insure IRS was
    able to reverse the decline in taxpayer confidence in its ability to
    impartially and efficiently manage its resources. The final
    recommendations were the result of compromise in the best sense of the
    word. Not everyone got what they wanted or thought would be best from
    their perspective, but we believe the blend of different views resulted
    in a package which, when implemented, will significantly help get our
    tax system back on its feet and restore the Service to the ranks of the
    best managed government agencies.
        We truly believe that the Oversight Board is precisely what the
    Service needs at this moment in time and prefer to focus on the
    positive aspects to be derived from its establishment. If we focus on
    the true nature of the Commission's objective--to make the IRS more
    responsive to America's taxpayers--especially the 85% who comply with
    all of their tax obligations every year--we see that instead of
    presenting a threat, the Oversight Board could bring an outstanding
    group of advocates for the Service to the table. These advocates, given
    the status of their own professional accomplishments and positions,
    would enjoy significant credibility with the Congress and the taxpaying
    public. We would envision a consultative role for the Oversight Board,
    one in which the expertise of Board members would contribute to the
    resolution of long-standing organizational and management issues.
        In past times of crisis we have seen Presidents appoint outside
    Boards to help government fulfill its mission. During World War II,
    President Roosevelt used many ``dollar-a-year'' men to guide our
    efforts and relied on extensive input from corporate and civic leaders
    outside of the federal government to resolve problems. We prefer to
    view the potential of the Oversight Board in the same light. Let it
    help IRS redefine its relationship with the American taxpayer. Let it
    bring to the table the best ideas, the best people, and the best
    systems to deal with our complex problems. The appointment of Charles
    Rossotti to be the new IRS Commissioner is a prime example of how this
    new system will work. We understand that Mr. Rossotti was identified as
    a possible Commissioner candidate by Josh Westin, CEO of ADP and a
    member of the National Commission on Restructuring the IRS. Mr.
    Rossotti's background in technology and management made him superbly
    qualified for the critical tasks IRS is facing, although he did not
    have any tax law expertise. One has to ask whether his name would ever
    have surfaced if the process for his nomination had been business as
    usual.
        The Department of the Treasury initially expressed opposition to
    the establishment of the Oversight Board and we were very concerned
    that its position was contrary to the bipartisan message of the
    Commission. If the Commission identified anything, it exposed the fact
    that there were significant problems with the way Treasury performed
    its oversight role in past years. It is only because of your hearings
    last September that the Administration realized the very serious nature
    of the situation. We are pleased that Treasury and the Administration
    came around on this critical issue.
        We believe there are sufficient safeguards written into the
    proposed legislation to insure the IRS will not be deterred in its
    mission. In our opinion, the Service will work effectively with an
    Oversight Board in much the same way it currently works with the
    Commissioner's Advisory Group. The one benefit the Oversight Board
    brings to the table is the planned management focus lacking in the more
    procedural and regulation orientation of the Commissioner's Advisory
    Group, which is authorized under the Federal Advisory Committee Act, to
    provide an organized public forum for discussion of relevant tax
    administration issues between IRS officials and representatives of the
    public. We see the Oversight Board as working hand in glove with the
    Commissioner to bring much valuable peer viewpoints on key management
    issues that arise.
     B. Other Measures
        We support the other legislative proposals which would modify the
    current laws with respect to posts of duty, employee details to other
    functions, compensation schemes, and bonus and award structures. These
    changes could go a long way towards making the upper management of the
    Service more competitive and more motivated and help the Service retain
    more of the truly excellent people they have working in their executive
    ranks.
     C. Electronic Filing
        We believe that at long last the IRS is on the right track with
    respect to implementation of electronic filing of tax returns. The
    enormity of the task will prevent immediate results, but we are
    confident that the recent appointments of Commissioner Charles Rossotti
    and Robert Barr to head the Electronic Tax Administration, will greatly
    enhance IRS' ability to get the job done. Rather than suggesting new
    approaches, we would prefer to see these professionals be given free
    rein to address the issues before them.
                           2. taxpayer rights issues
        As the Commission on Restructuring the IRS deliberated, NAEA
    representatives were invited to testify before it to offer suggestions
    on how to further protect taxpayer rights. Many of those suggestions
    were incorporated into the Commission's recommendations and later into
    the reform legislation itself.
        If Congress wishes to protect the rights of taxpayers, one of the
    best things this Committee can do is provide for sustained, regular
    oversight of the IRS. We were heartened to hear that this will be a
    major focus of your Committee in the coming year.
        Through its oversight activities, the Committee can see what needs
    to be done to improve our system of tax administration and, more
    importantly, keep apprised of the steps which are being taken to make
    the system better. We would emphasize the latter as much as the former:
    many good things are happening at IRS these days and you should know
    about them. To give you just one example, I attended our Florida
    Society's board meeting last weekend which included a practitioners'
    liaison meeting with the IRS. I was impressed with their candor,
    cooperative attitude, and willingness to work to resolve taxpayer
    issues. And that attitude was shared by all the IRS personnel: the
    North and South Florida District Directors, Henry Lamar and Bruce
    Thomas, and their senior management. It was clear to all of us that--at
    least in Florida--taxpayer service will be indeed a large part of the
    IRS mission.
        We would, however, offer the following comments for consideration
    by the Finance Committee to further protect taxpayer rights.
     A. Taxpayers' Right of Consultation (IRC 7521)
        Enacted as part of the first Taxpayer Bill of Rights, Congress
    created a statutory right to representation which had not previously
    existed except when taxpayers were compelled to appear before officers
    of the IRS by administrative summons. As significant as this statute is
    for taxpayers, it still represents the worst kind of law: a rule
    without sanction. Officers and employees of the IRS continue to deny,
    disparage and interfere with taxpayers' statutory right with impunity.
    IRS officials have, in the face of clearly stated wishes to consult an
    attorney, even asked taxpayers if they committed a crime to chill the
    taxpayers' exercise of their statutory right to consultation.
        Taxpayers are still being advised in some quarters that ``they
    don't need to consult with a tax advisor'' and worse yet, when IRS has
    a valid Power of Attorney on file, IRS employees sometimes resist
    meeting with the taxpayer's representative and instead go around the
    tax practitioner to speak with the taxpayer directly in violation of
    the taxpayer's express wishes and statutory rights.
        It is time for Congress to add sanctions for abuse of the statutory
    right of consultation. We believe IRS officials and employees who are
    charged with abuse of a taxpayer's right of consultation should be
    suspended from duty pending completion of an investigation by the IRS
    inspection service and a disciplinary decision by IRS management.
     B. Registration of All Commercial Tax Return Preparers
        We would like to see the recommendations of the IRS Commissioner's
    Advisory Group regarding the registration of all commercial tax return
    preparers enacted into law. Rather than another instance of
    governmental intrusion into the lives of taxpayers, we believe that a
    fundamental taxpayer right is the right 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 paid tax preparers to offer services
    to taxpayers without requiring that they maintain a minimum level of
    technical proficiency and that they stand by their product in the event
    of error. Taxpayers deserve no less.
     C. Extension of Client Privilege to Enrolled Agents and CPAs
        We were pleased to see the extension of client privilege in civil
    matters extended to Enrolled Agents and Certified Public Accountants in
    the IRS reform legislation. It is a basic right of taxpayers not to
    have their own advisors used as witnesses against them. We believe
    there are adequate safeguards available to the Service in regulating
    the practice of taxpayer representatives covered by Circular 230. The
    extension of the privilege to these private taxpayer advocates is long
    overdue.
     D. Payment of Tax (IRC 6159 & 7122)
        Also in the first Taxpayer Bill of Rights, Congress added Section
    6159 to the Code authorizing the Secretary to allow payment of tax in
    installments. Section 7122 of the Code has long permitted the Secretary
    to compromise any civil tax case arising under internal revenue laws.
    In our opinion, the Service is not administering these statutes fairly.
    The Service has instituted income and asset standards which they
    administer inflexibly in deciding the extent to which taxpayers will be
    permitted to use these provisions of the law and the Service
    unreasonably delays its decisions, claiming lack of resources and
    vagaries of contract law.
        We believe it is time for Congress to broaden these statutes and
    prohibit the IRS from using enforcement personnel to evaluate
    installment payment and compromise proposals. Once enforcement
    personnel determine that a taxpayer cannot pay what is owed in full
    without incurring hardship, taxpayer service personnel should negotiate
    payment arrangements or settlements with dispatch.
     E. Enforcement (IRC 6331)
        Section 6331 of the Code has long permitted seizure of taxpayers'
    property, real and personal, tangible and intangible, for nonpayment of
    federal taxes. Congress has authorized continuous levy on wages and
    salary and recently added authority to levy continuously on such
    nonmeans tested benefits as Social Security retirement payments. The
    Service has abused this seizure authority from time to time and has
    been admonished by the Courts. The Supreme Court ruled in G.M. Leasing,
    429 U.S. 338 (1977) that IRS entry on private property without a
    warrant to seize tangible personal property violated the Fourth
    Amendment of the Constitution. IRS--Taxpayer confrontations frequently
    occur when IRS agents physically seize real and tangible personal
    property which is in taxpayers' possession. IRS statistics reveal that
    only 10,000 seizures of property in the possession of taxpayers are
    made each year, but the statistics do not reveal any significant amount
    of dollars these physical seizures produce.
        It is time for Congress to broaden Section 6331 of the Code to
    require the Service to obtain judicial approval in the form of a Writ
    of Seizure prior to seizing real and tangible personal property in a
    taxpayer's possession. The procedures for obtaining such a writ would
    provide taxpayers an opportunity to show cause why the seizure should
    not be permitted. Having heard complaints about seizures for years, we
    think this may be the best way to diffuse what have become at times
    highly charged situations and provide a dispassionate setting for full
    airing of both taxpayer and IRS positions.
     F. Statutes of Limitation (IRC 6501 & 6502)
        Congress has limited the time the Service can assess additional
    taxes on a return to three years and the time the Service can collect
    an assessed tax to ten years in Code sections 6501 and 6502,
    respectively. The statutes contemplate extension of these periods if
    the Service and taxpayers mutually agree. The Service has been known to
    bring coercive force on taxpayers who are reluctant to extend these
    periods. It has been reported that Service employees have exacted
    twenty year extensions of a collection statute as a condition to
    approving installment proposals which, in fact, represented the
    taxpayer's maximum capacity to pay. It has also been reported that
    taxpayers who were reluctant to extend the statutory period for
    assessment have again and again been threatened with inflated and
    exaggerated assessments.
        It is time for Congress to end the possibility of statute
    extensions. Three years to assess and ten years to collect is enough.
     G. Indirect Methods of Proving Income (IRC 446)
        Congress has given the Secretary authority to compute taxable
    income using a method of accounting, which, in the Secretary's opinion,
    does clearly reflect income. The Service has frequently overreached
    without probable cause with this authority. The Service is also prone
    to use the statistical averages (BLS) produced by government agencies
    to charge taxpayers without further basis with underreporting income.
    These proposed assessments based on charts and graphs are expensive for
    taxpayers to protest at IRS Appeal or in Tax Court. Ordinary taxpayers
    facing accusations that you spent more than you received or that your
    ``T-Account'' is out of balance cannot always recall that they borrowed
    money, received insurance benefits, or got a $5,000 helping hand from
    Mom.
        It is time for Congress to end the abuse in this area by requiring
    a finding by the Service equivalent to probable cause before using the
    authority to determine taxable income by a method of the Service's own
    choosing.
                        3. position of taxpayer advocate
        We agree with the proposals in the legislation concerning the
    Taxpayer Advocate. We suggested the same in our prior testimony before
    the Commission and believe that in order for the Taxpayer Advocate to
    fully meet the expectations laid down in Taxpayer Bill of Rights II
    that the individual selected must come from outside the Service and
    report to Treasury. We believe it is completely unfair to civil
    servants to place them in the position where they are expected to issue
    reports and recommendations to Congress that may be in opposition to
    their superiors' wishes. It creates an untenable situation in which no
    one could perform well.
        Our only suggestion for change to the statutory language would be
    to prohibit any current IRS employee from appointment to the position.
    We would like to see a requirement that if the President wishes to
    nominate an IRS employee to the job, that person must either resign or
    retire before confirmation. This would insure a completely independent
    Advocate.
                                   4. summary
        We thank the Committee for this opportunity to share our Members'
    views on these important issues. I will be pleased to respond to your
    questions or comments about my testimony.

                                   __________

                  Prepared Statement of Fred T. Goldberg, Jr.

         Mr. Chairman and Members of the Committee: My name is Fred
    Goldberg. I have served as IRS Chief Counsel (1984-1986), IRS
    Commissioner (1989-1991), Assistant Secretary of the Treasury for Tax
    Policy (1992), and as a Member of the National Commission on
    Restructuring the IRS (1996-1997). I am appearing today on my own
    behalf and not on behalf of any client interest.
         Much has happened since the Commission released its Report last
    July. Many of the Commission's proposals are included in legislation
    that was approved last year by an overwhelming, bi-partisan majority of
    the House. The Administration had legitimate concerns that have been
    resolved to their satisfaction (properly, in my view), and they now
    support the measure.
         In the meantime, the Administration has nominated, and the Senate
    has confirmed, Mr. Charles Rossotti as the new IRS Commissioner. By all
    accounts, and based on his actions to date, Mr. Rossotti is the right
    person, at the right time, with the right experience and expertise for
    the job. The Administration's success in finding him, recruiting him,
    and convincing him to take the position is a great accomplishment.
         Your Committee hearings last year were rivetting, and make a
    compelling case for change. Without doubt, they will be a catalyst for
    additional reforms, especially in the area of taxpayer rights.
         In light of these developments, I will limit my statement to three
    observations: the need to reform IRS governance and management; the
    need for closure; and suggestions relating to taxpayer rights
    legislation.

                                *   *   *   *   *

         Above all, I want to emphasize the direct connection between
    reform of IRS governance and management, on the one hand, and the
    concerns highlighted by your recent hearings. The Commission's Report
    and your hearings described the same concerns using very different
    terms. The Report makes clear that the cases you focused on are
    symptomatic of a fundamental problem: the IRS is not delivering the
    quality of tax administration that the American people have come to
    expect and demand. For this reason, it is absolutely certain that the
    problems you identified, and many others that did not surface, can only
    be remedied by reforms that start at the top.
         The current IRS governance and management structure is fatally
    flawed. Unless you address those flaws, you and your colleagues will be
    back here two years from now, five years from now, and ten years from
    now--wondering why nothing really changed. Wondering why, despite all
    the promises, apologies, and taxpayer rights legislation, things aren't
    much better.
         The answer is really quite simple: the current governance and
    management structure fails on three counts: (i) in your words Mr.
    Chairman, it does not assure a ``powerful and undiluted commitment'' to
    what we want from the IRS; (ii) it does not provide the expertise,
    accountability and continuity to get the job done; and (iii) it does
    not give the Commissioner and the IRS the tools to deliver what's
    expected of them. There is a direct cause and effect between these
    failures and the problems your hearings identified.
         That's why the Commission's Report and the current Reform
    Legislation call for the following:
            Embrace two fundamental principles of tax administration: (a)
            The IRS should not contact a taxpayer unless the IRS is
            prepared to devote the resources necessary to provide that
            taxpayer with a prompt, high quality resolution of the matter
            in question. (b) The IRS should not force the taxpayer to deal
            with an IRS employee unless that employee is adequately trained
            and has the tools to do the job properly--and proper job
            performance requires the fair and courteous treatment of
            taxpayers.
            These standards are a business necessity and a democratic
            imperative in our system of government--but at present, and for
            all too many years, the IRS has failed to live up to these
            standards. That's obvious from your recent hearings, Mr.
            Chairman. I believe that every problem identified during those
            hearings can be traced back to a failure to adhere to these
            standards.

            Appoint the Commissioner for a five-year term. Changing any
            institution, especially one like the IRS, is hard--very, very
            hard. Give the Commissioner the time he needs to fulfill the
            promises he has made.

            Give the Commissioner the authority and tools to build his own
            senior management team, and hold those individuals accountable
            for performance. The Commissioner can't do it alone.

            Create an IRS Oversight Board--ultimately accountable to the
            President of the United States--with the expertise and
            continuity to focus on strategic, long-term objectives, and
            hold the Commissioner accountable for performance. Traditional
            Executive Branch oversight of the IRS just doesn't work.
            Personnel who don't have the relevant expertise and experience,
            the universal urge to micro-manage, and the overwhelming lack
            of continuity doom every Administration's efforts to failure.
            It isn't Republicans or Democrats and it's not a question of
            good intentions--it's the nature of the beast. Getting what we
            want from the IRS will be very difficult. An IRS Oversight
            Board within the Treasury Department is essential to provide
            the expertise, accountability and continuity to get the job
            done.

            Coordinate Congressional oversight among those responsible for
            all aspects of the IRS, with a specific focus on strategic and
            long-term issues. The IRS Oversight Board is necessary, but it
            is no substitute for Congressional leadership and oversight.
            There's only one way that the IRS will know what's expected
            from Congress, and only one way that Congress can assure
            continuity and hold the IRS accountable. Representatives from
            the IRS, Treasury, the Oversight Board, and all seven
            Congressional Committees with responsibility for the tax system
            and tax administration should spend time together, in the same
            room, at the same time, addressing the strategic and long-term
            issues that matter most to tax administration.

            Provide the IRS with stable financing over a three year
            period--in return, the IRS must develop appropriate performance
            measures and obtain ``clean'' financial audits. ``Feast or
            famine'' financing has wasted billions of dollars since the
            early 1980's. The lack of certainty and stability in funding
            the IRS makes it impossible to plan and execute its mission. Of
            equal importance, the lack of appropriate performance measures
            and adequate data make it impossible to manage effectively--or
            hold those in charge accountable for performance.

            Provide workforce flexibility to change the way the IRS does
            business, enable the IRS to recruit and retain those who
            measure up--and get rid of those who don't. While leadership
            and focus must come from the top, tax administration is
            delivered on the front lines.

         Mr. Chairman, this is an integrated package. Each of these
    elements is essential to provide focus on mission; the requisite
    expertise, accountability and continuity; and the tools to do the job.
    No single approach, standing alone, would be sufficient. And without
    these changes, the problems identified in your hearings will recur all
    too frequently.
         If I might digress for a moment, Mr. Chairman. You have received
    well-earned headlines for the IRS hearings you sponsored last year. You
    have received little public recognition for your leadership in the
    enactment of GPRA, the Government Performance and Review Act.
    Nonetheless, Mr. Chairman, I think GPRA will have a far more lasting
    impact. It's not glamorous, but it matters. Mr. Chairman, the
    governance and management portions of the IRS Reform Legislation, are
    the heart and soul of GPRA. They provide the structure and tools to
    assure focus on mission, and the expertise, accountability and
    continuity to get the job done. They are essential to making the vision
    of GPRA a reality at the IRS.[1]

                                *   *   *   *   *

         The second point I want to emphasize is the need for closure. To
    illustrate, consider the new Commissioner's job description. Until IRS
    Reform Legislation is enacted: he will have no idea how long he will be
    permitted to serve as Commissioner. He will not have the latitude and
    tools to build his own management team. He will be subject to Executive
    Branch oversight by an ever-changing cast of well-meaning individuals
    with far less experience and expertise than he has. Unless human nature
    has changed in the last 24 hours, these individuals will suffer from
    the universal urge to micro-manage his performance (which he will
    endure in silence). He will be managing in a vacuum--with little access
    to those with the expertise and experience that can help him, no hope
    for continuity, and no group to hold him accountable. He will not
    benefit from--and will not be subject to--coordinated Congressional
    oversight and guidance on the strategic and long-term issues facing tax
    administration. He is likely to face ``feast or famine'' budgets, with
    no ability to align funding of the IRS with the promises he has made.
    He and his colleagues at the IRS will not have the flexibility to
    redesign the way work is done, hire and reward employees who deliver,
    and fire those who don't measure up.
         Now, consider the Commissioner's job description, once the IRS
    Reform Bill has been enacted. The Commissioner will serve for a five
    year term. He will have the latitude and tools to build his own
    executive team, and hold them accountable. He will benefit from--and be
    subject to--coordinated Congressional oversight that focuses on long-
    term and strategic issues. He will benefit from--and be subject to--
    Executive Branch oversight that provides expertise, accountability and
    continuity. He will be able to run the Agency with a reasonable
    expectation of stable, long-term funding. He and his colleagues will
    have more latitude to redesign the way the IRS does its job, recruit
    and reward employees who measure up, and fire those who don't.
         It is impossible to overstate how important these changes are.
    They are essential to reforming the IRS. The sooner they are in place,
    the better.
         At the same time, however, I recognize the need to fully consider
    any IRS Reform Legislation before it is enacted. The House improved on
    the Commission's recommendations. Undoubtedly, you and your colleagues
    will make further improvements. As you know, the governance and
    management portions of the legislation have received thorough
    consideration over a protracted period of time, and now enjoy
    widespread support--both inside and outside government. In my
    judgement, these provisions strike the right balance. They should be
    enacted substantially in their current form; any changes should focus
    on ironing out the all-important details. In this regard, you may wish
    to consider the following:
       Reduce the size of the Board.
       Ensure that the workforce flexibility provisions achieve
            their stated objectives and allow the Commissioner to
            reorganize the way the IRS does business.
       Strengthen the provisions dealing with coordinated
            Congressional oversight.
       Explore ways to minimize Administration (and Congressional)
            micro-management of the IRS.
         At this point, I think its far more important to preserve certain
    basic features of the governance legislation. Above all, I think it
    would be a terrible mistake to provide the Board with access to
    taxpayer information; it is essential that the Board have no
    involvement whatsoever with tax policy matters or specific taxpayer
    cases. These activities would distract from the Board's mission, create
    apparent and real conflicts of interest, and make it far more difficult
    (if not impossible) to recruit high calibre Board members. The purpose
    of the Board is to fill and existing vacuum, not replicate the work of
    the IRS, the IRS Inspection function, Treasury, GAO, the tax writing
    committees, and the Joint Tax Committee.
         By the same token, I recognize the importance of ``real life''
    stories reflecting IRS failures--along with those reflecting IRS
    successes. Without question, the Board, as well as Congress and the
    public at large, should have access to these stories--but only in a way
    that does not violate the privacy of taxpayers and IRS employees.
    Section 6103 was not intended as a barrier, and should not be used as a
    barrier, to prevent an honest accounting.
                                *   *   *   *   *
         Finally, I would like to comment on taxpayer rights measures. In
    many ways, legislation to protect taxpayer rights is an admission of
    failure. If taxpayers and the IRS ``got it right the first time, every
    time,'' there would be no need for taxpayer rights legislation. From
    this perspective, the best way to protect taxpayer rights is to
    simplify the tax law and improve tax administration. That's why
    governance and management reforms, and simplification, are essential.
    They are the only way to prevent problems from arising in the first
    place. Without question, they will have a far greater impact than all
    the laws in the world to correct mistakes after they occur.
         At the same time, however, while perfection is a laudable goal, it
    is an impossible standard. Bad things will always happen. That's why
    measures to protect taxpayer rights are an important part of the IRS
    Reform Legislation you are considering.
         I will limit my comments today to the proposed change in burden of
    proof, and other areas where you may wish to consider additional
    legislation.
         Most of the ``experts'' oppose changing the burden of proof in tax
    cases. In my opinion, those who dismiss the proposal out of hand fail
    to appreciate its extraordinary power as a symbol of what most
    Americans want from their government in general, and from the IRS in
    particular. We want to be treated with respect, courtesy and dignity.
    We want rules administered reasonably. We want to be treated with
    common sense, not treated like common criminals. The notion that
    taxpayers are somehow ``guilty until proven innocent'' is profoundly
    contrary to our fundamental values as a country.
         Having said as much, of course, there are many logical reasons to
    oppose changing the burden of proof. While I'm sure you've heard them
    all, they bear repeating:
       As a practical matter, the chance that changing the burden
            of proof in litigated cases will make a difference is about
            like the odds of flipping a coin and having it land on its
            edge.
       In our system, taxpayers have the information necessary to
            prepare their returns. The IRS doesn't. Under these
            circumstances, it only makes sense to have the taxpayer prove
            up his or her case. The current rules reflect this reality;
            they have nothing to do with treating taxpayers as guilty until
            proven innocent.
       Changing the burden of proof will encourage a small group of
            dishonest taxpayers to abuse the system, give false hope to
            millions of honest taxpayers, make the IRS more aggressive in
            auditing taxpayers, and encourage more litigation.
         Mr. Chairman, you and your colleagues face a difficult decision--
    whether to support legislation that embodies a powerful and positive
    symbol, but will result in a substantial loss of revenue and create
    incentives that will move the system in the wrong direction.
         On balance, I would not change the burden of proof for two
    reasons: First, the change would do more harm than good. Second, as a
    practical matter, you can use the revenue associated with that proposal
    to make other changes that respond more effectively to concerns of the
    taxpaying public.
         The reason it would do more harm than good can be found in your
    hearings last year. The most important lesson of those hearings is that
    the IRS and its employees--like all organizations and workers--always
    respond to what they think is expected of them.[2]
         If you change the burden of proof, I guarantee you that the IRS
    will respond by deciding that it must do a better job of building its
    cases during audit. That is not be the message you are trying to send,
    but that is the message the IRS will receive. The result will be far
    more intrusive and expensive examinations of taxpayers. On occasion,
    IRS employees will ``make clear'' that if a taxpayer doesn't
    ``cooperate,'' then the taxpayer will have the burden of proof--
    coercing the taxpayer into satisfying the agent's every unreasonable
    request. Meanwhile, virtually every IRS audit will eventually settle,
    and shifting the burden of proof will have no practical impact on the
    remainder. Changing the burden of proof is a powerful--and positive--
    symbol. I just don't think it's worth the price of more intrusive and
    expensive IRS audits, frustrated taxpayer expectations, increased non-
    compliance, and more litigation.
         I am convinced, however, that you can make other changes that are
    powerful and positive symbols--while providing the IRS with the proper
    incentives. My guess is that most of these changes could be ``paid
    for'' with revenues otherwise going to change the burden of proof.
         First, I recommend that you dramatically expand provisions
    allowing taxpayers to recover their costs. Changing the standard from
    ``reckless'' to ``negligent'' may be helpful, but it's largely a
    lawyer's game. The rule should be simple and straight-forward: if the
    IRS loses, the IRS should pay the taxpayer's costs, including costs
    incurred during examination. No if's, and's, but's or qualifiers.
    Period.
         Taxpayers should be able to recover their costs if the IRS loses
    in court or substantially concedes an issue following conclusion of an
    examination. The IRS should also have administrative discretion to pay
    some portion of the taxpayer's costs if an issue is compromised at any
    time, or if an issue is conceded during an examination, but only if the
    IRS concludes that it imposed unnecessary costs on the taxpayer.
    Finally, I believe this remedy should be available to all taxpayers.
         This approach embodies fundamental notions of fair play. Taxpayers
    understand the need for audits, and taxpayers want everyone to pay
    their fair share--but if the taxpayer got it right to begin with, why
    should the taxpayer be saddled with needless costs and expense?
         Unlike changing the burden of proof, this proposal would create
    proper incentives for the IRS. It will make the agency better aware
    that, while its audit and collection activities are essential, those
    activities impose costs on taxpayers. It will not unduly inhibit the
    IRS from enforcing the law--but it will encourage the IRS to reach
    early closure on matters, and pause before lunging ahead on issues of
    dubious merit.
         Second, I suggest you scale back most of the current penalty and
    interest provisions. They may sound nice in theory, but forget the
    platitudes about encouraging voluntary compliance and charging a fair
    interest rate for the late payment of taxes. Penalties have become
    little more than a revenue grab and a tool to coerce taxpayers. My
    guess is that most of the interest that the IRS collects is
    attributable to IRS delays, not taxpayer misconduct. These provisions
    are destroying lives and doing untold damage to the tax system. It's
    just like attorneys fees: don't nibble around the edges. Make changes,
    and make them dramatic.
         Third, current restrictions imposed by the anti-injunction act
    should be scaled back. While current law serves a legitimate function
    in protecting the revenue, it can and should be modified--with adequate
    safeguards--to give taxpayers additional recourse, both with respect to
    collection matters and interpretations of the tax law. Again, this
    comports with basic notions of fair play. The IRS has to do its job,
    but citizens ought to be able to protect themselves through resort to
    an impartial third party. It also properly aligns IRS incentives. It
    will make the Agency better aware that prompt closure is important to
    taxpayers, and encourage the IRS to exercise greater care because its
    actions are subject to expedited review.
         Finally, I suggest you clarify Section 7801, et. seq. with a
    provision authorizing ``common sense in tax administration.'' I have
    always believed that this authority is inherent in IRS administration
    of the tax laws. It is evident in everything from law enforcement
    tolerances and offers in compromise to Taxpayer Assistance Orders, the
    APA program and administrative short-cuts in various IRS rules,
    regulations and closing agreements. The reason for making a provision
    of this type explicit is simple: it reaffirms your expectation that the
    IRS should act reasonably and use common sense. It provides positive
    reenforcement for the many IRS employees who want to do what's right,
    and may help thwart the obstructionists who say, ``It makes all the
    sense in the world . . . BUT, it's not in the rule book; it can't be
    done.'' Most IRS employees are well-meaning, hard-working and fair-
    minded. Congress should empower them to do what's right.
                                    endnotes
     [1]: I would also like to comment on recent stories regarding IRS
            misuse of enforcement measures. While enforcement quotas are
            illegal and abhorrent, I think much of the current discussion
            misses the point. The IRS can and should measure its
            enforcement activities. The problem is two-fold: First, the IRS
            does not properly measure those activities. Second, the IRS
            does not even try to measure most other aspects of what it
            should be doing (e.g., fair and reasonable treatment of
            taxpayers; timely closure; reductions in taxpayer burden).
     [2]: If Congress and the Administration are concerned about EITC
            fraud, the IRS will go after non-compliance in that area. The
            result will be more audits of low income taxpayers. If raw
            enforcement statistics are the only performance measure, then
            that's what mid-level managers and front-line employees are
            going to deliver. If the IRS does not measure prompt resolution
            of disputes and timely and courteous treatment of taxpayers--
            and does not reward employees who meet those standards--we
            won't get prompt resolution of disputes; we won't get timely
            and courteous treatment of taxpayers.

                                   __________

                Prepared Statements of Hon. Charles E. Grassley

                               [january 28, 1998]
        We are here today to resume discussion of a very important issue--
    the restructuring of the Internal Revenue Service. As my colleagues
    know, I have worked very hard on this issue--serving on the National
    Commission on Restructuring of the IRS, and joining Senator Kerrey to
    introduce the first piece of comprehensive legislation.
        I want to urge the Chairman to move rapidly on this issue. had
    hoped that we could pass a bill last Fall. But this year, certainly, we
    must pass legislation and have it signed into law by April 15.
        In addition, we must pass solid, real reform. As the Chairman has
    noted publicly, we get one chance at this legislation, so we must get
    it right. There are real problems in dealing with the IRS and at the
    IRS. In this committee's hearings last Fall we heard horror stories
    about our government's treatment of taxpayers. Every time I go home, I
    hear from constituents who tell me about their first-hand experiences
    with the IRS. And rarely are they good. For this reason, it is not good
    enough to just try--we must try and succeed.
        We must pass a bill that meets my seven-part plan.
        Point number 1. It must:
    Increase Taxpayer Rights and assure fairness to taxpayers
        Let me explain this point. For starters, we must increase the
    independence of the taxpayer advocates--at both the local and national
    levels and make sure that taxpayers can find these advocates. We must
    also change the penalty system so that penalties are not accruing
    unfairly. Also, we must seriously look at increasing innocent spouse
    protections and eliminating the interest differential between
    overpayments and underpayments. These are just a few specific points,
    but I will be more specific as the process continues.
        Point number 2. The IRS must:
        Focus on Customer Service rather than Consumer Abuse
        Any legislation that we pass must restructure the IRS so that it
    views the taxpayer as a customer, and aims to give this customer the
    best and most helpful service possible. One way of accomplishing this
    goal is to reorganize the IRS with the taxpayer in mind. This means
    that there would be divisions to help small businesses with all of
    their concerns and problems, a separate one to help big business, and
    so on. This idea was considered by the Restructuring Commission, and
    the Commission said that the idea deserves further exploration. Now
    Commissioner Rossotti has embraced the idea. This reorganization may be
    a good first step to reaching our goal of focusing on customer service
    rather than consumer abuse.
        Point number 3. IRS reform must:
        Provide for real? effective and constant oversight of the IRS
        Besides diligent and constant Congressional oversight, we must help
    the public and the press to assist us in this oversight.
        Point number 4. We must pass a bill that:
        Makes the IRS Culture into that of a business rather than that of a
    government bureaucracy
        This means creating an effective, tough, and independent Board of
    Directors with full time, independent staff.
        Point number 5:
        The IRS must meet the same expectations that it expects from
    taxpayers
        The IRS expects taxpayers to be financially accountable and to
    justify expenditures that they claim as deductions. Yet, the IRS spends
    $4 billion dollars of taxpayer money for computer modernization and has
    little to show for it. The GAO has been unable to express an opinion on
    the reliability of the IRS financial statements for any of the four
    fiscal years from 1992 through 1995. In order to have credibility with
    the American people, the IRS must be financially accountable and
    justify its expenditures.
        Point number 6. Any legislation must:
        Restore Public Confidence in the IRS
        For starters, we must improve employee training so that IRS
    employees always have the same answers when they are asked.
        Point number 7. Legislation must work towards:
        Making the tax code more user-friendly
        We must work to make the tax code understandable and to give the
    taxpayers the resources and information they need to work with it.
    People want to pay their taxes, and we must help them understand the
    tax code so that they can accurately do this.
        If we can stick to these seven principles, if we pass only
    legislation that meets this seven-point test, then we will have real
    IRS reform. And real IRS reform is the way we can help American
    taxpayers. The IRS has unfairly ruined people's lives. We, in Congress,
    are here to improve people's lives. This is one area where we can make
    a real difference. We have an opportunity--a responsibility--to reform
    this part of the government that touches more Americans' than any other
    part of the government.
        My seven-part plan stands for real IRS reform. I intend to continue
    working diligently to make sure that real reform is enacted. Thank you.
                               [february 5, 1998]
        I want to thank Chairman Roth for holding another hearing on the
    important issue concerning us today--Restructuring of the Internal
    Revenue Service. As I have said on many occasions, this issue is a
    priority for me, for my constituents, and for all taxpayers. I also
    believe that it is a priority for the Chairman. Hearings such as this
    one, and the two we had last week, prove that we are working to create
    the strongest, most effective legislation possible on this issue.
        We are not here to do a half-way job. We are not here to dispose of
    this issue so we can move on to other issues. We are certainly not here
    to use this issue as a partisan amendment to an unrelated bill.
        We owe our constituents, all taxpayers, and yes, IRS employees, a
    thoughtful and diligent effort that results in real change for all
    involved. I have confidence that our current efforts will result in the
    passage of a bill that truly reforms and restructures the IRS. We all
    must continue to contribute to this work, assessing the challenges and
    presenting solutions.
        I look forward to hearing from all of our witnesses today. We will
    hear from a variety of tax practitioners and administration officials.
    One witness we will hear from today is Richard Calahan, the Deputy
    Inspector General for the Treasury Department. As most of you know, I
    have had a special interest in the actions of the Treasury Department's
    Inspector General. The current Inspector General, Valerie Lau, cost the
    taxpayers hundreds of thousands of dollars by awarding a government
    contract on a noncompetitive basis to friends. These actions and her
    targeting of two Secret Service agents in retaliation for their
    Congressional testimony led me to call for her resignation from the
    Senate floor. I am pleased that she finally announced her resignation.
    I also have questions about the actions of others in her office.
        I will be looking at options to improve this Inspector General's
    office. It is my strong desire that a new acting IG come from outside
    that office to restore confidence, integrity, credibility and morale in
    the IG's operation. In addition, I will be considering whether IRS
    restructuring legislation should or could prevent this situation from
    reoccurring. But I will continue to look into this issue carefully. I
    thank the Committee for having this hearing.
                              [february 11, 1998]
        We are meeting today to look at a very important issue. This issue
    is how our tax laws hurt innocent people. The stories we will hear
    today will show us how our tax laws make a bad situation worse; how our
    government hits people when they are down.
        Our tax laws were written for the purpose of collecting taxes, not
    for harassing people or ruining their lives. They are not meant to take
    away people's chance at a new life; they are not created to keep people
    down despite repeated attempts to get back on their feet.
        Let me tell you about one of my Iowa constituents. This woman--a
    very nice woman, a woman who works hard and tries hard to meet her
    civic obligations--this woman has been mistreated by the system.
        Her letter begins, ``I'm writing to you at the 11th hour in a last
    desperate effort to avoid emotional and financial ruin at the hands of
    my ex-husband and the Internal Revenue Service.'' She owes $142,000
    dollars to the IRS for the tax ramification of an investment her then-
    husband made 17 years ago. She had nothing to do with this investment,
    never read anything associated with this investment, never understood
    the particulars of the investment, never filled out the tax return
    claiming the deduction for the investment. In addition, she never chose
    to spend the years her husband spent in tax court while penalties and
    interest accrued. As you can imagine, after 17 years, much of the
    $142,000 is not the original tax owed, but rather the cost of spending
    nearly 20 years fighting the IRS.
        Now, years after the divorce, after leaving an unfaithful husband,
    she is on her feet. Although she entered the workplace only a couple of
    years before her divorce, she is now a successful real estate agent,
    who supports herself, and prides herself on her work and her reputation
    in the community. As she says, ``at age 58, I have paid off the
    majority of my debts, a large portion of which was overhang from my
    failed marriage. I have managed to put away a small amount of money for
    retirement, but will have to spend a significant portion of my normal
    retirement years working full time because I'm told the IRS will take
    my retirement funds and maybe even my home.'' Now it looks like the IRS
    will even take her IRA and put a lien on her house. She would consider
    filing for bankruptcy to escape all of this, but values her
    professional reputation too much to take this way out. So she is left
    alone, hardworking, with no prospect for retirement or an end to the
    harassment.
         There are a many things that deeply disturb me about this story
    and the stories that our witnesses will tell us today. First, marriage
    is based on trust. The current system holds spouses, usually former
    spouses, liable for trusting their spouses. In the case of my Iowa
    constituent, she learned the hard way that she could not trust her
    husband--he had a long term affair that caused the divorce. Frankly,
    this affair should be the worst breech of trust she suffers. Instead,
    out tax laws and the IRS are assuring that a 1981 tax deduction is an
    ongoing wrong that she must suffer long after she has moved on.
        Our laws and the IRS insure that no one can escape a bad marriage
    where one spouse lied to the other. We should be in the business of
    promoting the family--the centerpiece of our society--and that means
    expecting wives to trust husbands and husbands to trust wives--not the
    other way around. In the current system, we punish trust.
        Another aspect of these stories that bothers me is that, in many of
    them, the IRS seems unwilling to go after the other liable former
    spouse. In all of the hearings of the IRS Restructuring Commission and
    the Finance Committee regarding IRS actions, it has become clear that
    the IRS sometimes, even oftentimes, pursues the weakest among us.  The
    IRS agents think they can win against the unrepresented and those who
    do not understand the process. The sad truth is, they often can win. In
    the cases we will hear today, it is clear that the innocent spouse is
    the person most vulnerable to the IRS. The innocent spouse didn't fill
    out the tax return, didn't understand the transaction that caused the
    tax problem, and often, does not know, until many years later, that
    there is a tax problem. Innocent spouses often have left bad marriages
    and are working hard just to make ends meet. The IRS chooses these
    people to pursue.
        In an even worse case scenario, the IRS becomes a tool of an
    abusive former husband to continue the abuse after the marriage ends.
    And the government allows this abuse to continue.
        For these reasons, and many more, I believe that this is an area
    that deserves our full attention, and I thank the Chairman for giving
    us this opportunity to focus on it. I want to thank all of the
    witnesses for taking the time to join us today, and for having the
    courage to share their stories.

                                   __________

                   Prepared Statements of Hon. Orrin G. Hatch

                               [january 28, 1998]
         Mr. Chairman, I commend you for holding this first hearing of the
    year on reforming the Internal Revenue Service. I clearly remember the
    testimony that was presented before this committee last September by
    courageous taxpayers and IRS employees. Since then, my office has
    received thousands of letters and phone calls concerning practices of
    the IRS. I look forward to working with this committee to enact
    legislation to reform and restructure the IRS.
         I do not think anyone can dispute the assertion that the IRS is
    severely overdue for a restructuring. However, the changes we make must
    go beyond a mere shifting of who oversees this organization at the top.
    Evidence has been clearly presented that rules for enforcement and
    collection need to be changed; that the web of penalties and interest
    charges need to be simplified; and the power of IRS field agents and
    managers to levy and seize taxpayer property must be curtailed. These
    reforms are essential so that the rights of the taxpayers are
    protected.
         Mr. Chairman, it is simple, IRS agents and mangers must be and
    will be held accountable for improper actions. The responsibility to do
    this is ours, the Congress. As has been mentioned, IRS abuses have been
    happening for decades. If we do not step up to the challenge soon, we
    will regret it and will be falling short of our constitutional
    responsibility to protect the rights of the citizens.
         Before taxpayer antagonism toward the IRS grows worse, we must
    ensure this powerful and essential agency is responsive to the needs
    and concerns of the taxpayers. Complaints about the practices and
    procedures of the IRS are all too common. Whenever I meet with Utah
    families in an open forum, I hear about the treatment that taxpayers
    are receiving from the IRS. The people are scared and they are angry.
         Mr. Chairman, what was begun last year started us on the proper
    path to better administration of the tax laws. I am pleased to hear the
    IRS is beginning to catch the vision of its duty as a taxpayer service
    organization. However, to make the transformation complete we in
    Congress must update the tax laws to ensure it stays a taxpayer service
    organization.
         I look forward to the testimony of the witnesses here today and to
    the work ahead in this committee to begin a new era at the IRS.
                               [february 5, 1998]
         Mr. Chairman, I commend you for holding this hearing today to
    discuss the ability of the Treasury Department and the IRS to oversee
    and inspect the activities of IRS employees. This hearing is very
    important to taxpayers in my home state of Utah and across the country
    because it goes at the heart of the government's ability to ensure that
    taxpayer rights are protected and that IRS employees are properly
    complying with all laws, regulations, and procedures.
         We in congress have the responsibility to oversee federal
    agencies, including the IRS. However, the day to day oversight of these
    agencies is done internally or by an independent inspector general.
    These functions are critical to maintaining confidence in the federal
    government.
         Earlier hearings held in this Committee have opened our eyes to
    specific operations of the IRS and its employees. Like any part of
    government, there exists a public trust. With respect to the IRS, that
    trust is gone. This committee found and the GAO has confirmed that the
    IRS is unable to effectively track taxpayer abuses within its own
    agency. To regain that trust and control, we must pass meaningful
    reform and strengthen the oversight functions with better internal
    controls that effectively protect taxpayers from abuse.
         Mr. Chairman, in order to ensure the integrity of the IRS, the
    inspector general's office must be able to function without restriction
    and conflicts of interest. I believe it must be independent. With
    respect to the inspection service, it must be as independent as
    possible with sufficient authority given to the Commissioner to
    effectively review the agency's operations.
         One of the best ideas for taxpayer protection is the Taxpayer
    Advocate. Like the name suggests, the Taxpayer Advocate needs to be
    free from IRS influence and truly represent the concerns of taxpayers.
    The final product of IRS must strengthen the ability of the Taxpayer
    Advocate's office to quickly and effectively resolve taxpayer disputes.
         Mr. Chairman, I look forward to hearing the testimony from the
    witnesses here today and to continuing our efforts to reform the IRS
    and strengthening internal controls and the office of the Taxpayer
    Advocate.
                              [february 11, 1998]
         Thank you, Mr. Chairman. I commend you for holding these hearings
    today. The subject of IRS reform is an important one. The American
    people are frustrated and angry. The stories of improper and
    confrontational techniques used by the IRS are sad and disheartening.
         However, we must take the time to do this right. Any changes we
    make to the IRS will have far reaching effects. To make a mistake now
    could cost the federal government the trust and confidence of the
    American people for years to come. We must separate fact from rhetoric.
    We must make sure that the changes we make will mean real changes in
    the way the IRS interacts with the taxpayer. Nevertheless, it is
    important to move forward, and I agree we must get this effort off the
    ground promptly.
         The issue of innocent spouse protections is a good example of one
    that warrants further review. The legislation passed last year by the
    House granted some additional relief for an innocent spouse by making
    it easier to obtain the innocent spouse protections. Today, we will
    hear the stories of only a few of the American taxpayers dealing with
    this difficult issue.
         The story here is more than just that of divorce, however. These
    stories involve more than just improper and intimidating techniques,
    although they are one part of the problem. These stories involve a much
    more serious problem--the IRS is going after the wrong taxpayers.
    Instead of putting their resources into collecting from those truly
    liable for the taxes, the IRS appears to be targeting the easiest
    spouse to find, and often the one with the least amount of resources to
    fight the system. This must stop.
         The Administration has announced that they will prepare a new form
    to assist taxpayers like those here today in claiming innocent spouse
    relief. It is also going to step up the training of IRS workers in
    dealing with this issue. This is not enough. We need to go further. We
    must make it easier for an innocent spouse to receive the relief she--
    or he--deserves.
         Today's hearing will focus on proposals to fix the problem. I look
    forward to hearing the testimony. The problem is clear--we must stop
    the IRS from going after the wrong taxpayer. I hope that we can come
    closer to a solution after the hearing today.

                                   __________

                      Prepared Statement of David Keating

         Mr. Chairman and Members of the Committee, thank you for the
    opportunity to testify on possible reforms of the innocent spouse
    rules. I represent the 300,000 members of the National Taxpayers Union
    (NTU) who strongly support providing taxpayers with additional rights
    and protections during the tax audit and collection process. As you
    know, I served on the National Commission on Restructuring the IRS that
    Senator Bob Kerrey ably co-chaired. I would like to acknowledge the
    assistance of Phoenix attorney Bob Kamman, Counsel for NTU's Taxpayer
    Rights Project, who contributed substantially to our analysis and my
    written statement.
         Mr. Chairman, we commend you for the excellent series of hearings
    you have already held on how the IRS works with average taxpayers and
    your decision to make substantial improvements to the House-passed
    legislation to restructure the IRS and provide additional taxpayer
    rights. Because the IRS has more power over more citizens than any
    other agency, it is especially important that Congress establish
    safeguards to protect the rights of taxpayers and to regularly maintain
    oversight of the tax collection power.
    Without Reforms, Divorce-Related Tax Problems Will Get Worse
        Everyone makes mistakes. That's why pencils have erasers, and the
    IRS has Form 1040X for amending a tax return. But there's one mistake
    that federal tax law won't forgive: the decision to file a joint
    return.
         Married couples do not have to file a joint return. They can
    choose to pay more tax--sometimes thousands of dollars more--for the
    privilege of filing separately. (That's in addition to the much-
    criticized ``penalty'' many couples pay for getting, or staying,
    married.) And once they decide to file jointly, they cannot change to
    separate returns, after the due date of their Form 1040. There is no
    exception for divorce or death (at least for the survivor).
         One of the most common complaints we hear comes from taxpayers
    whose former spouse has disappeared, at least from the IRS's radar
    screen. The IRS often, if not most of the time, pursues the former
    marriage partner it finds first, usually looking no further than for
    the name and address it has in its computer. She is often a single
    parent, working to support a family with little or no help. Tax-debt
    deadbeats are often child-support deadbeats, as well. The biggest
    mistake made by these targets of IRS collection and audit activity is
    that they filed a joint return.
         In certain narrow circumstances, a spouse can be relieved of
    liability for taxes assessed by an IRS audit after a joint return is
    filed. The complicated rules for claiming such relief are known as the
    ``innocent spouse'' exception. However, its provisions are so
    complicated that it should be known as the ``lucky spouse'' rule for
    the few people who can meet all of its tests.
        This policy simply has not worked in the real world. In many
    marriages, wives are reluctant to tell their husbands (or vice versa),
    ``I'm sorry dear, I promised to stay with you for better or for worse,
    but not through IRS collections and audits. So I think we should file
    separately, even though it means a few thousand dollars less to spend
    on our children each year.''
        Unfortunately, unless the law is changed this year, more single
    working moms will become victims of the current unfair innocent spouse
    rules. The tax law changes of the 1990s are making it financially more
    difficult, if not impossible, for many low-income and middle-class
    spouses to file separately and protect themselves from a spouse who
    might be consciously or unconsciously making erroneous declarations on
    the tax return. One major factor is the growing importance of the
    Earned Income Credit, which is unavailable to married couples filing
    separately. The 1997 Taxpayer Relief Act also barred couples filing
    separately from claiming the new educational credits, deducting
    interest on education loans (an ``above the line'' deduction available
    to nonitemizers), and converting to the new Roth IRA. Couples filing
    separately also cannot claim the childcare expense credits.
    The Innocent Spouse Rules Have Not Worked, and Must Be Replaced
        If the litigation on these rules is any indication, it is almost
    always an ex-wife who seeks relief from paying taxes that are owed
    because of an ex-husband's errors, or cheating, on a joint return. The
    position of the courts is clear: Women shouldn't trust their husbands.
        In many cases, the couple's tax return involves a business run by
    the husband, and the wife knows little about the day-to-day workings of
    the operation.
        If a married couple remains together, responsibility for taxes on a
    joint return stays within the family unit, and there may be no need for
    the IRS to allocate responsibility between the spouses. But what should
    the policy be in the event of divorce or death?
        Suppose John and Mary file a joint return for 1997 and pay all the
    tax they owe. They get a divorce in 1998 and the IRS discovers in 1999
    that John had additional income he kept hidden from Mary. Is Mary
    liable for paying the tax on the income, plus interest?
        The answer, under current law, is usually yes. The IRS can collect
    from either spouse all of the additional tax owed on a joint return,
    regardless of whose fault it was that the original return was wrong.
         As explained by the IRS, to qualify for Innocent Spouse relief,
    ``you must establish that you did not know, and had no reason to know,
    that there was a substantial understatement of tax that resulted
    because your spouse: 1) Omitted a gross income item, or 2) Claimed a
    deduction, credit, or property basis in an amount for which there is no
    basis in fact or law.''
        Some observers say the ``no reason to know'' standard and joint
    liability requirement are needed so that spouses will carefully review
    a prepared tax return. While we can understand this view, we believe it
    is unrealistic and unfair.
         First, about half of all tax returns are prepared by
    professionals. Most people have confidence in their tax professional to
    do the job properly and to guide them to comply with an
    incomprehensibly complex tax law. The fact that a return is prepared by
    a professional does not help meet the so-called ``reason to know''
    test.
         Second, many couples already pay a substantial tax penalty for
    being married. The only way to avoid joint and several liability is to
    file separately. But filing separately often increases the marriage
    penalty by hundreds or thousands of dollars on those who can least
    afford the penalty to begin with!
         Third, how many spouses grill the other spouse with a range of due
    diligence questions about the tax return before signing the return?
    Marriage is built on trust. Does Congress really want spouses to ask
    questions that show distrust of the other spouse? If so, just what
    questions should a spouse ask to meet the ``reason to know'' standard?
    Filing separately can be a multi-thousand dollar statement by one
    spouse that ``I don't trust you, and I'm filing separately.'' Many, if
    not most, taxpaying families can't afford the legal protection of
    filing separately.
         Fourth, you can't draw a fair line anywhere to separate the
    ``innocent'' from the ``guilty.'' Even if a wife suspects her husband
    is cheating on his taxes and gets some of the money, what is she guilty
    of? Simply of filing a joint return! If she had filed separately, she
    wouldn't have done anything wrong.
    The House-passed Legislation Will Not Adequately Protect Innocent
            Spouses
         The IRS Restructuring and Reform Act, passed by the House in
    October 1997, kept much of the existing ``innocent spouse'' rule while
    removing the current requirement that the IRS audit adjustment be an
    understatement of tax that is ``grossly erroneous.'' The word
    ``grossly'' would be removed, so an ``erroneous'' item would qualify.
    The House bill also removed the requirement that the tax adjustment has
    to exceed $500, or a percentage of the innocent spouse's adjusted gross
    income in the ``pre-adjustment year,'' whichever is greater.
         And the House bill would create a new taxpayer right, which
    certainly would be the subject of courtroom debate for several decades.
    It might be known as the ``not quite innocent but far from guilty
    spouse'' rule. Included in this category would be spouses who should
    have known about an error on a return, but ``had no reason to know the
    extent of such understatement.'' In such a case, the IRS or the courts
    would decide, and the spouse would have to pay the percentage of the
    tax that the spouse should have known about.
         While these provisions are constructive and beneficial, many
    deserving innocent spouses will still be denied relief. In most cases,
    the House proposal would still effectively deny relief to deserving
    spouses because most will not be able to afford a lawyer. Even the ones
    who can afford a lawyer will have to pay costly and unnecessary
    litigation expenses.
         Unfortunately, the House bill also still places the burden of
    proof on the spouse to prove both lack of knowledge about the
    understatement and that the spouse had no reason to know about it.
    Proving such a vague negative can be extremely difficult and is
    contrary to the bill's other provisions shifting the burden of proof in
    Tax Court cases from the taxpayer to the government.
         Overall, the House's attempt to ``restructure and reform'' the
    innocent spouse rule falls far short of the help needed for many
    innocent divorced and widowed taxpayers. It is now up to the Senate to
    find a workable solution.
    Separate Liability Will Bring Tax Justice To Divorced Spouses
         Fortunately, there is a way out of this mess. The National
    Taxpayers Union strongly supports the recommendations of the American
    Bar Association to repeal the obsolete and unfair provision of joint
    and several liability and ``to substitute separate liability for tax
    shown to be due on the joint return'' and to provide for proportional
    liability in certain circumstances.
        Most of the difficult innocent spouse cases arise when the IRS
    finds an error or omission on a joint tax return after a divorce has
    become final. The American Bar Association recommends that ``if, [after
    a tax return is filed], a deficiency in tax is determined with respect
    to the joint return,'' then such assessed deficiencies should be
    handled by ``an `item' approach, in which liability for the tax follows
    responsibility for the item.'' Here is more detail on how it would
    work, according to an ABA report:
            For deficiencies which are determined with respect to a joint
            return after it has been filed, liability for the tax would be
            imposed on the responsible spouse and would not be allocated
            between the spouses proportionately. Separation of liability
            would therefore mean that only the spouse responsible for the
            item in question could be required to pay the tax. . . .
            The proposal would make the allocation of liability explicit.
            Thus, if the deficiency arises from an omission or improper
            statement of an item of income, liability is placed on the
            spouse to whom the income item would be apportioned. If the
            deficiency arises from any improper or overstated deduction,
            liability is placed on the spouse to whom the deduction would
            have been apportioned to the extent that the deduction offset
            income of that spouse. . . .
         This may be a radical idea, by IRS standards, but the rest of the
    world doesn't think so. In explaining its proposal, the ABA points out
    that ``no marital liability for income tax is imposed in any form in
    Canada, Australia, Japan, Italy, Sweden or the United Kingdom. In
    France, married taxpayers who have not separated must file a joint
    return . . . but taxpayers who are no longer living with their spouses
    at the time of enforcement proceedings are nearly always excused from
    liability for tax on the spouse's income. Under the German income tax,
    either spouse may at any time request a `restriction of liability,' and
    obtain a separate tax assessment upon his or her separate income alone
    but still at the favorable joint rate.''
        Should Congress enact legislation that denies to American married
    couples, the taxpayer rights that Europeans and Japanese take for
    granted? We think not.
    Focus On Taxpayer Remedies
         In the last decade, many proposals have been made about granting
    rights to taxpayers who must deal with the Internal Revenue Service.
    Some of these suggestions have been enacted into law.
         Too often the taxpayer rights provisions of the Internal Revenue
    Code are like the civil rights provisions of the former Soviet Union's
    constitution. On paper, they tell a wonderful story. In practice, for
    many taxpayers there is no effective protection against government
    abuse.
         The first question that taxpayers may ask about an IRS action is,
    ``Can they do that?'' But when the answer is ``No,'' the next question
    has greater importance: ``What can I do to stop it?'' Too often, the
    answer is ``not much, or nothing at all.''
         As the Committee considers ways to reform the innocent spouse
    rules, please ensure that the reforms will work for the many divorced
    working mothers who can't afford an attorney to fight for their rights.
    Relief must be structured so that it can and will be granted through
    administrative measures that are easily accessible to taxpayers. The
    ABA's proposal meets this critical test with flying colors.
    A Second Best Solution: Allow divorced spouses to file an amended
            return as married filing separately.
         If Congress is not willing to adopt the ABA recommendation, then
    we strongly believe that it should allow divorced spouses to file an
    amended return as married filing separately.
         The decision to file a joint return should not be irrevocable,
    especially for a divorced person who might realize after filing jointly
    that their ex-spouse was a liar or a cheat.
         The first question that many widows and divorced women who are
    still making payments on their husband's taxes might ask their Senators
    is: Why can't I amend my filing status from joint to separate? Every
    year, the IRS send millions of dollars in refund checks to thousands of
    taxpayers who filed amended returns. Allowing separate returns, after
    joint ones, would probably cost the federal government nothing. In
    fact, the amount eventually collected on separate returns could exceed
    the taxes owed on joint returns.
         Why would spouses want to file separately and pay more tax than
    they would have to pay if filing jointly? To protect themselves if the
    IRS comes knocking on the door in the future asking them to pay tax on
    their former spouses' incomes.
         Would the IRS be able to administer a system that allowed an
    amended, separate return after a joint one is filed? IRS officials have
    not reported any problems with the current rule, which permits this as
    an alternative for personal representatives of deceased taxpayers. That
    exception has been in the law for decades.
         The IRS can ruin your life if you made a mistake and filed jointly
    with a tax cheat. Why not give such spouses a second chance? Most
    divorced couples would not use this procedure, but it would provide
    equitable relief to innocent spouses.
         Our proposal for changing the Code to allow separate returns after
    filing jointly is contained in Attachment 1. While we strongly believe
    all taxpayers should have a right to file an amended separate return,
    there may be too much resistance at IRS, or in Congress, unless such
    amended returns were only allowed to divorced taxpayers. Therefore, the
    proposal below is drafted to apply only to divorced taxpayers. Divorce
    decrees should not be required to order it or permitted to prevent it.
         Since the added tax caused by filing separately may run to
    thousands of dollars, we strongly urge that a provision be added to
    allow such spouses up to five years to pay the extra tax in
    installments and that there should not be any late payment penalties
    other than those for late payment of an installment payment.
    Other Observations
         Taxpayer Bill of Rights 2 required that the Treasury Department
    study this issue and report to Congress by January 1997. We are still
    waiting for that report. Why is it that the Treasury Department and IRS
    expect taxpayers to file on time, but that studies required by law are
    often extremely late? In at least one state, state judges are not paid
    if they fail to reach a decision on a pending matter within 90 days. If
    Congress impounded the paychecks of Treasury Department executives
    until required reports were delivered, perhaps these officials would
    find a way to turn in their homework on time.
        IRS personnel should be trained in the provision of the 1996
    Taxpayer Bill of Rights 2 requiring them to tell one spouse what
    efforts have been made to collect a joint-return debt from the other.
    In one recent case, a service-center Problem Resolution caseworker told
    a taxpayer who made such a request that this information is not
    available, because of the Privacy Act. The request was made again, to
    the District Problem Resolution Officer. A month later, no response had
    been received, but the taxpayer--a single-parent father--had his
    paycheck levied by IRS.
         A divorcing spouse should also have the right to petition the IRS
    for a final determination of any outstanding or potential tax
    liabilities, under the ``prompt assessment'' procedures now available
    to deceased taxpayers (that is, their executors and personal
    representatives). This would provide some protection from a tax
    surprise, after a divorce is final.
         Reportedly, the IRS computer system is unable to set up separate
    collection accounts when the two divorced spouses live in different IRS
    districts. If this is true, then it is not simply a question of the IRS
    trying to collect the joint tax liability from the spouse who is
    located first, but the spouse whose case is being aggressively pursued
    by one of the two districts. Or, a Revenue Officer may determine that
    another spouse lives in another district and refer his case to the
    other district for collection. Case closed, problem transferred. But a
    fair solution would still elude the unfortunate taxpayer.
    Conclusion
         The job of protecting taxpayer rights will never end. Much
    progress has been made, but more legal protections are necessary. We
    sincerely appreciate the efforts being made by members of this
    Committee to formulate legislation to finally protect divorced spouses.

    Attachment 1--
        THE PROPOSED STATUTE:
        Section 6013 (relating to joint returns of income tax by husband
    and wife) is amended by adding at the end the following new subsection:
              ``(i) Separate returns after filing joint returns and
            dissolution of marriage.--Under regulations prescribed by the
            Secretary,
              (1) If a husband and wife have filed a joint return and their
            marriage is subsequently dissolved by final decree or order of
            a State court, either spouse may elect to file a separate
            return for any taxable year for which the limitation on time
            for assessment, under Section 6501, or for collection, under
            Section 6502, does not apply.
              (2) A separate return under this subsection shall relieve the
            filing spouse of joint and several liability under paragraph
            (d)(3) of this section.
              (3) Such separate return shall include only the income,
            deductions and nonrefundable credits allocable to such spouse,
            which should properly have been included on an original
            separate return.
               (4) Refundable credits shall be reduced by any amounts
            either refunded to the taxpayers on the original joint return,
            or applied to other obligations owed by either spouse. If such
            refundable credits allowed on the joint return exceed the
            amount allowed on the separate return, the difference shall be
            an addition to tax owed by the spouse electing to file the
            separate return.
               (5) Upon assessment of such separate return, the Secretary
            shall notify the other spouse, by sending a copy of the
            separate return by certified mail to his or her last known
            address.
               (6) Such other spouse may also elect to file a separate
            return, according to the rules set forth in paragraphs (3) and
            (4).
               (7) If the other spouse elects to file a separate return,
            the tax assessed on the joint return shall be abated.
            Otherwise, the non-electing spouse shall remain individually
            liable for all of the tax owed on the joint return, including
            subsequent assessments.
               (8) Any overpayment on either separate return shall not be
            refunded unless the balance owed on the other separate return
            (or remaining joint return) has been paid in full.
         Here are a few examples of how our proposal to allow amended
    separate returns would work:
              (1) John and Mary filed a joint return showing tax of $2,000
            and withholding of $3,000. They received a refund of $1,000.
            They get divorced, and Mary decides she doesn't want to be
            liable for an audit of John's income and deductions. On a
            separate return, her tax is $1,000, and her withholding is
            $1,500. She must reduce her withholding by the $1,000 already
            refunded, so she can claim only $500. So she owes IRS $500--in
            this example, half of the refund she shared; also, the amount
            of tax saved by filing jointly.
            It won't work out that neatly, in every case; all it will do is
            keep IRS from collecting John's taxes from Mary. IRS is
            required to send John a copy of Mary's return. He can choose to
            do nothing; until and unless he is audited, he owes nothing.
            The ``joint return'' is still his. Suppose that his tax on a
            separate return would be $1,500, and his withholding was (like
            Mary's) $1,500. Like Mary, he can't claim $1,000 of the
            withholding, because it has been refunded. So on his separate
            return, if he elects to file one, he'll owe $1,000. IRS gets to
            subtract the $1,000 refund, from both accounts. While this may
            be an imperfect result, it will rarely happen, and is worth it
            to avoid most of the worst cases of the tax laws crushing
            innocent spouses. Remember that John can hold the hand he was
            dealt, and pay nothing.
              (2) Same facts, but the tax withheld was only $1,000--$500
            each--so they owed (and still owe) $1,000 on the original joint
            return. Mary's separate return now shows tax of $1,500, and
            withholding of $500, so she owes $1,000. If John keeps the
            joint return, he owes $1,000. If he files a separate return, he
            owes $1,000. Is anything wrong with this picture? No. If they
            had filed separately in the first place, they would owe IRS
            $2,000.
              (3) Same facts as Example #1, but on the original return
            there was also a $1,000 Earned Income Credit not allowed on
            separate returns. That made the refund on the original return,
            $2,000. Mary's separate return shows $1,500 tax. She had $1,000
            withheld, but after subtracting the $2,000 refund, she's $1,000
            in the hole. She must add the $1,000 difference to her tax,
            which is now $2,500. That's a lot of money, but it's what she
            would have owed in the first place ($500) plus the EIC, plus
            the refund of tax withheld. She doesn't have to file
            separately; she's only doing it because she suspects John
            understated his taxes. If John suspects that Mary understated
            her taxes, IRS gets the full refund back from him also.
              (4) John and Mary's tax on a joint return was $2,000. They
            had only $1,000 withheld--all of it from Mary. Her tax, on a
            separate return, is only $500. In other words, had she filed
            separately in the first place, her refund would have been $500.
            However, she can't now claim the $500 refund, until John pays
            the $1,000 owed on the original joint return (or whatever
            amount is owed on his separate return).

                                   __________

                     Prepared Statement of Paul C. Light *
    ---------------------------------------------------------------------------

        * This testimony reflects the views of the author as a private
    citizen and scholar and does not reflect the views of The Pew
    Charitable Trusts or its grantees.
    ---------------------------------------------------------------------------
         It is indeed a pleasure to be before this committee today to
    testify on the herculean task of restructuring the Internal Revenue
    Service to enhance accountability to Congress, the Chief Executive, and
    the American public. Having worked with the distinguished Chairman
    across the aisle at the Senate Governmental Affairs Committee in the
    One-Hundredth Congress, I can testify that he recognizes the
    seriousness of the task ahead of this Committee. Many have tried to
    reform government over the years, but few have achieved anywhere near
    the lasting impact that the Chairman has made through his sheer
    persistence, whether in his ten-year effort to win passage of the Chief
    Financial Officers Act or in his campaign on behalf of the Government
    Results and Performance Act. As with the pending legislation, the
    Senate has long been the point of last consideration in testing the
    merits of management reform. I expect that this bill will be much the
    better for it when the Chairman completes his review.
         Let me add that I am also delighted to testify before a committee
    so ably anchored by the distinguished ranking member. Having been able
    to observe the senator work his will in a host of settings, I know well
    his commitment to rigorous analysis and thoughtful application. From
    the 1983 Social Security rescue, where he almost singlehandedly rescued
    the rescue, to the 1988 Family Support Act, where he converted two
    decades of painstaking research into a welfare reform that was sadly
    rooted out before it could fully take hold, to his recent work on the
    intelligence community, where he has demonstrated an acute sense of the
    impact of administrative thickening in creating a culture of secrecy,
    the senator has forced all of us to think carefully before we enact. I
    will never forget his admonition to the National Commission on Social
    Security Reform: ``We are all entitled to our opinions, but not to our
    facts.''
    Defining Accountability
         Let me now turn to the subject at hand: accountability at the
    Internal Revenue Service. There is no question that there has been a
    serious erosion of accountability. Even acknowledging the fact that
    almost all IRS employees are dedicated to upholding the law and
    providing high quality service, the organizational structure of the
    agency has created a weakening of the accountability that has
    encouraged the small percentage of unethical employees to have their
    way with their authority. As the Founders of this national clearly
    understood, government cannot rely solely on the good intentions of its
    employees as the protection against abuse. Much as they hoped that
    government would be administered by able and virtuous human beings,
    they also understood that accountability resided in a firm commitment
    from the Chief Executive to oversee the operations of government and on
    thoughtful congressional review.
         This is not to suggest that the Founders imagined a thicket of
    continual second guessing. They most certainly believed in the
    efficient execution of the laws. Recall Alexander Hamilton's notion in
    Federalists No. 70: ``. . . a government ill executed, whatever it may
    be in theory, must be in practice a bad government.'' Although they
    hardly used the modern language of organizational theory, they believed
    in clear chains of command, through which the Chief Executive could
    deliver clear direction to the front lines of government, and an
    absolute commitment to the highest ethical standards. They clearly
    understood that human nature could undermine the best intentions, which
    it most certainly has in the IRS case.
         Having studied questions of accountability for the better part of
    ten years, I must admit that I am not surprised by the revelations of
    taxpayer abuse at the IRS. It is not because I believe revenue agents
    are deserving of suspicion. The agents I have met in my analysis of
    bureaucratic structure are deeply committed public servants. I had the
    opportunity to meet many of the agents in the St. Paul district office
    as part of my research in 1993-94 on the thickening of the federal
    hierarchy and was impressed by two findings: (1) they were enormously
    dedicated to doing their jobs well, even though they were clearly
    confused by changing signals from headquarters about just how tough or
    soft to be, and (2) they were thoroughly isolated from their regional
    offices and headquarters. They had little respect for the regions, if
    only because they saw the regional offices for what they were and still
    are: an organizational anachronism that added little value to doing the
    job of the Revenue agent well, and they had very little sense of the
    national mission of their own agency.
         If there is a single conclusion from my research it is that if
    you've seen one IRS district office, you've seen one IRS district
    office. Like Fort Apache, the front-lines of the agency are completely
    surrounded by what many Revenue agents see as hostile forces, cut off
    from the body of the corps. It is no wonder, therefore, that some
    offices and agents would go wrong. They are enveloped in the fog of
    war, relying on the modern equivalent of the pony express, if that, to
    get information back and forth to their commanders.
         To me, the essence of accountability is not to be found in good
    technology, though it certainly helps, oversight boards, which often
    add yet another layer of confusion to an already foggy situation, or
    special pay grades for senior managers, which hardly make the job of
    the front-line employee more livable. It is instead to be found in a
    clear vision of the agency's mission and an administrative structure
    that communicates that vision constantly and clearly. To me, the
    success of an agency's vision is not to be found in the number of
    leaders at the top scurrying around making grand pronouncements of the
    future, but in the simple ability of that vision to flow smoothly to
    every corner of the agency. Luckily, you now have a Commissioner who
    has the strength of commitment and foresight to articulate such a
    vision. If this Committee truly wants to do him a favor, it would
    attack the administrative clutter that is simply impossible to remove
    without statutory force. The Commission can exhort and order, but he
    does not have the statutory authority to delayer, or bulldoze, without
    your help. What good will an oversight board do the Commissioner if it
    competes with him in providing direction to the agency? How effective
    can it be if it cannot see any further down the chain of command than
    the Commissioner?
         Again, the essence of accountability is not to be found in the
    presence of new units or structures, but in the natural ease with which
    guidance flows down to the front-lines of an agency and the quality and
    timeliness of the information flowing up. As near as I can tell from
    this Committee's dramatic hearings, taxpayer abuse has been occurring
    for some time. The first step in creating legislation is to determine
    why the abuse has been so long in coming to light. If it is up to this
    distinguished Committee and this Committee alone to ferret out the
    problems, we are all at significant risk, for to do so would mean that
    you would be unable to discharge your other duties. Although some abuse
    will always elude the internal oversight mechanisms of government,
    sneaking past the Office of Inspector General, the Taxpayer Advocate,
    the Commissioner, the Secretary of the Treasury, the Office of
    Management and Budget, and the Oval Office, this Committee cannot and
    should not be the first line of defense against abuse.
    The Search for Accountability at the IRS
         As we all search for culprits in the taxpayer abuse at the IRS, I
    believe we need look no further than government's own flawed vision of
    how to make its employees obey. Government has long believed that
    accountability resides in having more layers of leaders and/or more
    leaders per layer.
         The result has been a steady thickening of the federal hierarchy
    that renders no one ultimately accountable for what goes right or wrong
    on the front lines where government meets the citizen. Absent a clear
    chain of command between the top and bottom of the IRS, district
    managers could invent just about any scheme they wanted to monitor
    their employees, while rogue revenue agents could easily persuade
    themselves that no one at the top would ever catch on.
         The thickening of the IRS has been underway for decades. In 1960,
    for example, the senior leadership of the IRS consisted of just
    thirteen people: a commissioner, two assistants to the commissioner, a
    deputy commissioner, five assistant commissioners, and four deputy
    assistant commissioners. By 1996, the senior leadership had grown to
    over 60. The IRS still had the one commissioner and deputy
    commissioner, but had added a chief of staff and two assistants to the
    commissioner, one assistant to the deputy commissioner, a new associate
    commissioner/chief information officer, five assistant commissioners,
    five deputies' assistant commissioners, and a host of lesser new
    titles, including at least one chief of staff to an assistant
    commissioner, with parallel thickening at the middle levels of both the
    Washington headquarters and the field offices. I challenge the IRS to
    demonstrate to anyone how the Chief of Staff to the Assistant
    Commissioner for Support Services in the Management and Administration
    Division contributes to the overall ability of the agency to do its
    job.
         The IRS has never had more leaders at its middle either. At my
    last count in 1994, there were sixteen layers of supervisors between
    the President of the United States, who is the ultimate chief executive
    of the agency, and revenue agents far below. Most agents report to a
    district group manager who reports to a branch chief who reports to an
    assistant chief of their division who reports to the assistant district
    director who reports to the assistant regional commissioner who reports
    to the regional commissioner who reports to the chief of staff to a
    deputy assistant commissioner in Washington who reports to the deputy
    assistant commissioner who reports to the assistant commissioner who
    reports to the chief operating officer who reports to the deputy
    commissioner of the IRS who reports to the commissioner who reports to
    the Deputy Secretary of the Treasury who reports to the Secretary who
    finally reports to the president (assuming that the White House deputy
    chief of staff and chief of staff don't get in the flow). No wonder
    rogue agents concluded they could get away with harassment.
         Supervisory chains are only part of the equation, however. The
    number of layers involved in making and executing basic policy
    affecting the field are even more complicated. Again at last count,
    there were sixty-six distinct steps in making policy decisions
    affecting examining agents, including Treasury department reviews, IRS
    policy analysts and assistant chief counsels, and assorted team leaders
    in Washington and field offices. Had the agency added agents as it
    created new layers of middle and top level management, perhaps district
    managers might not have invented the collection quotas that fueled the
    taxpayer abuse.
         I would be remiss in singling out the IRS for special criticism
    without noting the remarkable expansion in senior-level thickening that
    has occurred over the past few years. Much as we can applaud the
    president and vice president for overseeing both the downsizing of
    government that began with passage of the 1990 Defense Base Closure and
    Realignment Act, which ultimately resulted in the shuttering of 243
    installations, and implementing the 1993 Workforce Restructuring Act,
    which has driven federal employment down by nearly 300,000 positions,
    the thickening of the senior hierarchy has continued, indeed
    accelerated over the past five years.
         Although the number of senior positions has barely changed at all,
    the roughly 2,400 senior executives of government now sort into a much
    taller hierarchy. According to my most recent count, which is based on
    a careful, even mind-numbing coding of The Federal Yellow Book, there
    are now forty-nine layers open for occupancy at the upper levels of
    government, a gain of sixteen new titles in the past five years. The
    total full-time-equivalent federal workforce may have returned to pre-
    1960 levels, but the senior hierarchy continues to expand with what
    appears to be accelerating force. It took thirty years, from 1960 to
    1992, for the senior political and career hierarchy to grow from
    seventeen layers to thirty-three, but only five years to go from
    thirty-three to forty-nine.
         Among the new titles? Deputy to the Deputy Secretary, which now
    exists in three departments where it had never existed before,
    Assistant Deputy Secretary, which also exists in three where it had
    never existed before, Principal Assistant Deputy Under Secretary, Chief
    of Staff to the Associate Assistant Secretary, Chief of Staff to the
    Assistant Assistant Secretary, and Deputy Assistant Deputy
    Administrator. (I have attached the current list of titles open for
    occupancy for the Committee's review.) I can assure you that I take no
    pleasure in assembling such lists, for they confirm the continuing
    fascination in government with leadership by layering. Indeed, I
    challenge anyone in this room or elsewhere in Washington to explain how
    a Chief of Staff to an Assistant Assistant Secretary strengthens the
    president's leadership or the faithful execution of the laws. It is a
    formula for diffusing accounting, and, to paraphrase the distinguished
    Senator from New York, for defining leadership downward.
         These layers translate into staggering distances between the tops
    and bottoms of government, which in turn weakens accountability in
    every agency. Whether the front line is a VA nursing ward, an
    immigration office, or a national park, the bottom of government is
    virtually cut off from the top. VA nurses work eighteen supervisory
    layers below the president, air traffic controllers and park rangers
    nineteen; policy making for public housing agents can involve as many
    as seventy-one steps, air traffic controllers eighty-seven, and
    immigration inspectors sixty-five. Most agencies have evaded efforts to
    slim the middle layers of government by calling their supervisors
    something else. There are more team leaders in the federal hierarchy
    today than in all of Peewee basketball, but no real reduction in the
    distance between top and bottom.
         Given this analysis, it should hardly surprise the Committee that
    I would argue that the way to improve accountability at the IRS is not
    to add new layers of leaders or write a simpler tax code. More leaders
    will only make it more difficult to see the bottom from the top, and a
    flat tax that administered by a thick agency will be just as vulnerable
    to abuse. Rather, the first step toward accountability is to express
    the Committee's strong preference for a leaner, flatter organization.
         That means, for example, elimination of the regional office
    structure and redeployment of those employees down to the front lines
    where they can get back to work serving the nation's taxpayers. Most of
    the regional offices in the federal hierarchy were created by earlier
    administrations to further presidential control of the front-line in
    furtherance of the layers=leaders philosophy, and most currently add
    little by way of value to the front-line task. I believe that is the
    case with the IRS and strongly urge the Committee to do what
    Commissioners cannot do: eliminate the offices, lock, stock, and
    barrel.
         Slimming the hierarchy also means setting a deliberate target for
    reducing the layers of management between the Commission and the front-
    line. Instead of imposing an arbitrary goal of, say, a 50 percent
    reduction in the total number of layers, which I believe this agency
    could easily absorb without the slightest reduction in productivity, or
    setting a supervisory-subordinate target of, say, one supervisor for
    every ten or fifteen employees, which this agency could also achieve
    without a hint of decline in effectiveness, I strongly recommend a
    careful counting of each layer of management, be it formal or informal,
    be it occupied by a supervisor or a team-leader, followed by aggressive
    use of reductions-in-force and augmented buy-out authorities to remove
    specific layers from the organizational hierarchy. Where there are now
    sixteen layers between the president and the front-line, I suggest that
    this Committee set a goal of eight. To achieve such a reduction would
    be a significant achievement not just in achieving enhanced
    accountability for the IRS, it would also constitute a model to the
    rest of government about how to winnow through the assortment of
    nonsensical titles and outright interference that now preoccupy so much
    of the senior and middle-levels of the hierarchy.
    Further Considerations Regarding IRS Restructuring
         This Committee need not stop at a thinning of the hierarchy,
    however. Once undertaken, the agency needs to create an administrative
    culture of responsiveness. It will not surprise the Committee to note
    that I disagree with any proposal that would add new layers of
    management, be they occupied by political appointees or highly-paid
    senior executives, as the path to greater accountability. I see no
    reason to alter the longstanding commitment of this agency to a
    management corps composed of career civil servants. Add new layers of
    political appointees and we introduce the very real specter of partisan
    abuse of taxpayer files. But leave the current hierarchy untouched and
    we risk a ``wait-it-out'' mentality among career executives who have
    seen past reformers come and go through a veritable revolving door in
    the Commissioner's office and above.
         While I applaud the agency's commitment to career service, I also
    recognize the need for the Commissioner to have at his or her disposal
    a senior cadre of managers who are responsive to change. It is just
    this search for responsiveness that motivated your colleagues in the
    other chamber to argue for alterations in the rules governing the
    Senior Executive Service. My sense is that alterations will have
    limited effect on the administrative culture, possibly coupled with
    great risk to the merit principle that undergirds the career service.
         Toward resolving this tension between responsiveness and career
    leadership, let me suggest that the Committee consider creating an
    entirely separate Senior Revenue Service to be composed of individuals
    appointed under a five-to-seven year performance-based contract. Such a
    SRS, if you will, could be easily modeled on the senior career services
    that have evolved in New Zealand and Britain over the past decade.
        Consider, for a moment, how the concept has been applied under New
    Zealand's State Sector Act of 1988. Under the Act, the Senior Executive
    Service is composed of a unified force of highly trained, deeply
    dedicated career executives who are appointed by the chief executive of
    each department under merit principles. Appointments are to be made on
    the basis of each candidate's ability to
               (a) imbue the employees of the Department with a spirit of
            service to the community;
               (b) promote efficiency in the Department;
               (c) ensure the responsible management of the Department;
               (d) maintain appropriate standards of integrity and conduct
            among the employees of the Department;
               (e) ensure that the Department is a good employer; and
               (f) promote equal employment opportunity.
        Every person appointed to a position in the Senior Executive
    Service is to serve for a term of not more than five years, subject to
    reappointment on the basis of performance under a clearly defined
    contract. Employees cannot be removed before the end of their term
    without cause and can earn substantial bonuses upon meeting annual
    performance goals. The concept offers that rare balance between demand
    for high performance and career continuity. Although it has not worked
    as well as hoped in the New Zealand setting, in part because it was
    implemented government wide without regard to the specific
    circumstances in which it might provide an enhancement in
    accountability, a similar performance-based, term-specific system has
    worked much better in Britain.
         Much as I admire the other chamber's effort to design greater
    incentives for performance, I am concerned that the envisioned awards
    do not provide enough quo for the proposed quid, no pun intended. I
    would much prefer that IRS be given authority to create a set of
    carefully defined positions, perhaps as few as 20 in number, that would
    give its current career Senior Executives a first chance to trade in
    their life-tenured positions for much higher pay based on performance.
    I believe many would rise to the challenge. Not only would such a
    system provide the Commissioner with the opportunity to build a
    performance-based team, it would constitute the kind of innovation that
    I believe this Committee and body have long admired in public
    management. As such, I urge you to substitute such a trial system for
    Section 111 of the pending proposal.
         Before concluding, let me briefly assess the proposed structure
    and duties of the Oversight Board. Truth in advertising requires that I
    note my serious reservations about creating such an board in the first
    place. Well intended though it may be, the Board would likely diffuse
    accountability within the IRS even further, adding an entirely new
    layer to a patchwork of already confusing accountability systems.
         If Congress and the executive must create such a board, I urge you
    to properly segregate its duties so that it has no program operating
    responsibilities of any kind. You can refer to the Inspector General
    Act for the needed language that might make the prohibition stick. I
    also urge you to consider establishing a sunset for the board so that
    this Committee can revisit the decision after a reasonable interval of
    time. Government is filled, as you know, with mechanisms established
    for missions that have long ago lapsed. These kinds of mechanisms have
    a remarkable tendency to take on a life of their own. Finally, I would
    urge you to keep the board reasonably small and insulate it fully from
    active participation by any sitting officials, including the Secretary
    of the Treasury and Commissioner. If there is to be an oversight board,
    let it be solely an oversight board, separate from the line supervisory
    responsibilities that must reside with the President of the United
    States and the appointees who serve with Senate advice and consent.
         Should this Committee decide to proceed with the Oversight Board,
    I would urge you to place the Taxpayer Advocate under its care, at
    least until it is able to establish itself as a source of independent
    advocacy on behalf of the American taxpayer. To date, the unit has not
    fulfilled its promise. Placed as it is in the direct chain of command,
    the advocate has virtually no place to turn when he or she confronts
    obvious abuse. Put under the care of the Oversight Board, the Taxpayer
    Advocate might finally be seen as a safe harbor for citizen complaints.
    Ever aware of the difficulties of an agency to investigate itself, the
    unit needs at least some umbrella of independence to persevere in its
    difficult task.
         I would also urge this Committee to undertake a full review of the
    current status of the Treasury Department's Office of Inspector
    General. It is no secret that the Office is in a state of disrepair
    following the recent resignation of its head. Although I understand
    that the House Government Reform and Oversight Committee is planning a
    major review of the Inspector General concept on the occasion of the
    twentieth anniversary of the 1978 Inspector General Act, this Committee
    is well within its authority to assess the merits of two possible
    approaches to strengthening this important source of independent
    oversight. The first would be to create a separate Deputy Inspector
    General for Internal Revenue Service Operations within the larger
    Treasury Department Office of Inspector General. Such a Deputy
    Inspector General would have to be given a separate staffing complement
    equivalent to the task. The second path would be to create a separate
    Internal Revenue Service Office of Inspector General reporting
    simultaneously to the Oversight Board and the Commissioner.
         Should the Committee take this second course, I would urge it to
    consider giving the Oversight Board responsibility for recommending a
    list of three names for appointment from which the president would be
    invited to choose. It is a perfectly constitutional approach that is
    currently used for the appointment of the Comptroller General of the
    United States. As the recent resignation of the Treasury Department
    Inspector General suggests, the appointment of this specific IGship is
    simply too important to leave to the ordinary vagaries of the White
    House personnel process. As I will argue should I be called to testify
    on the Inspector General Act, it is a change that should be made for
    all presidentially appointed Inspectors General. At the risk of further
    limiting presidential discretion, the Committee might also consider a
    similar appointment mechanism and term of office for the Commissioner,
    the Chief Information Officer, and the Chief Financial Officer. I
    should add, however, that this appointment mechanism has not proved
    noticeably effective in filling the Comptroller General's post, which
    has been vacant much too long.
         I make these recommendations with some trepidation, of course. I
    believe strongly in the caliber of the civil service at work in the
    agency. The vast majority of IRS employees are dedicated public
    servants who can be trusted to discharge their duties with integrity
    and skill. They should not be doomed to constant suspicion, lest that
    suspicion turn them into what we most fear. Give them the support they
    deserve, the front-line resources to complete their tasks, and the
    leadership to set a clear, unwavering standard of performance. They
    will rise to the task, if only because so many are already doing their
    work with pride and integrity in spite of a top-heavy bureaucracy,
    antiquated information systems, and a tax code of staggering
    complexity.
    A Modest Final Proposal
         At the risk of overstaying my welcome, let me turn in my last
    paragraphs to an idea whose time has clearly come. The Chairman will
    remember how hard he fought lo these many years ago for establishment
    of a National Commission on Executive Organization and Management. The
    Senate Governmental Affairs Committee succeeded in attaching his
    commission to the Department of Veterans Affairs Act in 1988. Alas, the
    Commission was never activated by the president. It was long overdue in
    1988 and remains so today. I urge the Committee to attach such a
    Commission to this bill with two simple additions. First, the
    Commission should be given the widest latitude to sort through the
    existing structure of government in an effort to remove the sediment of
    past reform efforts, whether that sediment comes from administrative
    layers that have been tossed ashore in past hurricanes of concern or in
    defunct procedures that distract departments and agencies from more
    promising reforms such as the Government Performance and Results Act.
    Second, the Commission should be given authority to propose to Congress
    and the president a unified list of statutory adjustments that could be
    accepted or rejected en masse. Although it has been some time since I
    have drafted legislation for a living, I have attached a draft proposal
    that this Committee might consider should it decide to establish such a
    National Commission that would make its report at the beginning of the
    new millennium.

                        Titles Open for Occupancy, 1996

    Secretary
    Chief of Staff to the Secretary
    Deputy Chief of Staff to the Secretary

    Deputy Secretary
    Chief of Staff to the Deputy Secretary
    Deputy to the Deputy Secretary
    Principal Associate Deputy Secretary
    Associate Deputy Secretary
    Deputy Associate Deputy Secretary
    Assistant Deputy Secretary

    Under Secretary
    Chief of Staff to the Under Secretary
    Principal Deputy Under Secretary
    Deputy Under Secretary
    Principal Associate Deputy Under Secretary
    Associate Deputy Under Secretary
    Principal Assistant Deputy Under Secretary
    Assistant Deputy Under Secretary
    Associate Under Secretary
    Assistant Under Secretary

    Assistant Secretary *
    ---------------------------------------------------------------------------
        * The Assistant Secretary compartment includes all Executive Level
    IV titles, including Commissioner, Director, Administrator, Inspector
    General, General Counsel, and Chief Financial Officer.
    ---------------------------------------------------------------------------
    Chief of Staff to the Assistant Secretary
    Principal Deputy Assistant Secretary
    Associate Principal Deputy Assistant Secretary
    Deputy Assistant Secretary
    Principal Deputy to the Deputy Assistant Secretary
    Deputy to the Deputy Assistant Secretary
    Associate Deputy Assistant Secretary
    Assistant Deputy Assistant Secretary
    Principal Associate Assistant Secretary
    Associate Assistant Secretary
    Chief of Staff to the Associate Assistant Secretary
    Deputy Associate Assistant Secretary
    Assistant Assistant Secretary
    Chief of Staff to the Assistant Assistant Secretary
    Deputy Assistant Assistant Secretary

    Administrator
    Chief of Staff to the Administrator
    Assistant Chief of Staff to the Administrator
    Principal Deputy Administrator
    Deputy Administrator
    Associate Deputy Administrator
    Deputy Associate Deputy Administrator
    Assistant Deputy Administrator
    Deputy Assistant Deputy Administrator
    Associate Administrator
    Chief of Staff to the Associate Administrator
    Deputy Associate Administrator
    Assistant Administrator
    Chief of Staff to the Assistant Administrator
    Deputy Assistant Administrator
    Associate Assistant Administrator

          NATIONAL COMMISSION ON EXECUTIVE ORGANIZATION AND STRUCTURE

    SECTION 1. THE COMMISSION
      (a) ESTABLISHMENT.--(1) Within 30 days after the effective date of
                this Act, the President shall establish the National
                Commission on Executive Organization and Structure under
                this section.
      (b) MEMBERSHIP OF THE COMMISSION.--A commission established under
                this section shall be composed of 16 members appointed not
                later than 90 days after the effective date of this Act.
                The members shall be appointed as follows:
               (1) Six citizens of the United States appointed by the
            President, one of whom shall be designated by the President to
            be the Chairman of the Commission. Not more than four of the
            members appointed by the President may be from the same
            political party as the President.
               (2) Two members of the Senate and one citizen of the United
            States appointed by the President pro tempore of the Senate
            upon the recommendation of the majority leader of the Senate.
               (3) One Member of the Senate and one citizen of the United
            States appointed by the President pro tempore of the Senate
            upon the recommendation of the minority leader of the Senate.
               (4) Two members of the House of Representatives and one
            citizen of the United States appointed by the Speaker of the
            House of Representatives upon the recommendation of the
            majority leader of the House of Representatives.
               (5) One Member of the House of Representatives and one
            citizen of the United States appointed by the Speaker of the
            House of Representatives upon the recommendation of the
            minority leader of the House of Representatives.
      (c) RESTRICTIONS ON PAY AND ALLOWANCES.--(1) Except as provided in
                paragraph (2), members of the Commission shall receive no
                pay, allowances, or benefits by reason of service on the
                Commission.
               (2) Members of the Commission appointed from among private
            citizens of the United States may be allowed travel expenses,
            including per diem, in lieu of subsistence, as authorized by
            law for persons serving intermittently in the Federal
            Government.
      (d) FUNCTIONS OF COMMISSION.--The Commission shall examine and make
                recommendations with respect to--
               (1) the organization of the executive branch, including the
            appropriate number of departments and agencies, the
            organizational structure of each such department and agency,
            the advisability of reorganizing or abolishing any such
            department or agency, and the advisability of establishing any
            new executive department or agency;
               (2) the internal administrative structure of departments and
            agencies, including the appropriate number of administrative
            units and their responsibilities, the appropriate number of
            administrative layers and positions, the conditions governing
            the management and appointment of such layers and positions,
            the advisability of setting fixed targets for reducing such
            layers and positions, and the advisability of creating,
            consolidating, and/or abolishing specific units of departments
            and agencies;
               (3) the most effective and practicable structure of the
            Executive Office of the President for conducting oversight of
            the executive branch, including examination of the need for an
            Office of Management, and criteria for use by such Office in
            evaluating and overseeing the performance of the executive
            branch;
               (4) the most effective and practicable structure of the
            President's cabinet and means of operation of such cabinet,
            including recommendations concerning the number, composition,
            and duties of the members of such cabinet.
      (e) REPORT.--(1) Not later than 12 months after the completion of
                appointment of the members of the Commission, the
                Commission shall submit to the President, the Senate, and
                the House of Representatives a report which contains a
                detailed statement of the recommendations of the
                Commission, including a list of specific proposals in
                response to the investigation conducted under section (d).
               (2) The date on which the report is due may be extended to
            such date as the President may prescribe in an Executive Order,
            except that such date may not be later than six months after
            the date on which such report is otherwise due under paragraph
            (1).
      (f) POWERS OF COMMISSION.--(1) The Commission may, for the purpose of
                carrying out this section, hold such hearings and sit and
                act at such times and places, as the Commission considers
                appropriate.
               (2) The Commission may adopt such rules and regulations as
            may be necessary to establish procedures and to govern the
            manner of the operation, organization, and personnel of the
            Commission.
               (3) (A) The Commission may request from the head of any
            department, agency, or other instrumentality of the Federal
            Government such information as the Commission may require for
            the purpose of carrying out this section. The head of such
            department, agency, or instrumentality shall, to the extent
            otherwise permitted by law, furnish such information to the
            Commission upon request made by the Chairman.
                       (B) Upon request of the Chairman of the Commission,
                    the head of any department, agency, or other
                    instrumentality of the Federal Government shall, to the
                    extent possible and subject to the discretion of such
                    head--
                               (i) make any of the facilities and services
                            of such department, agency, or instrumentality
                            available to the Commission; and
                               (ii) detail any of the personnel of such
                            department, agency, or instrumentality to the
                            Commission, on a nonreimbursable basis, to
                            assist the Commission in carrying out the
                            duties of the Commission under this section.
               (4) The Commission may use the United States mails in the
            same manner and under the same conditions as the departments
            and agencies of the Federal Government.
               (5) The Commission may, to such extent and in such amounts
            as are provided in appropriations Acts, enter into contracts
            with State agencies, private firms, institutions, and
            individuals for the purpose of conducting research or surveys
            necessary to enable the Commission to discharge the duties of
            the Commission under this section.
               (6) Subject to such rules and regulations as may be adopted
            by the Commission, the Chairman of the Commission may appoint,
            terminate, and fix the pay of an Executive Director and of such
            additional staff as the Chairman considers appropriate to
            assist the Commission. The Chairman may fix the pay of
            personnel appointed under this paragraph without regard to the
            provisions of chapter 51 and subchapter III of chapter 53 of
            title 5, United States Code (relating to the number or
            classification of employees and to rates of pay), the
            provisions of such title governing appointments in the
            competitive service, and any other similar provision of law.
      (g) APPLICABILITY OF THE FEDERAL ADVISORY COMMITTEE ACT.--The
                Commission shall be an advisory committee for purposes of
                the Federal Advisory Committee Act (5 U.S.C. App. 2).
      (h) TERMINATION OF COMMISSION.--The Commission shall cease to exist
                on the date that is 30 days after the date on which the
                Commission submits the report required under subsection
                (e).
      (i) PREPARATION FOR THE COMMISSION.--Not later than 90 days after the
                effective date of this Act, the Comptroller General of the
                United States, the Director of the Congressional Research
                Service, the Director of the Congressional Budget Office,
                and the Director of the Office of Technology Assessment
                shall each submit to the Commission established under this
                section an index to and synopses of materials of the
                organization of the official that such official considers
                useful to the Commission. Subject to laws governing the
                disclosure of classified or otherwise restricted
                information, such materials may include reports, analyses,
                recommendations, and results of research of such
                organization.
      (j) AUTHORIZATION OF APPROPRIATIONS.--There are authorized to be
                appropriated to the Commission not more than $2,500,000 for
                carrying out this section.
    SECTION 2. CONSIDERATION OF THE COMMISSION REPORT
      (a) IN GENERAL.--The President may not carry out any of the
                recommendations contained in the Commission report unless--
               (1) no later than June 30, 2001, the President transmits to
            the Committee on Governmental Affairs of the Senate and the
            Committee on Government Reform and Oversight of the House of
            Representatives a report containing a statement that the
            President has approved, and the departments and agencies of
            government will implement, all of the recommendations
            recommended by the Commission in the report referred to in
            section 1 (e);
      (b) TERMS OF THE RESOLUTION.--For purposes of section 2(b), the term
                ``joint resolution'' means only a joint resolution which is
                introduced before March 15, 2001, and--
               (1) which does not have a preamble;
               (2) the matter after the resolving clause of which is as
            follows: ``That Congress disapproves the recommendations of the
            National Commission on Executive Organization and Structure,''
            the blank space being appropriately filled in; and;
               (3) the title of which is as follows: ``Joint resolution
            disapproving the recommendations of the National Commission on
            Executive Organization and Structure.''
      (c) REFERRAL.--A resolution described in subsection (a), introduced
                in the House of Representatives shall be referred to the
                Committee on Government Reform and Oversight of the House
                of Representatives. A resolution described in subsection
                (a) introduced in the Senate shall be referred to the
                Committee on Governmental Affairs of the Senate.
      (d) DISCHARGE.--If the committee to which a resolution described in
                subsection (a) is referred has not reported such resolution
                (or an identical resolution) before July 15, 2001, such
                committee shall be, as of July 15, 2001, discharged from
                further consideration of such resolution, and such
                resolution shall be placed on the appropriate calendar of
                the House involved.
      (e) CONSIDERATION.--(1) On or after the third day after the date on
                which the committee to which such a resolution is referred
                has reported, or has been discharged (under subsection (c))
                from further consideration of, such a resolution, it is in
                order (even though a previous motion to the same effect has
                been disagreed to) for any Member of the respective House
                to move to proceed to the consideration of the resolution
                (but only on the day after the calendar day on which such
                Member announces to the House concerned the Member's
                intention to do so). All points of order against the
                resolution (and against consideration of the resolution)
                are waived. The motion is highly privileged in the House of
                Representatives and is privileged in the Senate and is not
                debatable. The motion is not subject to amendment, or to a
                motion to postpone, or to a motion to proceed to the
                consideration of other business. A motion to reconsider the
                vote by which the motion is agreed to or disagreed to shall
                not be in order. If a motion to proceed to the
                consideration of the resolution is agreed to, the
                respective House shall immediately proceed to consideration
                of the joint resolution without intervening motion, order,
                or other business, and the resolution shall remain the
                unfinished business of the respective House until disposed
                of.
               (2) Debate on the resolution, and on all debatable motions
            and appeals in connection therewith, shall be limited to not
            more than 10 hours, which shall be divided equally between
            those favoring and those opposing the resolution. An amendment
            to the resolution is not in order. A motion further to limit
            debate is in order and not debatable. A motion to postpone, or
            a motion to proceed to the consideration of other business, or
            a motion to recommit the resolution is not in order. A motion
            to reconsider the vote by which the resolution is agreed to or
            disagreed to is not in order.
               (3) Immediately following the conclusion of the debate on a
            resolution described in subsection (a) and a single quorum call
            at the conclusion of the debate if requested in accordance with
            the rules of the appropriate House, the vote on final passage
            of the resolution shall occur.
               (4) Appeals from the decisions of the Chair relating to the
            application of the rules of the Senate or the House of
            Representatives, as the case may be, to the procedure relating
            to a resolution described in subsection (a) shall be decided
            without debate.
      (f) CONSIDERATION BY OTHER HOUSE.--(1) If, before the passage by one
                House of a resolution of that House described in subsection
                (a), that House receives from the other House a resolution
                described in subsection (a), then the following procedures
                shall apply:
                       (A) The resolution of the other House shall not be
                    referred to a committee and may not be considered in
                    the House receiving it except in the case of final
                    passage as provided in subparagraph (B)(ii).
                       (B) With respect to a resolution described in
                    subsection (a) of the House receiving the resolution--
                               (i) the procedure in that House shall be the
                            same as if no resolution had been received from
                            the other House; but
                               (ii) the vote on final passage shall be on
                            the resolution of the other House.
               (2) Upon disposition of the resolution received from the
            other House, it shall no longer be in order to consider the
            resolution that originated in the receiving House.
      (g) RULES OF THE SENATE AND HOUSE.--This section is enacted by
                Congress--
               (1) as an exercise of the rulemaking power of the Senate and
            House of Representatives, respectively, and as such it is
            deemed a part of the rules of each House, respectively, but
            applicable only with respect to the procedure to be followed in
            that House in the case of a resolution described in subsection
            (a), and it supersedes other rules only to the extent that it
            is inconsistent with such rules; and
               (2) with full recognition of the constitutional right of
            either House to change the rules (so far as relating to the
            procedure of that House) at any time, in the same manner, and
            to the same extent as in the case of any other rule of that
            House.

                                   __________

                     Prepared Statement of Hon. Trent Lott

        Welcome, Mr. Rossotti. You are undoubtedly a brave man for taking a
    job as IRS Commissioner. I will be honest with you--you run an agency
    that I don't like, and that I wish did not exist. Some call the IRS a
    ``necessary evil.'' I know I agree with the second part of that
    description. I have not yet made up my mind about the first part.
        You are in the unenviable position of attempting to restructure an
    agency within an Administration that is out of touch with our citizens'
    feelings about taxes. Your bosses don't understand Americans' fear and
    distrust of the Internal Revenue Service.
        I look forward to studying your reorganization plan, and I know
    that you have both professional training and experience as a successful
    business manager. Until I have evaluated your proposal, I will not deem
    it as ``too little.'' I will, however, say here to your superiors that
    it is certainly ``too late.''
        This Administration seems to delight in spending its citizens'
    money. Last night we heard another laundry list of new government
    programs and expansions. If this Administration spent one-tenth the
    time and effort on taxes as they do on creating new government
    programs, our tax system and your agency would be in much better shape.
        We need to cut the taxes Americans pay, to reduce the economic
    burdens of those taxes on the taxpayers, and the manner in which they
    collect them. We also need Americans to know how much they pay--
    billions of dollars pass into your agency's hands through hidden taxes.
    I always remember one simple rule: ultimately, people pay taxes. Every
    tax dollar comes from a person, either as a worker, as a consumer, or
    as an owner of capital. We must never forget that the function of
    government is to serve the American people, and that we the people,
    through the engine of a competitive market economy, pay for all the
    services we receive.
        Last night I gave my word to the American people that we would stop
    the abuses the IRS is inflicting on the American taxpayer. We took
    several small steps last year, and will do much more this year.
    Chairman Roth, you did a fine job last year in constructing the
    Taxpayer Relief Act, and I look forward to working with you again this
    year as we jointly attack the serious problems this agency faces.

                                   __________

                     Prepared Statement of Hon. Connie Mack

         Mr. Chairman, I thank you for holding these hearings on the most
    important of subjects, cleaning up the IRS. I look forward to
    participating in this bipartisan effort to restructure this agency. The
    IRS interacts with more Americans than any 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, our hearings last September confirmed that we have
    a big job ahead of us. Those hearings exposed a rogue agency that was
    literally out of control. We learned about the illegal use of
    enforcement statistics to evaluate IRS employee performance--in other
    words, judging employees based on how much they say the taxpayers owe.
    We heard testimony that IRS management encourages IRS employees to
    mislead and lie to taxpayers about their rights, and to fabricate
    evidence against taxpayers and fellow employees. We learned that IRS
    management encourages IRS employees to ignore tax code provisions that
    would result in a favorable adjustment to taxpayers, and to violate the
    laws concerning taxpayer privacy and the commencement of liens, levies,
    and seizures This was shocking. Taxpayers who spend $8 billion to run
    the IRS deserve at least honest service.
         But the September hearings revealed that the IRS views itself more
    as a law enforcer rather than a service provider. We heard that many
    IRS managers believe that all tax debtors are tax cheats that must be
    punished. This is hard to accept. IRS employees, of all people, should
    recognize that our complex tax code can easily lead to innocent
    mistakes on the part of well-meaning taxpayers. The attitude of
    antagonism toward the taxpayer must end.
         I am encouraged by the early efforts by Commissioner Rossotti to
    turn things around at the IRS. But he needs our assistance.
         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
    restructuring bill passed by the House is 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. This requires
    both restructuring and a renewed emphasis on taxpayer protections--
    including increased taxpayer confidentiality, correcting the
    presumption that the IRS is always right and the taxpayer always wrong,
    and treating the Service as it treats the taxpayer by making it pay for
    its mistakes.
        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 weeks to
    hear from witnesses that will help us in our efforts to end the culture
    of waste, fraud, and abuse at the IRS.

                                   __________

                     Prepared Statement of Michael E. Mares

         Mr. Chairman and members of the Committee: Thank you for inviting
    the American Institute of Certified Public Accountants (``AICPA'') to
    testify before you today. I am Michael Mares, Chair of the AICPA's Tax
    Executive Committee. The AICPA is the national, professional
    organization of more than 331,000 certified public accountants. The
    Institute's members advise clients on Federal, state, and international
    tax matters and prepare income and other tax returns for millions of
    Americans. They provide services to individuals, not-for-profit
    organizations, small and medium-size businesses, as well as America's
    largest businesses. It is from this base of experience that the AICPA
    offers its comments.
         The AICPA actively participated in the work of the National
    Commission on Restructuring the Internal Revenue Service (``National
    Commission'') during the past year, testifying at several hearings of
    the National Commission, attending numerous meetings, and providing
    written and oral comments and suggestions. We also testified before the
    House Ways and Means Committee and its Oversight Subcommittee on the
    National Commission's report, A Vision for a New IRS, and on H.R. 2292,
    the legislation introduced to implement that report and the predecessor
    to H.R. 2676, the Internal Revenue Service Restructuring and Reform Act
    of 1997 as passed by the House of Representatives.
         Overall, the AICPA supports the Commission's report, H.R. 2292,
    and H.R. 2676. Set forth below are our comments on some of the most
    significant provisions and topics in H.R. 2676 and H.R. 2292. Upon
    request, we will be happy to provide you with comments on any
    additional issues.
           title i--executive branch governance and senior management
     Independent Oversight Board
         The IRS is a large, complex organization; the structure and
    governance processes which have served it well in the past will not do
    so in the future. The Institute believes a fundamental change in the
    governance of the IRS is needed to provide the IRS with consistent
    direction and to enable the IRS to benefit from private sector
    experience and expertise. Thus, the AICPA supports the H.R. 2676
    proposal to create an independent Internal Revenue Service Oversight
    Board (``Board''). We take exception, however, with some of the
    criteria for selection of members, as discussed later.
         There is a need for changing the way the IRS is governed. There is
    public consensus, agreement within Congress and the Administration,
    among tax professionals and, importantly, within IRS management, that
    the agency requires revitalization and renewal. The expertise needed to
    govern the IRS can no longer be easily categorized into the two broad
    components, tax policy and tax administration. Instead, IRS
    Commissioners now wrestle with massive information systems projects,
    the need to dramatically improve financial management, re-engineering
    IRS work processes and providing dramatically improved customer
    service. At the same time, the traditional expectations of increasing
    voluntary compliance, handling non-compliance and collecting tax
    revenues must still be met. This must all be done with smaller budgets.
    Thus, the need for additional and different perspectives on managing
    these broad challenges is very clear. This is not an indictment of the
    present structure. It is, however, a recognition that the unprecedented
    challenges facing the IRS require a different approach and new mix of
    governance skills and abilities.
         Creating more independence for the IRS will improve tax policy
    deliberations. While concerns have been expressed that separating the
    IRS from Treasury will undermine tax policy effectiveness, we believe
    it will actually have the opposite effect. Independence will provide
    the IRS with the ability to provide needed input into the impact of tax
    policy and legislative proposals on compliance. We understand that this
    input will be limited to taxpayer burdens and administrative complexity
    inherent in such changes. This is important information, however, which
    should be, but currently is not always, made available to Congress or
    the public. The current relationship between the IRS and Treasury does
    not give the IRS an independent voice on such issues.
         For example, IRS tax administrators were extremely concerned about
    the difficulty and complexity involved in administering the earned
    income tax credit when the concept was first introduced. Those concerns
    were not expressed to Congress because the IRS was limited in its
    ability to discuss the impact of tax policy on administration, except
    with Treasury's guidance. It was several years before Congress and
    Treasury took notice of IRS's concerns. Creating more independence for
    the IRS would allow the IRS to more clearly articulate its views when
    such debate is underway, thus reducing the practical problems in
    implementing specific provisions.
         A Board of presidential appointees specifically assigned for a
    fixed term to govern the IRS will increase continuity of oversight as
    well as accountability. Under the proposal in H.R. 2676, the Board
    members (other than the initial Board members) would serve five-year
    staggered terms. This structure would provide much-needed continuity in
    the overall governance of the IRS and contrasts markedly with the very
    limited governance continuity under the current system. Further, since
    Board members would be appointed by the President, confirmed by the
    Senate and could be removed at will by the President, there would be
    controls in place to ensure integrity and accountability.
         A properly constituted and managed Board, focused on overall
    governance of the IRS, not specific law enforcement matters, can avoid
    conflict of interest problems. Much has been written and said about the
    potential for conflicts of interest if there is a primarily private
    sector Board for the IRS. We believe the proposal adequately addresses
    these concerns. The Board is to focus on the overall governance of the
    IRS, not to deal with day-to-day decisions or specific law enforcement
    matters in the IRS, so conflicts should not arise. The Board members
    will be ``special government employees'' subject to conflict of
    interest rules in Title 18 of the United States Code. It thus appears
    that there are adequate statutory safeguards. If not, we believe that
    additional safeguards could be drafted to prevent conflict of interest
    problems.
         It also should be noted that the conflict of interest discussions
    seem to be concerned with potential members of the Board who would
    serve as executives of business enterprises at the same time they serve
    on the Board. Even if it were determined that potential conflict of
    interest problems could not be adequately addressed with respect to
    such individuals, we believe there is a large pool of highly qualified
    individuals who could serve on the Board, for example, retired business
    executives, retired professionals, or educators, all of whom could meet
    the criteria for serving on the Board, without raising the specter of a
    potential conflict.
         Board members should be selected for their expertise, not for
    their representation of special interest groups. H.R. 2676 specifies
    that the private sector members of the Board are to be selected
    ``solely on the basis of their professional experience and expertise''
    so that collectively, the members can contribute to the Board expertise
    in management of large service organizations, customer service, federal
    tax laws (including tax administration and compliance), information
    technology, organization development, and the needs and concerns of
    taxpayers. The AICPA strongly supports the concept of stated areas of
    required expertise for the current Board, especially the need for
    individuals with practical experience and expertise in tax compliance
    and the needs and concerns of taxpayers. The AICPA also strongly
    believes that all Board positions, other than the positions reserved
    for the Commissioner and for the Secretary or Deputy Secretary of the
    Treasury, should be filled based solely on the qualifications of the
    individuals and the needed expertise of the Board. The AICPA,
    therefore, believes no position on the Board should be reserved for
    representatives of special interest groups such as the IRS employees
    union.
         Public confidence must be restored in the Internal Revenue
    Service. The professional men and women who manage and work for the
    Internal Revenue Service have been the subject of unprecedented
    criticism over the past three years. Some of the criticism is valid,
    but much is not. Obviously, there have been operational problems such
    as the documented difficulties with the Tax System Modernization
    program and the taxpayer abuse cases disclosed in your Committee's
    hearings last Fall. While problems such as these need to be addressed,
    the AICPA believes it is time to focus on the future direction of the
    IRS as well. The proposed Board would serve as the catalyst to do so.
         The tax system and the IRS are a part of this nation's
    infrastructure, just like the highways and airports. The tax
    administration infrastructure is in need of attention, repair and
    reconstruction. A part of the renewal of the infrastructure is a
    restructured IRS. The proposed Board provides a focused direction
    critical for this effort, undistracted by the broader issues that the
    Treasury Department must address daily. The Board would also recreate
    credibility about the governance of this vital effort.
     Commissioner
         Just as there is a need for stability and continuity in the
    overall governance of the IRS, there is a need for stability and
    continuity in its senior management. The current system, with no fixed
    term of office for the Commissioner and the possible appointment of a
    new Commissioner with each new Administration, does not provide the
    stability required for such a vitally important leadership position.
    The AICPA, therefore, supports the H.R. 2676 proposal for a fixed five-
    year term for the Commissioner.
     Executive Leadership
         The IRS has been a very closed organization, with its executive
    leadership consisting almost exclusively of IRS career employees.
    People with varied backgrounds and expertise need to be added to the
    executive leadership to provide the IRS with different insights and to
    help generate innovative approaches to the many challenges confronting
    the IRS. Also, steps need to be taken, such as providing flexibility in
    compensation, to encourage qualified IRS career executives to remain
    with the IRS so that their knowledge and expertise is not lost to the
    IRS.
         To facilitate broad approaches and thinking on issues, AICPA
    recommends that some positions now reserved for career civil service
    employees be open for ``professional appointees.'' These professional
    appointees should be selected based on their professional and
    managerial competence rather than political affiliation and should be
    appointed by the Commissioner with the approval of the Board.
         Emphasis should be placed on using professional appointees in
    positions managing program execution rather than solely in policy-
    making positions. To prevent such appointees from dealing directly with
    specific taxpayer cases, no such appointments outside the National
    Office should be for positions below the Regional Commissioner level.
     Taxpayer Advocate's Office
         Section 7802(d)(2)(A) of the Internal Revenue Code assigns the
    Taxpayer Advocate's Office the responsibility to:
               1. Assist taxpayers in resolving problems with the IRS;
              2. Identify areas in which taxpayers have problems in
            dealings with the IRS;
              3. To the extent possible, propose changes in the
            administrative practices of the IRS to mitigate such problems;
            and
              4. Identify potential legislative changes which may be
            appropriate to mitigate such problems.
         The Taxpayer Advocate's Office is in the unique position of being
    inside the IRS, yet having the specific charge of representing the
    interests of American taxpayers, scrutinizing the Service's activities,
    and serving as the advocate of taxpayers in recommending changes that
    will improve taxpayer services and the IRS's responsiveness to
    taxpayers. Given that role, the Taxpayer Advocate's Office must be a
    zealous advocate of taxpayers.
         For the Taxpayer Advocate's Office to fulfill its
    responsibilities, it must have the trust of taxpayers. The fact that it
    is a part of the Internal Revenue Service may taint its objectiveness
    in the minds of taxpayers. It is, therefore, crucial that the Taxpayer
    Advocate's Office be regarded by taxpayers as being independent, both
    in fact and in appearance. We urge your committee to incorporate into
    the IRS reform legislation measures that enable the Taxpayer Advocate
    and his office to act in such a manner that they are regarded as
    independent from the IRS both in fact and in appearance; for example,
    have the Taxpayer Advocate appointed by and report directly to the
    Board instead of the Commissioner or have the Taxpayer Advocate's
    Office removed from the IRS and operate out of the Department of
    Treasury.
     Director of Practice
         Currently, the Director of Practice is appointed by the Secretary
    of the Treasury. The Director of Practice acts upon applications for
    enrollment to practice before the IRS, institutes and provides for the
    conduct of disciplinary proceedings relating to attorneys, certified
    public accountants, enrolled agents, enrolled actuaries and appraisers,
    makes inquiries with respect to matters under the office's
    jurisdiction, and performs such other duties as are necessary or
    appropriate to carry out the functions of the office as described above
    or as prescribed by the Secretary of the Treasury.
         We recommend that the Secretary of the Treasury be required to
    obtain input regarding the selection of the Director of Practice from
    the Board and that a candidate for the position should have either
    substantial experience as a tax practitioner representing taxpayers
    before the IRS or substantial experience within the IRS working with
    tax practitioners. The primary source of candidates should be from
    outside the IRS.
         We also recommend that the Director of Practice's responsibilities
    be expanded to include monitoring the leading causes of disciplinary
    action against tax practitioners and developing recommendations for
    reducing the occurrence of such causes, developing criteria for the
    process and types of cases where referral of tax practitioners is
    appropriate, and maintaining close relationships with tax
    administration and professional organizations. The Director of Practice
    should also work closely with the IRS chief compliance office in
    establishing standards for ethical behavior on the part of IRS
    employees.
                           title ii--electronic filing
         The AICPA has supported for many years the concept of electronic
    filing and strongly agrees the use of electronic filing needs to be
    increased. CPAs have not embraced electronic filing because: all forms
    cannot be filed electronically; there is no ability to attach white
    paper schedules, disclosures or elections electronically; the required
    Form 8453 (Jurat form) disrupts the normal processing of the returns in
    a CPA office; the procedures for registration and the annual
    registration cutoff in early December are less desirable than a rolling
    acceptance date; and the registration is cumbersome for firms with
    multiple offices. Further, since it costs taxpayers more, not less, to
    file electronically, there currently is no perceived benefit to filing
    electronically for those taxpayers who have a balance due.
         The AICPA supports the provisions in Title II of H.R. 2676 that
    call for the removal of the barriers to, and for promoting the use of,
    electronic filing. We are concerned, however, that the language of
    section 203 of the current H.R. 2676 is weaker than that of the
    comparable provision (section 203) in H.R. 2292, the predecessor to
    H.R. 2676.
         With respect to electronic signatures, section 203 of H.R. 2292
    provided that, until procedures are established for the acceptance of
    signatures in digital or other electronic form, the Secretary ``shall
    accept'' electronically filed returns and other documents on which the
    required signatures are typed, provided the filers retain a signed
    original of each and make them available for inspection by the
    Secretary. In contrast, section 203 of H.R. 2676 merely provides that
    the Secretary ``may waive'' the required signature or provide an
    alternative means of subscribing during that time period.
         Similarly, section 203 of H.R. 2292 provided that ``[n]ot later
    than December 31, 1998, the Secretary . . . shall establish procedures
    to accept, in electronic form, any other information, statements,
    elections, or schedules, from taxpayers filing returns electronically,
    so that such taxpayers will not be required to file any paper.'' In
    contrast, section 203 of H.R. 2676 qualifies that statement with the
    phrase ``to the extent practicable'' and extends the effective date of
    the requirement by making it apply for ``taxable periods beginning
    after December 31, 1998.''
         The National Commission, the House Ways and Means Committee,
    Treasury, and the IRS all have indicated the importance of promoting
    the use of electronic filing. The AICPA agrees and feels that removing
    the barriers to using electronic filing should be given a high
    priority. For this reason, we support the stronger, more time sensitive
    approach contained in section 203 of H.R. 2292 than that in section 203
    of H.R. 2676.
                    title iii--taxpayer protection and rights
         The following discussion of taxpayer protection and rights issues
    is divided into five sections: H.R. 2676 provisions supported by the
    AICPA; H.R. 2676 provisions not supported by the AICPA; H.R. 2676
    provisions supported by the AICPA, but with revisions or additional
    recommendations; H.R. 2292 provisions supported by the AICPA which are
    not in H.R. 2676; and additional AICPA recommendations.
     A. H.R. 2676 Provisions Supported by the AICPA
         The AICPA supports, without reservations, the following provisions
    in H.R. 2676:
       Expanded Authority to Award Fees and Costs (Section 311),
            expanding the authority of courts to award fees and costs under
            IRC section 7430 by: (1) allowing courts to consider the local
            availability of practitioners with tax expertise when
            determining whether to allow more than the $110 hourly rate for
            attorney's fees; (2) permitting an award of costs beginning
            from the date of the notice of proposed deficiency--i.e., the
            30-day letter; (3) clarifying that fees can be allowed for pro
            bono services; and (4) providing that, in determining if the
            position of the IRS was substantially justified, the court
            should take into account if the IRS has lost in courts of
            appeals in other circuits on substantially similar cases.
       Disclosure of Criteria for Examination Selection (Section
            353), requiring the IRS to include in Publication 1, ``Your
            Rights as a Taxpayer,'' the criteria and procedures used in
            selecting returns for audit.
       Disclosure of Records to National Archives (Section 373),
            allowing the IRS to disclose tax records to the National
            Archives for purposes of determining which records should be
            destroyed and which should be retained in the Archives.
       Study Regarding Confidentiality of Tax Return Information
            (Section 382), directing the Joint Committee on Taxation to
            establish a study of present protections for taxpayer privacy,
            the need for third parties to use tax information, and the
            ability to achieve greater levels of voluntary compliance by
            allowing the public to know who does not file tax returns.
       Taxes Made Payable to U.S. Treasurer (Section 374),
            requiring tax payments be made payable to the Treasurer, United
            States of America.
       Tax Court Jurisdiction (Section 313), increasing the
            jurisdictional limit under the small case procedures from
            $10,000 to $25,000.
       Explanation of Joint Liability (Section 351), requiring the
            IRS to insert a notice on all tax forms, publications, and
            instructions to alert taxpayers of their joint and several
            liabilities.
       Procedures Relating to Extensions of the Statute of
            Limitations by Agreement (Section 345), requiring the IRS to
            notify taxpayers on each occasion they are asked to consent to
            an extension of the statute of limitations, that they have the
            right to refuse to execute such consent or to limit their
            consent to particular issues.
       Low Income Taxpayer Clinic (Section 361), allowing the IRS
            to make grants for low income taxpayer clinics.
       Suspension of Statute During Disability (Section 322),
            suspending the statute of limitations for filing refund claims
            for an individual during any period the individual is unable to
            manage his or her financial affairs because of a physical or
            mental impairment expected to cause death or last at least
            twelve months and who does not have a spouse or other
            individual who is authorized to act on the taxpayer's behalf in
            financial matters.
       Increase in Overpayment Interest Rate (Section 332),
            eliminating the differential between the overpayment and the
            underpayment interest rates for noncorporate taxpayers.
       Limitation on Financial Status Audit Techniques (Section
            343), prohibiting use of financial status audit techniques
            unless the IRS has ``a reasonable indication that there is a
            likelihood of such unreported income.''
       Limitation on Authority to Require Production of Computer
            Source Code (Section 344), prohibiting the IRS from summoning
            third-party tax-related computer source code, with some
            exceptions.
       Notice of Deficiency Procedures (Section 347), requiring the
            IRS to include on every deficiency notice the date determined
            by the IRS as the last day on which the taxpayer may file a
            petition with the Tax Court.
       Refund Procedures (Section 348), allowing the refund of that
            portion of any overpayment determined by the Tax Court to the
            extent the overpayment is not contested on appeal.
       Directive Regarding Tip Reporting Program (Section 349),
            requiring the IRS to instruct its employees that they may not
            threaten a taxpayer with an audit in an attempt to coerce the
            taxpayer into entering into a Tip Reporting Alternative
            Commitment Agreement.
       Explanations of Appeals and Collection Process (Section
            354), requiring that an explanation of the appeals and the
            collection processes with respect to a proposed deficiency be
            included with the first letter of proposed deficiency sent to
            the taxpayer that allows the taxpayer an opportunity for
            administrative review.
       Jurisdictional Changes Regarding Estate Tax Refund Claims
            (Section 371), granting the U.S. Court of Federal Claims and
            the U.S. district courts jurisdiction to determine the estate
            tax liability (or refund) in actions brought by taxpayers that
            have elected the installment method of payment, provided
            certain conditions are met.
       Clarification of Authority of the Secretary Relating to
            Making Elections (Section 375), indicating that, except as
            otherwise provided, the Secretary may prescribe the manner of
            making the election by any reasonable means.
     B. H.R. 2676 Provision Not Supported by the AICPA
         Burden of Proof
         The AICPA does not support section 301 of H.R. 2676, which would
    shift the burden of proof from the taxpayer to the IRS in court
    proceedings in certain circumstances. If the provision were adopted, we
    are concerned agents might feel compelled to make overly broad document
    requests during examinations in order to have a complete file prepared
    for trial prior to the time the burden shifts to the IRS. Also, since
    the burden is to shift from the taxpayer to the IRS only if the
    taxpayer has ``fully cooperated,'' the provision might induce an agent
    to intentionally make overly broad document requests so that the
    taxpayer will not comply and, therefore, will not be deemed to have
    ``fully cooperated.'' Thus, we believe that the provision could
    actually result in more intrusive behavior against taxpayers by the IRS
    during the examination function.
         Since only a small percentage of tax disputes actually are
    litigated, it is our concern that the provision may potentially result
    in subjecting many taxpayers to unnecessary, burdensome, and intrusive
    behavior from the IRS, for the possible benefit of only a small number
    of taxpayers. We, therefore, oppose this provision.
     C. H.R. 2676 Provisions Supported by AICPA, But With Revisions or
            Additional Recommendations
         Privacy in Tax Matters
         The complexity of the Federal income tax laws and the often
    surprising ways in which income tax statutes and regulations may apply
    to taxpayers with moderate or sophisticated financial affairs means
    that millions of taxpayers must choose or elect to choose tax advisors.
    Advisors become privy to much private information about their clients
    in the course of forming recommendations; for individuals, this may
    include information about lifestyle, family, and habits; for
    businesses, it may include trade secrets and competitive factors.
         The recommendations or tax advice given to clients may be based in
    part on such private information and also may involve professional
    opinions and judgments, and even pure speculation as to the outcome of
    financial transactions and events over time. Taxpayers expect privacy
    and confidentiality in discussing tax matters with their advisors. As a
    matter of public policy, a taxpayer has the right to expect that if the
    tax advisor selected is authorized to practice before the IRS, all
    information the advisor has regarding the taxpayer's tax matters will
    be accorded the same protection of privacy, regardless of the specific
    professional classification of the advisor.
         Section 341 of House-passed H.R. 2676 affords taxpayers needed
    confidentiality protection in noncriminal proceedings before the IRS
    for tax advice from any Federally-authorized tax advisor to the same
    extent such advice would be protected under the attorney-client
    confidentiality privilege. The AICPA supports the section 341 proposal
    but we believe some modifications are needed to clarify the appropriate
    taxpayer protections. The language should be clarified to apply in
    court proceedings regarding matters previously before the IRS.
    Otherwise, the IRS would have an incentive to litigate these matters in
    court. Also, clarification is needed to ensure uniform application to
    all tax practitioners who are authorized under Federal statutes to
    practice before the IRS. The key in this situation is recognizing the
    disparate treatment of taxpayers based on their choice of tax advisor
    and providing them the needed privacy protections.
         Expansion of Authority to Issue Taxpayer Assistance Orders
         IRC section 7811 authorizes the Taxpayer Advocate to issue
    Taxpayer Assistance Orders (``TAOs'') if the Taxpayer Advocate
    determines that the taxpayer is suffering or about to suffer a
    significant hardship. The Code, regulations, and other administrative
    guidance set forth a standard of hardship requiring that the basis for
    seeking relief is ``undue'' or ``significant'' hardship. Section 342 of
    H.R. 2676 would expand the authority to issue TAOs by directing the
    Taxpayer Advocate to consider whether there is an immediate threat of
    adverse action, an unreasonable delay in resolving taxpayer account
    problems, the prospect that the taxpayer will have to pay significant
    fees for representation if relief is not granted, and irreparable
    injury or long-term adverse impact if relief is not granted. Further,
    if the IRS employee is not following applicable published guidance
    (including the Internal Revenue Manual), the Taxpayer Advocate shall
    construe the factors in the manner most favorable to the taxpayer.
         The AICPA supports this provision; however, we believe that the
    provision does not go far enough. The AICPA recommends that the
    Taxpayer Advocate's authority under section 7811 be further expanded by
    eliminating the qualifiers ``undue,'' ``significant,'' etc., thereby
    allowing the Taxpayer Advocate to take action when deemed necessary to
    assure that taxpayers do not suffer unfairly. This recommendation is
    consistent with Congress' goal that the Taxpayer Advocate take a more
    assertive role on behalf of taxpayers when addressing the IRS'
    shortcomings.
         Increased Damages for IRS Negligence in Collection Actions and for
            Wrongful Liens
         Section 312 of H.R. 2676 includes a provision which would allow
    taxpayers to recover up to $100,000 for damages incurred as a result of
    the IRS' negligence in unauthorized collection actions; to qualify for
    this relief, the taxpayer must exhaust all administrative remedies. The
    AICPA supports this provision, but is concerned that taxpayers may not
    be aware of all procedures to be followed to obtain relief. To protect
    taxpayer rights in this area, we recommend that when an assessment
    notice is mailed to a taxpayer, it be accompanied by a notice detailing
    the relief available and how to apply for it, along with a form for use
    in appealing the assessment. Further, although, the AICPA supports this
    provision, we believe that it, alone, is insufficient because it does
    not provide jurisdiction where the IRS has wrongfully filed tax liens.
    Accordingly, we recommend that this provision be amended to provide a
    cause of action against the IRS for wrongful liens and for federal tax
    liens filed in violation of the automatic stay provisions of the
    Bankruptcy Code (11 USC section 362).
         Offers in Compromise
         Section 346 of H.R. 2676 would require the IRS to develop and
    publish national and local allowance standards to ensure that taxpayers
    who enter into compromise agreements have adequate means to provide for
    their basic living expenses. In addition, the provision would require
    Treasury to prepare a statement describing the rights of taxpayers and
    the obligation of the IRS regarding offers in compromise. The statement
    is to (1) advise taxpayers to promptly notify the IRS of change of
    marital status or address and (2) notify taxpayers that if a compromise
    agreement is terminated due to actions of one spouse or former spouse,
    the IRS will, on application, reinstate the agreement for the spouse or
    former spouse who remains in compliance with the agreement.
         The AICPA supports this provision, but recommends the legislation
    be amended to reflect that revenue officers are encouraged, not just
    allowed, to use the discretion contained in the Internal Revenue Manual
    to permit variances from national and local standards when
    circumstances justify the variance. The standards should generally be
    followed but exceptions should be made if documented by the taxpayer or
    the IRS. In many cases, justifiable exceptions currently are not being
    allowed. We also recommend that legislation provide that the standards
    should be updated and adjusted for inflation annually and that the
    standards be adjusted by moving the cost of food from a national to a
    local standard, by localizing the cost of housing by zip code rather
    than by county, and by taking into account the taxpayer's income and
    the size of the family in determining the housing standard.
         In addition, we recommend that a study of the offer program be
    made to determine the reason for the declining acceptance rates, the
    increasing number of unprocessable offers, and other issues related to
    uniformity and fairness.
         Innocent Spouse Relief
         Section 321 of H.R. 2676 generally makes innocent spouse relief
    easier to obtain. It eliminates the understatement thresholds, requires
    only that the understatement be attributable to an erroneous (not just
    a grossly erroneous) item of the other spouse, and allows relief on an
    apportioned basis. The provision also grants the Tax Court both
    jurisdiction to review any denial of relief (or failure to rule) by the
    IRS and authority to order refunds if it determines the spouse
    qualifies for relief and an overpayment exists as a result of the
    spouse so qualifying. The provision requires the development of a form
    and instructions for use by taxpayers in applying for innocent spouse
    relief. The provision is to be effective for understatements with
    respect to taxable years beginning after the date of enactment.
         The AICPA supports this provision but urges that the relief being
    granted be made retroactive to apply to returns for the last three
    taxable years provided the specific issue has not already been
    addressed by a final court determination rendered with respect to the
    taxpayer.
         Elimination of Interest Differential on Overpayments and
            Underpayments
         Section 331 of H.R. 2676 would eliminate the differential in
    interest rates for overpayments and underpayments. The AICPA supports
    this provision, with additional recommendations, as set forth later in
    our discussion of various issues concerning interest.
         Limitation on Failure to Pay Penalty
         Section 376 of H.R. 2676 limits the failure to pay penalty to a
    maximum of 9.5% while an installment agreement is in effect. H.R. 2292
    would have eliminated the penalty completely while the agreement
    remains in effect. While we believe it appropriate to, at a minimum,
    limit the penalty, we feel the provision in H.R. 2676 does not go far
    enough and instead support the provision in H.R. 2292 that would impose
    no penalty while the installment agreement is in effect.
         Review of Penalty Administration and Development of
            Recommendations
         Section 381 of H.R. 2676 would require the Joint Committee on
    Taxation to review the administration and implementation of penalty
    reform recommendations made by Congress in 1989 and provide a report to
    the House Committee on Ways and Means and the Senate Committee on
    Finance, containing legislative and administrative recommendations to
    simplify penalty administration and reduce taxpayer burden. The AICPA
    supports this provision; however, we believe the review and recommended
    legislation should also address all other penalty issues, particularly
    penalty assessment and abatement practices of the IRS.
         The IRS assesses numerous penalties, thus requiring taxpayers to
    spend a great deal of time documenting reasonable cause in order to
    have the penalties abated. The process is both time consuming and
    expensive. Through reasonable cause and because of IRS errors, however,
    the IRS abates up to 50 percent of some types of proposed penalties.
    Unfortunately, taxpayers without representation are often unaware of
    the opportunities for abatement. It may be possible to achieve a more
    cost-effective and equitable outcome by establishing criteria for
    reducing assessments that are likely to be abated.
         To reduce the burden on both the IRS and taxpayers, we recommend
    that the IRS establish safe harbor provisions for a variety of
    penalties which would automatically be deemed to be reasonable cause
    for abatement. This could be confined to late filing, late deposit, and
    certain information return related penalties. The object would be to
    concentrate on those penalties that are regularly assessed and abated.
    Safe harbor provisions could take the form of:
       No penalty assessments for an initial occurrence; however,
            the taxpayer would receive a notice that a reoccurrence will
            result in a penalty;
       Automatic non-assertion or abatement based on a record of a
            certain number of periods of compliance; or
       Voluntary attendance at some type of educational seminar on
            the issue in question, as the basis for non-assertion or
            abatement.
         Use of the safe harbor approach would encourage and create a
    vested interest in compliance, since a good history of compliance could
    automatically result in relief. Additionally, the likelihood of future
    abatements would diminish if the taxpayer has a history of non-
    compliance. Furthermore, a system of automatic abatements would reduce
    the time spent by the IRS and taxpayers on proposing assessments,
    initiating and handling correspondence, and subsequently abating a high
    percentage of penalties. The ability to abate a penalty for a
    reasonable cause other than those used for automatic abatements would
    exist; however, reasonable cause abatements requiring independent
    evaluation may be reduced.
         Cataloging Taxpayer Complaints of IRS Misconduct
         Section 372 of H.R. 2676 would require the IRS to establish
    procedures for cataloging and reviewing taxpayer complaints of
    misconduct by IRS employees. The AICPA supports such procedures. We
    have reservations, however, about how such complaints should be
    registered with the IRS.
         We are concerned that establishing yet another toll-free telephone
    number, given the IRS' limited resources and its current inability to
    handle the volume of calls it receives on its taxpayer assistance toll-
    free lines, could drain resources and further erode the level of
    service provided. As an alternative, an electronic means of registering
    complaints might be considered to minimize the burden on the IRS.
    Further, a better approach might be to use existing avenues for
    registering complaints, such as the Problem Resolution Program or the
    IRS Inspection Service, that currently receive, handle, and catalog
    such complaints; however, the public should be made aware of the
    existence of such forums and of the procedures for filing complaints.
    Taxpayers should also receive a positive response, in some fashion,
    from the IRS indicating the resolution of their matter. Adequate
    safeguards should be added to protect taxpayers from reprisals when a
    complaint has been filed.
         Procedures Involving Taxpayer Contacts and Interviews
         Section 352 of H.R. 2676 would require that, before conducting an
    initial in-person interview relating to the determination of tax, IRS
    personnel must: (1) explain to the taxpayer the audit process and the
    taxpayer's rights under the process; (2) inquire as to whether the
    taxpayer is represented by an individual authorized to practice before
    the IRS; (3) explain that the taxpayer has the right to have the
    interview take place at a reasonable location, and that the location
    does not have to be the taxpayer's home; (4) state the reasons why the
    taxpayer's return was selected for examination; and (5) provide the
    taxpayer with a written explanation of the applicable burdens of proof
    on taxpayers and on the IRS. The section also would require that,
    before conducting an in-person interview relating to the collection of
    any tax, IRS personnel must explain to the taxpayer the collection
    process and the taxpayer's rights under the process. The AICPA supports
    these provisions.
             a. Taxpayer Interviews
         The AICPA also recommends an additional provision concerning
    taxpayer interviews, to inform taxpayers of their rights to
    representation. IRC section 7521 specifically states that ``if the
    taxpayer clearly states to an officer or employee of the IRS at any
    time during any interview . . . that the taxpayer wishes to consult
    with an attorney, certified public accountant, enrolled agent, enrolled
    actuary . . . such officer or employee shall suspend such interview
    regardless of whether the taxpayer may have answered one or more
    questions.'' We are aware of many instances where the IRS appeared to
    demand that a taxpayer personally appear at an initial examination
    meeting, and the taxpayer was not informed of the right to have a
    representative appear on his or her behalf. In most instances, an
    examination can be handled in its entirety by a representative. We
    believe stronger legislation is needed to ensure that taxpayers are
    notified of their rights under section 7521 and allowed appropriate
    representation.
             b. Place of Examination
         Currently, IRC section 7605(a) provides that the ``time and place
    of examination . . . shall be such time and place as may be fixed by
    the Secretary and as are reasonable under the circumstances.'' Treas.
    Reg. section 301.7605-1 provides general criteria for the IRS to apply
    in determining whether a particular time and place for an examination
    are reasonable under the circumstances. The regulation also instructs
    that sound judgment should be exercised in applying these criteria and
    that there should be a balancing of the convenience of the taxpayer
    with the requirements of sound and efficient tax administration.
         Unfortunately, the IRS placed unnecessary limitations on their
    field personnel through the Internal Revenue Manual. Parts 320:(1) and
    (2) of IRM [4235], the Techniques Handbook for In-Depth Examinations,
    provide that the place of examination will be established consistent
    with the regulation and, with few exceptions, the examination of the
    records should be made at the taxpayer's place of business. This
    guidance also indicates that consideration should be given to
    conducting the examination at the IRS office or the representative's
    office only if the taxpayer's place of business falls short in some
    respect relevant to conducting an examination. This often places an
    undue burden on small taxpayers with limited space. It also may result
    in a denial of a taxpayer's privacy if the taxpayer does not want
    others to know an audit is being conducted. Thus, the IRM guidelines
    are inappropriate in certain circumstances; the place of examination
    standard needs to be clarified legislatively. We recommend that IRC
    section 7605(a) be amended to state that the ``time and place of
    examination . . . shall be such time and place as requested by the
    taxpayer and as are reasonable under the circumstances.''
             c. Notice of Examination
         The IRS initially contacts taxpayers either by telephone or letter
    to inform them of an upcoming examination. When the initial contact is
    made by telephone, it is followed by a letter to present the taxpayers'
    rights in written form. The process of allowing initial contacts to be
    made by telephone, however, creates many problems in ensuring taxpayers
    their rights. The revenue agent may request an appointment with
    taxpayers in initial calls. As previously noted, sometimes taxpayers
    believe they must personally be at the appointment and do not
    understand that they have a right to representation.
         In order to protect the rights of taxpayers, we recommend that IRC
    section 7605 be amended to require that the initial notification of an
    examination be made in writing. This requirement should extend to all
    examinations. The rights accorded to taxpayers under IRC section 7521
    (explanation of examination process, right to be represented, etc.)
    should attach when taxpayers receive a notice of examination.
     D. H.R. 2292 Provision Supported by AICPA But Not in H.R. 2676
         Safe Harbor for Qualification for Installment Agreement
         Section 311 of H.R. 2292 created a safe harbor for paying taxes by
    means of an installment agreement, provided the taxpayer does not owe
    more than $10,000, has not failed to file any tax return in the prior
    five years, and has not previously used this safe harbor provision. The
    AICPA supports this provision and recommends its adoption.
     E. Additional AICPA Recommendations
         The AICPA recommends that any taxpayer rights legislation also
    address the following issues:
         Consistent Standards for Raising an Issue in an IRS Examination
         Treasury Department Circular No. 230, IRC section 6694, and
    professional ethics guidance of the AICPA and the American Bar
    Association (``ABA'') provide that tax advisors may not recommend a
    position in a return that lacks a realistic possibility of being
    sustained on its merits. A position is considered to have a realistic
    possibility of being sustained on its merits if a reasonable and well-
    informed analysis by a person knowledgeable in the tax law would lead
    such a person to conclude that the position has approximately a one in
    three, or greater, likelihood of being sustained on its merits.
         Although the AICPA and the ABA prefer not to assign mathematical
    probabilities to the realistic possibility standard, nevertheless, both
    professions subscribe to the standard. Unfortunately, the IRS has not
    chosen to instruct revenue agents to apply the same ``realistic
    possibility'' standard before raising issues in examinations.
         For example, in a recent IRS examination, a revenue agent asserted
    in his Revenue Agent's Report (``RAR'') that a taxpayer corporation
    must switch from the cash method of accounting to the accrual method of
    accounting based on an IRS Industry Specialization Paper for Health
    Care. Although the taxpayer was a personal service corporation (with no
    inventories) that is entitled by statute (IRC section 448) to be on the
    cash method of accounting, the revenue agent did not feel constrained
    from raising the method of accounting issue. When the taxpayer
    protested this issue to the Appeals Office, the Appeals officer
    consulted with the industry coordinator and dropped the issue. The
    taxpayer incurred the expense of protesting the revenue agent's
    adjustment to the Appeals Office even though there was no realistic
    possibility of the IRS prevailing on the issue.
         As a matter of fairness and consistency, we recommend that the IRS
    require revenue agents to have concluded that there is at least a
    realistic possibility of success before proposing an adjustment against
    a taxpayer. One method of ensuring that a position contained in a RAR
    has a realistic possibility of success could be to require that each
    RAR be signed by an individual at the group manager or higher level,
    attesting to the fact that the proposed adjustments set forth therein
    meet the realistic possibility standard. Implementing a policy such as
    this would be consistent with tax administration principles for the
    IRS, set forth in Rev. Proc. 64-22, 1964-1 C.B. 689

    . Rev. Proc. 64-22 provides, in part:
            The Service . . . has the responsibility of applying and
            administering the law in a reasonable, practical manner. Issues
            should only be raised by examining officers when they have
            merit, never arbitrarily or for trading purposes. At the same
            time, the examining officer should never hesitate to raise a
            meritorious issue. It is also important that care be exercised
            not to raise an issue or to ask a court to adopt a position
            inconsistent with an established Service position.
         Timely Case Resolution
         Currently, there is no incentive for the IRS to complete an
    examination within the statutory period (without regard to extension).
    Furthermore, taxpayers faced with the prospect of a notice of
    deficiency are, in essence, forced to grant extensions of the
    limitations period as a matter of course. This practice defeats the
    general purpose of a limitations period: finality.
         Too frequently the Internal Revenue Service initiates an
    examination of a taxpayer's return when there is insufficient time
    remaining within the statue of limitations (without regard to
    extensions) to complete the examination and make a correct
    determination of the taxpayer's liability. In such a case, the IRS must
    either seek a consent to extend the statute of limitations or issue a
    statutory notice of deficiency. Ultimately, the choice falls upon the
    taxpayer; if the taxpayer extends the assessment period, a more
    accurate determination can be made; if the taxpayer fails to extend the
    assessment period, a notice of deficiency may be issued. In such a
    case, the notice of deficiency may be speculative or arbitrary, because
    the IRS failed to complete a thorough examination of the taxpayer's
    books and records.
         In response to a notice of deficiency, a taxpayer has two options:
    file a petition for redetermination with the United States Tax Court or
    pay the deficiency. Either alternative can result in substantial
    expense to the taxpayer. Furthermore, a notice of deficiency receives a
    presumption of correctness before the Tax Court. As a result of the
    consequences of the issuance of a notice of deficiency, taxpayers
    generally are forced to agree to an extension of the limitations
    period.
         In complicated audits, such as those involving large corporate
    returns, it may not be feasible for the IRS to complete an examination
    within the statutory period. Accordingly, in such cases, it may be
    reasonable for the government to request a consent to extend the
    statute. However, in audits of individual taxpayers, the government
    should complete its examination in the time prescribed by statute,
    without the need for extensions. Administrative or legislative changes
    should be made to provide a disincentive to the IRS for seeking
    extensions.
         Safeguard for Divorced or Separated Spouses and Married Persons in
            Community Property States
         Taxpayer Bill of Rights 2 (``TBOR2'') provided for the disclosure
    of collection activities with respect to joint returns. However, we
    believe additional safeguards are needed to ensure the equal and fair
    treatment of spouses who are separated, divorced and/or have community
    property issues compounding their tax problems. The root of the
    collection problem is in the examination procedures that do not require
    both spouses be involved in an audit. We recommend legislation be
    enacted that would require, at the initiation of an examination, the
    absent spouse acknowledge by signature whether the other spouse may, or
    may not, represent the absent spouse (as well as procedures to deal
    with situations where a spouse refuses to sign such a statement or
    cannot be located). If both parties are aware of, or participate in the
    examination, then no one should be caught unaware of the liability and
    the resulting collection process.
         Elimination of Interest Differential on Overpayments and
            Underpayments and Interest Netting
         Currently, there is a differential between the interest rate a
    taxpayer pays on a deficiency and the interest rate the government pays
    to a taxpayer on an overpayment; the differential rate can vary from 1
    percent to 4.5 percent. Situations often arise when a taxpayer is
    indebted to the government at the same time that the government is
    indebted to the taxpayer. Absent netting, a taxpayer who owes the
    government the same amount that the government owes the taxpayer would
    incur an interest obligation in favor of the government.
         As noted earlier, section 331 of H.R. 2676 would eliminate the
    differential in interest rates for overpayments and underpayments. On a
    ``going-forward'' basis, the elimination of all interest rate
    differentials for purposes of determining interest on overpayments and
    underpayments effectively eliminates the economic detriment for some
    taxpayers who are both creditors and debtors during the same period of
    time. (However, it generally does not eliminate it for individuals who
    will be taxed on interest income and not be allowed a deduction for
    interest expense.)
         With interest rate equalization, there is not an economic
    detriment for some taxpayers caused solely by the timing of payment and
    refunds (for interest periods after date of enactment). In addition,
    the use of a single rate will ease the administrative burden of the
    IRS, encourage prompt payment of even partial deficiencies, and
    simplify the overall computation process. It is certainly a first step
    in the overall simplification process.
         Given the recent court decisions in cases such as The May
    Department Stores Co. v. United States, 36 Fed. Cl. 680, 96-2 USTC
    Para. 50,596 (Nov. 4, 1996) and Fluor Corporation and Affiliates v.
    United States, 97 TNT 162-9, however, the IRS should also take this
    opportunity to review the overall interest scheme and analyze the
    existing rules given the ``use of money'' principles long advocated by
    taxpayers and the courts. In addition, for interest accruing after 12/
    31/86 and before date of enactment, IRS should allow taxpayers to
    provide supportable interest computations which reflect interest
    netting to eliminate the economic detriment to such taxpayers currently
    resulting from the existing rate differential of up to 4\1/2\%.
         The Service's current policy with respect to interest netting is
    fundamentally unfair, both because of the manner in which the Service
    makes interest netting calculations and also because of the Service's
    inconsistent application of netting principles, resulting in similarly
    situated taxpayers receiving disparate treatment.
         Interest provisions in the Code are intended to compensate the
    government or the taxpayer for the use of the money. (Rev. Proc. 60-17,
    1960-2 C.B. 942) Interest applies only if there is an amount that is
    both due and unpaid. (See, e.g., IRC Sec. 6601(a); and Avon Products,
    Inc. v. United States, 78-2 U.S.T.C. (CCH) Para. 9821 (2d Cir. 1978).)
    To the extent there is a ``mutuality of indebtedness'' between the
    taxpayer and the government (i.e., to the extent the government and the
    taxpayer owe each other the same amount of money over the same period
    of time), there is no unpaid balance and, therefore, no amount on which
    interest should accrue.
         The Service's current policy (See Treas. Reg. *301.6402-1.) of
    only netting outstanding overpayments against outstanding liabilities
    for both computational and collection purposes is unfair to taxpayers
    that promptly pay contested amounts of tax and, therefore, have no
    ``outstanding'' liabilities. This is illustrated by the recent case of
    Northern States Power, in which the company's prompt payment of alleged
    deficiencies cost it $460,000 more in interest than it would have had
    to pay if it had delayed in making the payment. (See Northern States
    Power Co. v. United States, 73 F3d 764 (8th Cir. 1996), cert denied 117
    S.Ct. 168.)
         Finally, and of significant import, despite the Service's stated
    policies toward interest netting (i.e., that netting can legally occur
    when both deficiencies and overpayments are outstanding and unpaid,
    see, e.g., Notice 96-18), netting continues to be performed on an ad
    hoc basis. A revenue agent's decision to deny a taxpayer netting is
    supported and justified by language in the Eighth Circuit's opinion in
    Northern States Power, which states that such netting is discretionary.
    However, the Service's discretionary application of the law without any
    formal or enforced guidelines, policies or procedures is inherently
    unfair to taxpayers. The virtual absence of any clear legal standards
    for interest netting also is unacceptable from a systemic standpoint,
    because it affords the IRS unfettered power to convert a taxpayer from
    a creditor to a debtor, with the size of a potential interest debt
    quickly becoming astronomical.
         Further, viewing comprehensive netting as entirely within the
    discretion of the Service interjects serious fairness concerns into the
    settlement process. The Service has used the netting issue as a
    bargaining chip in negotiations to extract concessions from taxpayers
    on issues under examination. This inappropriately distances
    negotiations from the merits of the underlying issues. It also has the
    inappropriate effect of using netting (or the absence of netting) as a
    tool to raise revenue, rather than as a means to compensate for the use
    of money.
         The Service counters taxpayer criticism of unfairness with the
    argument that netting in all situations is not administratively
    feasible. While comprehensive interest netting raises concerns of
    administrative feasibility, more progress must be made in balancing
    these concerns with taxpayer fairness.
         For these reasons, we recommend that Congress mandate that: (1)
    within 90 days, guidance be issued to implement comprehensive netting
    in all situations; and (2) as an interim measure, guidance be issued to
    require the Service to net comprehensively at the request of the
    taxpayer, provided the taxpayer furnishes the Service with relevant
    information and interest computations. We also recommend that the
    mandated guidance in this area be issued in the form of proposed
    regulations, so that all interested persons will have an opportunity to
    comment on the technical details.
         By ``comprehensive netting'' we mean netting for all interest
    accruing after December 31, 1986 for all types of taxes and all years
    (open or closed) to the extent necessary to compute interest accurately
    for a refund or an assessment in an open year. The interim
    recommendation is similar to the elective approach previously
    recommended by the House Ways and Means Subcommittee on Oversight, as
    well as the approach of a draft revenue procedure submitted by the
    Compliance Subgroup of the Commissioner's Advisory Group at its January
    1995 meeting.
         As stated by House Committee on Ways and Means Chair Bill Archer
    in his letter to Treasury Secretary Rubin dated September 26, 1996:
    ``In my view, Congress has given Treasury and the IRS both a clear
    mandate and clear authority to implement comprehensive procedures to
    net underpayments and overpayments before applying differential
    interest rates.'' Chairman Archer concluded that interest netting is a
    problem ``Congress has long expected would be resolved administratively
    and I certainly hope that Treasury will reexamine its position on this
    issue.'' No further delays are acceptable. The time has come for the
    IRS to implement these procedures.
     Detailed Interest Computations
         The AICPA is of the opinion that the IRS should provide interest
    computations, as a matter of course, to taxpayers when adjustments
    involving interest are made. Currently, a taxpayer only receives a
    notice showing the amount of tax and the interest due on such amount.
    IRC section 7522, which is applicable for notices mailed on or after
    January 1, 1990, requires that such notices describe the ``basis for,
    and identify the amounts (if any) of, the tax due, interest, additional
    amounts, additions to the tax, and assessable penalties included in
    such notice.'' At the present time, the starting date for the interest,
    the principal amount upon which such interest is based, and the rate
    charged on such amount are not provided to taxpayers as part of the
    notice procedure.
         We believe the ``basis for'' description in the notice should
    apply to interest computations and should include interest rates and
    the dates for which the interest applied, the dates and amount of
    payments and credits, and the interest compounding method. With this
    information, taxpayers and practitioners will be able to verify the
    accuracy of interest computations and expeditiously resolve any
    discrepancies. We recognize that detailed interest computations could
    result in a burden to the IRS. Therefore, an exception could be made
    for de minimis interest amounts such as less than $50 or $100. If
    providing this information still would constitute a significant burden
    on the IRS, at a minimum, this information should be made available to
    taxpayers upon request and notice of the availability of the
    information should be communicated to taxpayers.
     Payroll Tax Collection
         The Taxpayer Bill of Rights 2 made a number of changes in the
    procedures under IRC section 6672 for the assessment against and
    collection of unpaid payroll taxes from owners, officers, and others
    known as ``responsible persons.'' We recommend additional legislation
    be enacted to prohibit the IRS from attempting to collect the trust
    fund recovery penalty (also known as the 100 percent penalty) from any
    alleged responsible person during the pendency of any administrative
    proceeding or judicial action brought to contest the merits of the
    trust fund recovery penalty liability.
     Disclosure Changes (PIN/POA)
         IRS statistics indicate approximately 50 percent of all individual
    returns are prepared by paid preparers. We believe, especially because
    of the increasingly complex nature of the tax law, that taxpayers have
    a right to expect that the hiring of a preparer will avoid personal
    inconvenience and unnecessary loss of their own productive time in
    having their return accepted in the processing phases by the IRS. Our
    experience and IRS records show that the processing of notices during
    the return perfection and processing phase is a significant workload
    factor. Many practitioners and taxpayers, unaware of the strict
    enforcement of the disclosure rules, attempt to resolve these notices
    by having a preparer ``do what the preparer is being paid to do''--i.e,
    prepare the return, solve any processing problems, and appropriately
    interact with the Service.
         We believe changes in the disclosure rules would reduce taxpayer
    burden, reduce IRS correspondence in dealing with ineffective contacts
    by preparers without a power of attorney, and support the taxpayer's
    rights to be represented. Specifically, we recommend that third parties
    be allowed to discuss a notice and its related account with the IRS by
    use of a Personal Identification Number (``PIN'') on the notices sent
    to taxpayers.
         The use of a PIN was under active discussion between the AICPA Tax
    Practice and Procedures Committee and the IRS in the past, but we were
    unable to reach agreement with the Service regarding implementation of
    such a procedure.
         The ability of a practitioner, parent, child, or neighbor to
    assist a taxpayer who does not understand, see well, hear well, etc.,
    in handling his or her business affairs with the IRS immediately (i.e.,
    a telephone reply or discussion), would reduce the time spent,
    frustration, and cost for the IRS, taxpayers, and preparers. Telephonic
    interaction with the IRS is the future of ``one-stop'' service and
    efficiency in a modern-day tax system. Two-way conversations between
    taxpayers, their representatives, and the IRS discussing notices,
    payments, penalties, errors, missing information, etc. must be
    distinguished from representing taxpayers before the Service and
    entering into binding agreements on their behalf, for which there is a
    need for a formal power of attorney.
     Consistency When Implementing IRS Policies
         Often, the IRS will institute policies designed to assist
    taxpayers or clarify the application of particular Code sections.
    However, when the Service institutes policies that impact taxpayers, it
    can be unfair when those policies are applied only to some taxpayers.
    In certain instances, the policies are designed to apply only to
    particular taxpayers, and those instances are not at issue. But, when a
    benefit is intended to apply to a taxpayer, and through ignorance or
    capriciousness, an agent fails to give the taxpayer the benefit of
    those policies, it is detrimental to both the taxpayer and tax
    administration. One such example is the IRS' inconsistent application
    of interest netting principles. Other examples exist. On June 3, 1996,
    the Assistant Commissioner (Examination) issued a memorandum to all
    regional compliance officers regarding overly broad Information
    Document Requests (``IDRs''). The memorandum was, in part, in response
    to complaints from taxpayers and practitioners about revenue agents
    initiating an examination and immediately requesting an array of
    documents, many of which prove to be irrelevant to the examination. The
    well-reasoned memorandum of the Assistant Commissioner (Examination)
    set forth a standard for issuing document requests: an IDR should be
    issued for specifically identified issues or specifically identified
    reasons. The memorandum made it clear that ``kitchen sink'' or
    ``boxcar'' IDRs are inappropriate.
         The experience of many tax practitioners is that the guidance
    issued by National Office is sometimes disregarded and, in this
    instance, many agents are unaware of the memorandum. As a result,
    taxpayers continue to receive these overly broad, burdensome document
    requests. From the standpoint of an advocate, it is imprudent to bypass
    the revenue agent, and taxpayers thus frequently comply with these
    broad IDRs. As a general principle, the Service must strive to
    communicate its policies more uniformly throughout the organization.
    Policies should be meaningful, and there should be consequences when an
    agent or Appeals officer disregards a policy set forth by the National
    Office.
     Notification of Intention to Offset
         Current IRS procedures require that before any overpayment is
    refunded or credited to estimated tax, as requested by the taxpayer,
    there must be a review of a taxpayer's account for any balances due. If
    a balance due is showing for the taxpayer on another account or module,
    the overpayment will be offset and the remaining balance, if any,
    refunded or credited. The taxpayer is not given an opportunity to
    verify the correctness of the IRS data before this action is taken. We
    believe the IRS should provide taxpayers with notification of its
    intention to offset an overpayment from one account to a balance due on
    another account or module. We recognize the IRS' authority to credit
    amounts due the taxpayer to any other liability of the taxpayer, in
    accordance with IRC section 6402. However, the taxpayer should be
    notified of such credit application before the action is taken. In many
    instances, the balance due is erroneous or subsequently abated. Also,
    the credit application may have serious ramifications for the taxpayer,
    particularly an individual or a smaller business that cannot afford to
    engage a representative to deal with the IRS on such issues.
         For example, a taxpayer may elect to apply an overpayment of
    income tax from one year to the next as an estimated tax payment. This
    overpayment is sufficient to cover the taxpayer's first quarter
    estimate for the subsequent year. The taxpayer, a sole proprietor, may
    have been assessed an employment tax penalty on a given quarter. The
    penalty is due to the fact that a proper liability breakdown was not
    included with the Form 941. Once this information is supplied by the
    taxpayer, the penalty will be abated.
         Under the IRS' current system, the taxpayer's overpayment of
    income tax will be applied to the outstanding assessment for the
    employment tax penalty. The remaining amount applied to the first
    quarter estimated tax payment for the subsequent year may then be
    insufficient to cover the required quarterly payment and cause the
    taxpayer to be subject to an estimated tax penalty on the subsequent
    year. If the employment tax penalty is subsequently abated, the amount
    credited to the account will then be refunded to the taxpayer from the
    employment tax account; the estimated tax penalty will not be abated
    automatically.
         To remedy this and similar situations, we recommend that taxpayers
    be notified prior to the application of overpayments to balances due on
    other accounts or modules. There may be other actions in progress to
    rectify such accounts or significant mitigating factors under
    consideration by another area within the IRS. The application of such
    overpayments, without providing the taxpayer an opportunity to address
    the situation, is a denial of ``due process'' and may create
    unnecessary complications and frustrations for both the IRS and
    taxpayers.
     Protection from Retroactivity
         The Taxpayer Bill of Rights 2 (``TBOR2'') provided relief from
    retroactive application of Treasury Department regulations by providing
    that temporary and proposed regulations must have an effective date no
    earlier than the date of publication in the Federal Register or the
    date on which any notice substantially describing the expected contents
    of such regulation is issued to the public, with some limitations. The
    revision also allowed Treasury to provide that taxpayers may elect to
    apply a temporary or proposed regulation retroactively from the date of
    publication of the regulation. However, to date, Treasury has not
    provided taxpayers with the option of retroactive application.
         In addition, the changes by TBOR2 did not address the issue of
    proposed regulations that are not finalized in a timely manner. For
    example, many proposed regulations have existed for ten years or more
    and have yet to be finalized. Even with the TBOR2 changes, such changes
    would apply retroactively to the date the proposed regulations were
    first issued. We recommend a time limit of no more than eighteen months
    be added for the period between the date proposed regulations are
    issued and the date they are finalized, for purposes of retroactive
    application.
     Rounding
         We believe requiring the rounding of numbers on most tax returns
    would decrease the number of errors in tax return preparation and
    processing. It could greatly enhance efficiency in processing tax
    returns and does not affect the rights of individual taxpayers.
     Technical Advice in Employee Plans and Exempt Organizations
         Currently, if technical advice is sought with regard to an exempt
    organization, and the determination by the National Office is in favor
    of the Service as to a tax-related issue (i.e., liability for or amount
    of tax), Examination is bound by that determination; however, the
    taxpayer may take the issue to Appeals. If already in Appeals (or once
    appealed), Appeals may settle the issue, but must accept the underlying
    legal analysis of the National Office. In other words, Appeals could
    settle the issue based on litigation risks, but could not ``give away''
    the issue. However, if technical advice is sought with regard to an
    exempt organization and a determination is made by the National Office
    that the entity does not qualify as an exempt organization (or has
    engaged in activity that should result in the termination of the
    entity's exempt status), both the Examination Division and Appeals
    Office of the Service are bound by this decision.
         Generally, technical advice may be reviewed on appeal, and the IRS
    Appeals Office may settle an issue, regardless of technical advice. The
    reason for this is that Appeals specializes in, and is trained to look
    at factors other than the ``Service's position'' as to an issue.
    Appeals is intended to give the issue a ``fresh look'' and can make
    independent determinations. One important factor considered in Appeals
    is the risk of litigation. Generally, issues may be settled for some
    dollar value despite the fact that one (or both) of the parties
    believes that its position is correct. However, the unique rules
    established in the limited circumstances of EP/EO deny taxpayers a
    ``fresh look'' other than by a court, which necessarily involves the
    expenses of litigation. We recommend that the legislation address this
    issue.
     IRS ``Test'' Programs
         In an effort to enhance taxpayer service, the IRS has implemented
    several test programs or other programs that are limited to select
    groups of taxpayers. Generally, it is the intent of the Service to
    expand test programs to other groups of taxpayers. Unfortunately,
    expanding the scope of taxpayers who may avail themselves of some of
    these programs often takes years, if ever. Some of these programs are
    naturally suited to be expanded into other areas.
         For example, in Fiscal Year 1996, the Service began a one-year
    test of mediation with certain types of cases in the Coordinated
    Examination Program. The Service has now announced that the ``test''
    will continue for another year. To the extent that mediation has been
    used, it has been an unmitigated success. Furthermore, there are other
    taxpayers and subject matters that would be particularly well suited to
    mediation--such as valuation cases--that could benefit from the
    expansion of the mediation program rather than continuation as a
    ``test.'' Other programs that could be evaluated for expedited
    expansion include accelerated issue resolution, early referral, and the
    delegation of more settlement authority to the Examination Division.
     Allowing Taxpayers in ``Small Cases'' in Tax Court to be Represented
            by CPAs
         The vast majority of small cases in Tax Court are ``pro se.'' In
    such instances, the taxpayers do not have the benefit of representation
    and the Tax Court, in trying to determine a just resolution of the tax
    controversy, does not have the benefit of having the facts and
    applicable tax authorities presented to it by an individual
    knowledgeable in the area.
         The need for greater access to representation of taxpayers in the
    Tax Court apparently is recognized by the court itself, by permitting
    students enrolled in certain tax clinic programs to practice before the
    Tax Court. The need also is apparently recognized by the National
    Commission on Restructuring the Internal Revenue Service and the
    drafters of the H.R. 2676, based on the proposal to fund tax clinics
    where students may practice before the Tax Court.
         To provide taxpayers with greater access to representation with
    respect to their controversies, it is recommended that legislation be
    enacted to designate all CPAs as being authorized for small case
    practice before the Tax Court.
        title iv--congressional accountability for the internal revenue
                                    service
     Coordinated Congressional Oversight
         H.R. 2676 calls for two joint hearings a year, to be attended by
    representatives of the six Congressional committees/subcommittees
    having oversight responsibility with respect to the IRS. One of the
    purposes of the proposal is to eliminate overlapping investigations and
    inquires. Nevertheless, there is no language in H.R. 2676 that would
    reduce or limit the number of hearings each of the six committees/
    subcommittees can hold. Some restrictions should be provided so that
    the result of the two new joint hearings is not an increase, but rather
    a decrease, in the overall number of hearings with respect to the IRS.
     Tax Law Complexity
         The problem of tax law complexity originates with complex
    statutes, not administration. The IRS can be restructured over and over
    again but the basic frustration taxpayers experience with the IRS will
    remain until the issue of complexity has been addressed.
         At the National Commission's November 8, 1996 hearing, we
    presented a detailed discussion of the complexity issue and the AICPA
    Tax Complexity Index; we would be happy to provide you with a copy of
    that testimony at your request. Further, in the AICPA's overall
    recommendations to the National Commission, we submitted the following
    proposals to address the complexity problem:
       Establish a Complexity Analysis Process for Hearings.
            Hearings on all tax proposals before either the House Ways and
            Means or the Senate Finance Committees should require
            disclosure of the proposals' effect on complexity. Analysis of
            such effects by the staffs of both the Joint Committee on
            Taxation and the Tax Legislative Counsel should be published
            and discussed. The staff of the Joint Committee on Taxation
            should be required to adopt a methodology for evaluating the
            complexity aspects of a proposal and to discuss the results in
            any hearing pamphlets or other published documents. In
            addition, simplification options, with respect to the proposals
            under consideration at the hearing, should be discussed.
            Testimony by representatives of the Treasury Department should
            include an independent analysis of the effect of any proposals
            on complexity, as well as evaluation of the published comments
            of the staff of the Joint Committee on Taxation.
       Establish a Complexity Review Process for Legislative
            Markup. All proposals considered during the legislative markup
            process should also be evaluated to determine their effect on
            complexity. If the markup begins with acceptance of a
            Chairman's Mark or other basic document, a complexity analysis
            should be required for each item in the mark. Amendments must
            include analyses of their effect on complexity before being
            considered. At each step, the staff should be prepared to offer
            alternatives to the items included in the mark or offered as
            amendments that could make greater contributions to
            simplification.
       Study Revising the Legislative Drafting Process. The staffs
            of the House and Senate Legislative Counsel's Offices should be
            instructed by the members to undertake a study of drafting
            procedures and techniques that would contribute to
            simplification, such as requiring IRS input on complexity
            (including comments re administrative complexity) during the
            drafting process and using horizontal drafting. Candidates for
            horizontal drafting include the constructive ownership rules
            and the provisions governing pass-through entities and their
            owner or beneficiaries. The respective Legislative Counsel's
            Offices should be required to publish the results of their
            study within a reasonable period of time.
       Establish a Complexity Review Process for Regulatory Action.
            The Treasury Department and the IRS should be required to
            include an analysis of the effect of any proposed, temporary,
            or final regulations on complexity, along with a discussion of
            alternative approaches.
       Mandate Periodic Simplification Initiatives. Appropriate
            governmental staff (Treasury, IRS, Ways and Means, Finance,
            Legislative Counsel, and/or Joint Committee on Taxation) should
            be required periodically to publish simplification initiatives
            that could form the basis of future legislation. Such
            initiatives could include:
               A review of the Internal Revenue Code for
            ``deadwood'' provisions;
               A review of the Code and regulations for complex
            rules that should be withdrawn or substantially simplified;
               Analyses of various rules to determine where
            horizontal consistency is lacking (proposals to enhance
            horizontal consistency would be expected) and development of a
            tax term glossary to ensure consistent use of terms across
            different sections of the Code; and,
               Analyses of specific subjects in the Code to
            determine the level of complexity present and to make proposals
            for the reduction of complexity.
         Although section 422 of H.R. 2676 constitutes some attempt to
    address the complexity problem, it does not go far enough. We urge you
    to give serious consideration to the proposals set forth above. At a
    minimum, we ask you to adopt section 422 of H.R. 2292 instead of the
    much weaker section 422 of H.R. 2676. H.R. 2676 requires a complexity
    analysis only if legislation is determined by the Joint Committee to
    add significant complexity or provide significant simplification; H.R.
    2292 required a complexity analysis for all legislation that would
    amend the Internal Revenue Code. Further, H.R. 2676 does not set forth
    the basis to be used in determining complexity; H.R. 2292 detailed
    specific factors to be considered in the complexity analysis.
                              iii. closing comments
         The AICPA appreciates the opportunity to offer comments at today's
    hearing and is willing to provide your committee with additional
    assistance and comments as requested. Thank you for your attention.

                 Additional Comments Requested by Senator Roth

    March 25, 1998

    Hon. William V. Roth, Jr.,
    Chairman, Committee on Finance,
    U.S. Senate,
    Washington, DC.

        Dear Senator Roth: Thank you for requesting additional comments
    from the AICPA on certain IRS restructuring issues. Our responses to
    the questions you raised on your March 5, 1998 letter to us are set
    forth below, in a slightly different order from that of your questions.
    We will be happy to discuss these and other issues with you if you so
    desire.
                    oversight board/strengthening oversight
    1. Oversight Board's Powers and Responsibilities
        We believe the proposed IRS Oversight Board should have powers and
    responsibilities similar to those of a corporate board of directors, it
    should not be merely another advisory group. The Board should provide
    direction, oversight, and support for the IRS management and make
    policy decisions regarding IRS operations. Tax policy decisions should
    remain the responsibility of Treasury.
        The IRS Oversight Board's responsibilities should include providing
    input on long range strategic planning, approving the IRS strategic
    plan, monitoring organizational performance, and evaluating
    compensation for the Commissioner and the top-level IRS managers.
    Similar to a corporate board of directors, the Oversight Board's
    activities should remain at the programmatic management level and
    address systemic problems, but not, for example, specific instances of
    employee misconduct, although the Board should be advised of generic
    employee misconduct problems in order to evaluate the systemic response
    and devise corrections.
    2. Board's Relationship to Commissioner
        The Commissioner and the senior management of the IRS should have
    powers and responsibilities similar to the president and senior
    management of a corporation. They should have responsibility for
    directing the day-to-day activities of the IRS in a manner consistent
    with the management policies established by the Oversight Board and be
    answerable to the Board for those activities. We do not believe it
    would be appropriate for the Board to have legal authority to direct
    the actions of the Commissioner. If the actions of the Commissioner are
    inconsistent with the Board's policy decisions for the IRS, however,
    the Board should have the authority to recommend to the President that
    the Commissioner be removed from office.
    3. Sunsetting Oversight Board
        The AICPA believes the Oversight Board should not be subject to a
    sunset. The Board would be established to provide the IRS with
    consistent direction and enable it to benefit from private sector
    experience and expertise. These are ongoing, systemic needs of the IRS.
    The Board should remain in place to meet those needs, not subject to
    termination because the perceived problems that caused the Board's
    creation are resolved.
    4. Prohibition on Board's Authority Over Law Enforcement Activities
        As noted above, the Oversight Board should focus on the overall
    governance of the IRS and not deal with day-to-day activities. Thus, it
    should not be involved in specific law enforcement cases. In its
    policy-making and oversight roles, however, the Board should have
    authority over policies regarding how the IRS carries out its law
    enforcement responsibilities.
    5. Board vs. Inspector General Oversight
        We believe both the Board and the Treasury Inspector General should
    work together on oversight of the IRS. The Inspector General should
    provide oversight with respect to specific activities or problems and
    should report its conclusions regarding problems to the Board. The
    Board should keep itself apprised of the Inspector General's activities
    and conclusions and, to the extent that systemic problems are
    discovered, should take action to correct them.
    6. Oversight Board Within Treasury
        The AICPA believes that the Oversight Board should be independent
    of Treasury. If, however, the final restructuring legislation provides
    for an IRS Oversight Board similar to that previously proposed by
    Treasury, we recommend that the members of the Board serve only on a
    part-time basis and that a majority of the members of the Board be from
    outside Treasury and the IRS.
                            protecting the taxpayer
    1. Penalty and Interest Reforms
        The AICPA believes major revisions to the penalty and interest
    provisions are critically necessary, but feel they should be made only
    pursuant to a comprehensive study of the current system and a detailed
    analysis of the impact the proposed revisions would have on taxpayers,
    tax practitioners and tax administration. We would welcome the
    opportunity to participate in such an undertaking. Please see the
    enclosed March 17, 1998 letter to staff of the Senate Finance Committee
    regarding this matter.
    2. Independence of Taxpayer Advocate
        The Taxpayer Advocate's Office is in the unique position of being
    inside the IRS, yet having the specific charge of representing the
    interests of American taxpayers, scrutinizing the Service's activities,
    and serving as the advocate of taxpayers in recommending changes that
    will improve the IRS's service and responsiveness to taxpayers. Given
    that role, the Taxpayer Advocate must zealously represent taxpayers,
    not serve as a spokesperson or apologist for the IRS.
        For the Taxpayer Advocate's Office fulfill its responsibilities, it
    must have the trust of taxpayers. We recognize that, from a realistic
    point of view, it is probably necessary to have the Taxpayer Advocate's
    Office be part of the IRS, so that the employees of the Advocate's
    Office can have access to taxpayer information. The fact that the
    Office is organizationally a part of the Internal Revenue Service,
    however, may taint its objectivity in the minds of taxpayers. It is,
    therefore, crucial that the Taxpayer Advocate's Office be structured
    and operated in such a manner as to maximize the independence of its
    advocacy. For example, the Taxpayer Advocate should be appointed by and
    report directly to the independent Oversight Board instead of to the
    Commissioner.
        While we recognize the many contributions already made by the
    Advocate's Office, based on the Taxpayer Advocate's annual reports to
    Congress in 1997 and 1998, it appears the Taxpayer Advocate's view of
    issues is too heavily weighted from the IRS' perspective rather than
    that of the taxpayers. The weighted IRS perspective, unfortunately,
    sends the message to the taxpaying public that the Advocate may not be
    independent. This image must be changed.
    3. Offer in Compromise Program
        In an October 9, 1997 letter to the Assistant Commissioner
    (Collection), we set forth our concerns about the offer in compromise
    program; a copy of that letter is enclosed for your reference. It is
    our understanding that an IRS task force currently is addressing some
    of the issues in that letter. We are pleased that the IRS is working to
    improve the offer in compromise program. We urge your committee to also
    address the problems of the current system.
    4. Illegal Tax Protester
        We concur with the need to protect both the rights of innocent
    taxpayers and an individual's right to freedom of speech. Currently,
    the Internal Revenue Manual sets forth guidance on what constitutes
    grounds for classifying an individual as an ``illegal tax protester''
    and describes how returns filed by illegal tax protesters are to be
    processed. Classification of taxpayers as illegal tax protesters is
    done by the IRS with no input, notice, or review by affected taxpayers.
    To provide taxpayers with protection from an unjust classification, we
    recommend that the illegal tax protester classification should apply
    only after the initial determination of such status by the IRS has been
    reviewed and approved by the Taxpayer Advocate's Office.
        An individual's exercise of the right to free speech, such as
    advocating a change in the tax system or even advocating a protester
    position, should not be grounds for classification as an illegal tax
    protester. Clearly, the IRS should bear the burden of proof in
    classifying someone as an illegal tax protester, and any review should
    be particularly critical of evidence presented by the IRS to ensure
    that a taxpayer's rights are fully protected.
    5. IRS Employee Contact Information
        We agree that IRS employees should be held accountable for their
    actions and, therefore, agree with the concept of having each employee
    sign correspondence coming from him or her. Also, to the extent
    practical, we agree with the concept of putting the name and phone
    number of a contact person on notices; we are concerned, however, that
    this may not always assist the taxpayer because of varying work hours,
    notices relating to returns with several issues under consideration and
    thus requiring different areas of expertise, etc. Further, this may not
    always be practical, such as on computer-generated notices of math
    errors.
                              changing the culture
    1. Personnel Management/Employee Morale
        Recruitment and Retention of the Best for the IRS. Employment at
    the IRS has always been viewed as a professional career. In the past,
    the IRS successfully recruited entry level personnel who not only grew
    with the organization, but who today are leaders in the tax field both
    inside or outside the IRS. Ensuring the continuity of this succession
    of leaders will require improvements in recruitment, training, and
    compensation, as well as clarification of career paths for IRS
    employees. The IRS's strategic plan needs to focus on accomplishing
    these objectives. We make the following recommendations in this area:
       Pay Competitive Salaries. In many geographic locations, IRS
            salary levels are woefully uncompetitive. The IRS must be
            capable of paying competitive salaries in order to recruit and
            retain qualified employees If this raises issues of equity
            among governmental agencies, we would note that no other agency
            so touches the lives of the U S. public, and no other agency is
            charged with raising over $1.5 trillion a year.
       Provide Superior Training. Superior training has been one of
            the attractions of a career with the IRS. Obviously, better
            trained IRS employees work more efficiently and taxpayers have
            a better experience dealing with properly trained IRS
            employees. Conversely, for taxpayers and tax professionals,
            dealing with ill-informed auditors often results in wasted time
            resolving needless issues and promotes negative attitudes
            toward the IRS.
       Set High Educational Standards. High educational standards
            must be set for IRS employees. These standards should require
            both a quality accounting education as a prerequisite to hiring
            and dismissal of agents who cannot pass training. .
       Increase the Number of CPAs in the IRS. To increase the
            depth of knowledge and practical experience of IRS employees,
            it is recommended that the practice of hiring CPAs in the
            Office of IRS Chief Counsel be reinstated and that continuous
            and active recruiting of CPAs in the Examination Branch be
            undertaken. Further, in connection with continuing education
            for IRS employees, non-CPA employees should be encouraged to
            become CPAs.
        Professionalism and Image. The ``Forward'' to the IRS Rules of
    Conduct notes that public confidence in the Service ``can be instilled
    and maintained only if every contact with the public reflects high
    ethical standards and [the] commitment to perform [the] work
    conscientiously, courteously, and effectively.'' The professionalism
    that is present in the executive ranks of the IRS must be passed down
    to employees at all levels. We make the following recommendations
    regarding these issues:
       Codify Professional Standards. The IRS should codify and
            enforce its professional standards. Due to the
            interdisciplinary nature of tax standards, the IRS and
            professional tax organizations should form a working group to
            collegially develop such standards of professionalism.
       Measure Job Performance Based on Professionalism. In
            testimony before the National Commission on Restructuring the
            Internal Revenue Service and in a July 7, 1997 letter to the
            IRS, the AICPA objected to the measurement standards applied to
            job performance of IRS employees and encouraged measurement
            based on professionalism. Better performance measures must be
            devised to reward performance that furthers the mission of the
            IRS rather than encourage overly aggressive and unjustified
            proposed adjustments and collection actions. We are pleased
            with the actions taken thus far in this area and hope the
            process of improving the measurement system is continued.
       Engage in a Public Relations Campaign. As a means of
            increasing employee morale as well as aiding compliance and
            reducing negative ratings, the IRS should communicate to the
            public that it works in the public interest carrying out the
            mandates of Congress.
    2. Doing Away with the IRS
        Currently the IRS processes over 200 million tax returns and
    collects over $1.5 trillion of revenue in a year. For the majority of
    taxpayers, a ``successful'' filing of their returns is the only contact
    they have with the IRS. To the extent they have criticisms of the IRS
    it its likely the criticisms relate more to the complexity of the tax
    law, rather than to specific acts of the IRS.
        Further, the IRS recently has been the subject of much criticism,
    both warranted and unwarranted. Such criticism tends to gain momentum
    on its own; in the case of the IRS, this is exacerbated by the natural
    tendency of individuals to dislike paying taxes and by the common
    misunderstanding that the IRS is responsible for the complexity of the
    tax law and related forms.
        Realistically, some institution needs to administer the tax law and
    collect the revenue needed for our country to operate. This is true
    regardless of the type of tax system used to fund the government.
    Further, as is pointed out in Changing America's Tax System: A Guide to
    the Debate, a 1996 AICPA study on alternative tax systems, there also
    are collection problems in all of the alternative tax systems being
    discussed.
        There is no easy solution. People who would do away with the IRS
    are doing this nation a disservice. Rather, the energy would be better
    spent in revitalizing and improving the IRS. It is disingenuous to
    maintain that the federal government can continue to raise needed
    revenues on the scale to which it has become accustomed without
    significant administrative, collection and enforcement efforts.
    3. IRS Employee Adherence to IRS Procedures
        Consistency When Implementing IRS Policies. Often, the IRS will
    institute policies designed to assist taxpayers or clarify the
    application of particular Code sections. (In certain instances, the
    policies are designed to apply only to particular taxpayers, and those
    are not at issue.) But, when a benefit is intended to apply to all
    taxpayers, and through ignorance or capriciousness, an agent fails to
    give a taxpayer the benefit of those policies, it is detrimental not
    only to the taxpayer, but also to tax administration in general.
        One such example involves document requests. On June 3, 1996, the
    Assistant Commissioner (Examination) issued a memorandum to all
    regional compliance officers regarding overly broad Information
    Document Requests (``IDRs''). The memorandum was issued, in part, in
    response to complaints from taxpayers and practitioners about revenue
    agents initiating an examination and immediately requesting an array of
    documents, many of which prove to be irrelevant to the examination. The
    well-reasoned memorandum of the Assistant Commissioner (Examination)
    set forth a standard for issuing document requests: an IDR should be
    issued for specifically identified issues or specifically identified
    reasons. The memorandum made it clear that ``kitchen sink'' or
    ``boxcar'' IDRs are inappropriate. The experience of many tax
    practitioners, however, is that the guidance issued by National Office
    is sometimes disregarded and, in this instance, many agents are unaware
    of the memorandum. As a result, taxpayers continue to receive these
    broad IDRs. Out of fear of reprisal, taxpayers frequently comply with
    these overly broad, burdensome document requests rather than attempt to
    bypass or confront a revenue agent regarding this memorandum.
        As a general principle, the Service must strive to communicate its
    policies more uniformly throughout the organization. Policies should be
    meaningful, and there should be consequences when an agent or Appeals
    officer disregards a policy set forth by the National Office.
        Consistent Standards for Raising an Issue in an IRS Examination.
    Treasury Department Circular No. 230, IRC section 6694, and
    professional ethics guidance of the AICPA and the American Bar
    Association (``ABA'') provide that tax advisors may not recommend a
    position in a return that lacks a realistic possibility of being
    sustained on its merits. A position is considered to have a realistic
    possibility of being sustained on its merits if a reasonable and well-
    informed analysis by a person knowledgeable in the tax law would lead
    such a person to conclude that the position has approximately a one in
    three, or greater, likelihood of being sustained on its merits.
        Although the AICPA and the ABA prefer not to assign mathematical
    probabilities to the realistic possibility standard, nevertheless, both
    professions are bound to abide by the standard, as prescribed by
    regulations under section 6694. Unfortunately, the IRS has not chosen
    to instruct revenue agents to apply the same ``realistic possibility''
    standard before raising issues in examinations.
        As a matter of fairness and consistency, we recommend that the IRS
    require revenue agents to have concluded that there is at least a
    realistic possibility of success before proposing an adjustment against
    a taxpayer. One method of ensuring that a position contained in a RAR
    has a realistic possibility of success could be to require that each
    RAR be signed by an individual at the group manager or higher level,
    attesting to the fact that the proposed adjustments set forth therein
    meet the realistic possibility standard. Implementing a policy such as
    this would be consistent with tax administration principles for the
    IRS, set forth in Rev. Proc. 64-22, 1964-1 C.B. 689.

    Rev. Proc. 64-22 provides, in part:
            The Service . . . has the responsibility of applying and
            administering the law in a reasonable, practical manner. Issues
            should only be raised by examining officers when they have
            merit, never arbitrarily or for trading purposes. At the same
            time, the examining officer should never hesitate to raise a
            meritorious issue. It is also important that care be exercised
            not to raise an issue or to ask a court to adopt a position
            inconsistent with an established Service position.
                              simplifying the code
        The AICPA believes the IRS can be restructured again and again but
    the basic frustration that taxpayers experience in dealing with the IRS
    will remain until the issue of complexity has been addressed. Enclosed
    for your reference are tax simplification proposals we have submitted
    to Members of Congress during the past year. Also enclosed for your
    consideration is the AICPA Tax Complexity Index. The Index is intended
    to be used as a tool to analyze the complexity of any proposed
    legislation.

                                   __________

                  Prepared Statement of Marjorie A. O'Connell

         Mr. Chairman, Members of the United States Senate Committee on
    Finance. Thank you for the opportunity to testify before you today
    about proposals to reform the innocent spouse tax rules.
         My name is Marjorie O'Connell, I have practiced law in Washington,
    D.C. for 25 years. I am a tax attorney, my specialty in practice is
    family taxation, particularly divorce taxation. I have authored
    numerous articles, several books, and a tax service supplemented
    monthly since 1982 about divorce taxation. I have served in the
    American Bar Association's various Sections as a specialist, leading
    committees and task forces that have addressed the subject about which
    I testify before you today. I have provided my professional credentials
    as the last page of my written testimony.
         Through my law practice experience, my work as a author and
    lecturer, and significant involvement in professional organizations'
    efforts to improve tax law, I have encountered hundreds of spouses
    innocent of tax liability, yet confounded by the tax code's current
    provisions to relieve them from that liability. I am here today to tell
    you from these experiences why current law does not work and why even
    as current law is improved in the House-passed Taxpayer Bill of Rights
    3, the law still would not work. I choose to do this only briefly
    because the panel who appeared before me has told you their tales.
    There are more stories in legion which I know you have read in letters
    from stricken constituents who have squarely put the problem on your
    desks.
         In short, current law in its overwhelming complexity has proven
    itself no relief but a waste of time and money for many innocent
    spouses. The Internal Revenue Service as you heard from Professor Beck
    frequently pursues the perceived lesser empowered of spouses who signs
    a joint return and succeeds in overwhelming that spouse through
    perfectly legal collection mechanisms. For those few spouses who can
    afford and are well enough informed to allege an innocent spouse
    defense, even early in the audit process, conflicting administrative
    rulings and court decisions defeat them. Under current law and even
    under the revision proposed in TBR 3, an innocent spouse must prove,
    among other things, that he or she did not know and had no reason to
    know of the item on the return which caused the tax understatement.
    That spouse must also prove that it will be inequitable to hold him or
    her liable for the tax. Inequitable is defined to mean that the party
    alleging the innocent spouse status must prove that he or she did not
    benefit from the tax understatement. It is rare that innocent spouses
    can meet these two extremely difficult ``negative'' burdens of proof.
    Even in cases like those you heard this morning, and others numbering
    in the thousands, some decision makers will always find a basis to
    suspect ``reason to know'' (in cases in which a spouse is simply
    employed in the market place) or a basis to find ``benefit'' (in cases
    in which a spouse receives any portion of a marital estate after a
    long-term marriage).
         We can have a system that is fair for taxpayers, easier to
    administer for the Internal Revenue Service and simpler for all. This
    system could work without jeopardizing tax collections.
         Let us simplify the problem. What don't we like about everything
    we heard today? It is that a spouse is held liable, who is not
    responsible for the tax mistake: liable up to 100 percent of the taxes
    owed, plus penalties and interest; when not responsible simply because
    it is not the innocent spouse's income or his or her business or
    investment; for a reporting mistake when that spouse was not even
    involved in deciding how to report the item that caused the
    understatement.
         What is the path to a solution? Well, how do we cause the problem?
    When spouses sign joint returns, they undertake joint and several
    liability becoming fully responsible for mistakes in which they are not
    involved.
         What's the solution? It could not be simpler, disassociate joint
    return signing from tax liability.
         How would that work? What would happen under various systems of
    doing that? Professor Beck has given you some of the history and
    alluded to our projects principally through the American Bar
    Association to address this problem. Almost 15 years ago, those of us
    who had participated in a five-year effort to reform domestic relations
    taxation, thought we had truly invented a ``rounder wheel'' for joint
    return liability. Compared to then existing law, indeed, we had. But,
    as if sent rolling down pothole- ridden streets of Washington, D.C.,
    this wheel has taken the blows of uneven IRS administration and
    inconsistent court decisions. Today, the misshapen wheel is no longer
    able to roll the wagon of tax equity forward.
         In 1994 and 1995, 10 years after the last major legislative relief
    in this area, I participated with the American Bar Association to
    design a solution that would disassociate joint return signing from tax
    liability. The ABA recommendation also addresses the circumstance of
    the spouse in a community property state who does not sign a joint
    return but who might nonetheless be held liable for the tax mistake of
    a spouse in whose economic activities the innocent spouse had no
    involvement. As is our policy in the ABA, we adopted a recommendation.
    Those of us who worked on the project also prepared an extensive report
    in support of it and drafted proposed statutory language. All of these
    materials are provided to the Committee in my written testimony.
         It is recommended that all married persons be taxed only on their
    own individual incomes, without liability for tax on the income of
    their spouses, even when they file joint returns or are residents of a
    community property state.
         There is ordinarily no difficulty in determining each spouse's
    gross income on a joint return. The difficulty, if any, results from
    the necessary allocation and apportionment of deductions. However,
    allocation and apportionment of deductions between related taxpayers is
    routinely required in other circumstances, and the audit process almost
    necessarily reveals the source of any asserted deficiency. Most
    deficiencies are assessed as result of matching the return with
    information forms W-2, 1099, K-1 and the like, which reveal the source
    of income.
         It is important to emphasize that, in order to separate the
    liability of married persons for payment of income tax on a joint
    return, no other changes would be required. The current rate structure
    and filing status system would remain unchanged, and the benefits of
    income-splitting for joint filers would be preserved. The basic formula
    for determining the separate liability of each spouse on a joint return
    is as follows: First, each spouse's tax would be calculated as if he or
    she filed a separate return of a married individual, second, the ratio
    of a spouse's separate tax to the sum of both separate taxes would be
    applied to the total joint tax due. In this way, the benefit of the
    income-splitting rate structure is preserved, but each spouse is liable
    only for the portion of the joint tax which is due to his or her
    separate income. The calculation will not increase the complexity or
    difficulty of preparing returns, because it will only be employed on
    audit in cases where there is a deficiency which is contested by one
    spouse.
         Determining liability for subsequently assessed deficiencies may
    be thought of as an ``item'' approach, in which liability for the tax
    follows responsibility for the item, and represents a departure from
    strictly proportional liability.
         Poe v. Seaborn, 282 U.S. 101 (1930), construed family property law
    in the community property states to create a separate liability on each
    spouse for the tax on one-half of the income of the other on the theory
    that all earnings during marriage inure to the marital community and
    are therefore owned by and taxable to each spouse in equal amounts.
    This form of liability does not depend upon filing a joint return, but
    results automatically from residence in a community property
    jurisdiction. Seaborn should be legislative overruled, as has already
    occurred in limited contexts. In 1976, Congress in effect repealed the
    Seaborn rule for couples one or both of whom are nonresident aliens. It
    is this rule, codified under Internal Revenue Code section 879(a),
    which our recommendation would extend to all taxpayers, modified, as
    explained below, with respect to the treatment of investment income. As
    under section 879(a), the earned income of couples would taxable to the
    earner alone. Items of income and deduction from a trade or business
    would be treated as items of the spouse who exercises substantially all
    the management and control of the trade or business. Income and
    deductions from a partnership distributive share would be taxable
    entirely to the spouse who is the partner. Income from separate
    property would be the separate income of the spouse, notwithstanding
    the law of some states which treats such income as community property.
    Tax liability would be incurred solely by the titleholder(s) of
    investment property just as in common law states. The sole titleholder
    can usually control and dispose of investment income without consent of
    the other spouse, often, as a practical matter, without incurring any
    accounting or other liability for the non-titleholding spouse's
    community interest in the income.
         In conclusion, we recommend that the Committee approve legislation
    that would (i) eliminate joint and several liability of a taxpayer who
    has signed a joint return with his or her spouse for tax on income
    properly attributable to his or her spouse, (ii) substitute separate
    liability for tax shown to be due on the joint return, and (iii) repeal
    innocent spouse relief from liability for tax on the joint return when
    the liability arises from erroneous items of the taxpayer's spouse; and
    would (iv) overrule the holding in Poe v. Seaborn, 282 U.S. 101 (1930),
    so that married taxpayers who live in community property states would
    not be individually liable for income tax on any portion of the income
    earned by their spouses; (v) refer to section 879(a), with
    modifications, for the purpose of attributing income to a spouse in a
    community property state for income tax purposes; and (vi) repeal the
    provisions granting relief from tax on income attributed to the
    taxpayer as the taxpayer's share of community income earned by the
    taxpayer's spouse.
         Thank you for your consideration of these recommendations.

                                   __________

                      Prepared Statement of Nina E. Olson

        Mr. Chairman and Members of the Committee:
         Thank you for providing me the opportunity to testify on the
    topics of IRS restructuring and taxpayer rights. I comment in my
    capacity as the Executive Director and staff attorney of The Community
    Tax Law Project (CTLP). CTLP is a 501(c)(3) organization founded in
    1992 for the purposes of (1) providing low income Virginia residents
    with pro bono legal representation in federal, state and local tax
    disputes; (2) educating low income individuals about their rights and
    responsibilities as U.S. taxpayers; and (3) increasing public awareness
    of and encouraging informed debate about policy and practice issues
    impacting on low income taxpayers.
         CTLP accomplishes its goals in a variety of ways, including in-
    house legal representation and a statewide pro bono referral panel of
    volunteer attorneys, accountants and enrolled agents. The Project
    provides back-up training and technical support for its volunteers and
    maintains a research library. It sponsors continuing legal education
    programs, including one coming up in March, 1998, on representation
    before the United States Tax Court. I frequently address groups of low
    income parents and workers about tax issues impacting on their families
    and their businesses.
         In January, 1996, CTLP became the first independent nonprofit
    clinic to enter into an agreement with the United States Tax Court,
    whereby letters from CTLP are included in trial notices to pro se
    petitioners scheduled for the Richmond or Roanoke court calendars.
    These letters advise the pro se petitioner that the Project may provide
    him or her with legal advice or representation if eligibility
    guidelines are met. The Tax Court has similar agreements with student
    tax clinics at law schools throughout the United States. Such
    agreements permit law students to argue cases before the Court.
         CTLP attorneys also attend calendar call at all Tax Court dockets
    in Richmond and Roanoke. The presiding judge makes an announcement from
    the bench, pointing out the availability of volunteer attorneys for
    consultations prior to trial. These efforts are uniformly a success
    from the point of view of all parties involved.
         The Virginia-West Virginia District of the Internal Revenue
    Service recently agreed to publicize CTLP's services by displaying
    brochures and posters in walk-in taxpayer services offices and waiting
    rooms throughout Virginia. The District further agreed to include
    letters from CTLP in exam notices and 30-day letters issued from the
    Richmond field office.
         In response to our pro bono panel's need for training, CTLP
    publishes a national quarterly newsletter about low income tax practice
    and policy. The Community Tax Law Report's target audience includes
    attorneys and accountants, economists, lawmakers and community services
    workers having an interest in low income and/or tax issues. Since its
    first issue in October, 1996, The Report has published articles about
    tax reform, IRS collections (including outsourcing of collections),
    innocent spouse relief, dividing pensions at divorce, the taxation of
    workfare, social security and child care reform.
         My remarks today are informed by my experiences as a taxpayer
    advocate, one who has daily contacts with all levels of the Internal
    Revenue Service on behalf of low income taxpayers. Perhaps even more
    important, I am the attorney who answers taxpayers' calls for
    assistance and screens cases for acceptance by the Project. I hear
    directly from low income taxpayers about their own efforts in resolving
    tax disputes and their treatment by IRS employees.
                                  collections
    In General
         Collections is the branch of the IRS with which low income
    taxpayers have the most contact. Many low income taxpayers attempt to
    bring up substantive issues in Collections because they have not
    understood their opportunities to dispute a proposed assessment at
    earlier stages of the examination process. Collections is, of course, a
    most inappropriate place to attempt to clear up matters of substantive
    tax law. My clients do not understand why the revenue officer is not
    willing to listen to their protestations that they do not owe the tax
    being collected. A recognition of this misconception is fundamental to
    an understanding of the problems low income taxpayers have with the
    collections branch and their resentment toward the Internal Revenue
    Service. This resentment goes beyond the general feeling of not wanting
    to pay over any of one's hard-earned money; rather, it generates from
    the belief that noone is interested in learning whether the tax was
    correctly assessed.
         Collection employees--revenue officers, managers, ACS employees--
    all must be trained in basic customer relations approaches to
    taxpayers. They must learn to view the taxpayer as someone who is
    trying to work out a way to pay his tax debt and not as someone who
    automatically warrants the institution of harsh collection techniques.
    The RO can easily use those methods when the situation calls for them.
         All too often today the taxpayer is told of only one option--pay
    up or else dire steps will be taken. The taxpayer develops an attitude
    of resentment and suspicion, which in turns feeds the RO's perception
    that the taxpayer is a ``deadbeat.'' This unfortunate scenario might be
    avoided if, when a taxpayer initially contacts Collections, the
    interviewer outlines to the taxpayer his or her options for payment. By
    this I mean ALL of the options--payment in full, payment within 12
    months, other installment plans, and the offer in compromise procedure
    (including those based on doubt as to liability).
         If a taxpayer is willing to pay and has not demonstrated to the
    IRS that he is trying to delay payment in hopes of evading the tax
    entirely or that he has willfully not honored prior payment agreements,
    the Service should be willing to work out with the taxpayer reasonable
    payment arrangements. The public fisc will be protected by the
    imposition of interest and late payment penalties.
    Late Payment Penalties (Section 376)
         I do not support the abatement of the late payment penalty during
    the term of an installment agreement. Nor do I support a percentage cap
    on additions to tax for late filing or paying. As a rule, taxpayers who
    fail to timely pay their taxes should be penalized. In general, the
    combined rate of interest and penalty charged by the government should
    be greater than that for a commercial installment loan, a mortgage, or
    a credit card. The government should not get in the business of
    competing to be a money lender to taxpayers. Rather, the government
    should be a lender of last resort. Revenue officers should encourage
    taxpayers to find alternate loan sources at lower interest as well as
    explain the payment options available from the Service.
         Collection employees should explain that the price of working out
    a deal with the government is the combined interest/late payment
    charge. Most taxpayers can recognize the sense behind this policy, even
    if they don't like its application in their individual cases. Any other
    approach will seriously erode taxpayer confidence.
         I do support, however, the imposition of a cap on civil penalties
    equal to 100% of the underlying tax. This limit will still retain the
    disciplinary nature of civil penalties while not creating a hopeless
    situation from which the taxpayer feels she will never extricate
    herself. Rather than discouraging compliance, a 100%-of-tax limit on
    penalties may actually encourage taxpayers to continue paying, since
    they will be able to see the light at the end of the tunnel.
    Trust Fund Recovery Penalty
         One area where taxpayers need additional information involves the
    assessment of the IRC Sec. 6672 trust fund recovery penalty (aka the
    ``responsible person penalty''). Often the taxpayers involved in a
    failing business have lost all they own in the process of keeping the
    business afloat. The arrival of an IRS revenue officer on the scene
    produces fear in an already anxiety-ridden situation. All too
    frequently the RO does not explain to the taxpayer the concept of a
    ``responsible person.'' He does not explain the underlying purpose of
    the inquiry into responsibility for payment and the possible results of
    a finding of responsibility. I have represented taxpayers in several
    cases where the RO simply explained that they had no choice but to
    agree to the assessment of the trust fund tax against them. They were
    not advised that they have the right to disagree with the RO and obtain
    further review of the proposed assessment. They were not told that by
    agreeing to the assessment and signing Form 2751, Proposed Assessment
    of 100 Percent Penalty, they waive their right to claim a refund or
    abatement of tax.
         Given that taxpayers in these situations are hesitant about
    spending any funds for legal counsel (and if they do have counsel, the
    taxpayers are often questioned by the RO as to why they are spending
    money on legal representation when they can't pay their taxes), it is
    vitally important that revenue officers be required to provide the
    taxpayer with a separate statement outlining the requirements for
    making a 6672 assessment, the taxpayer's rights pertaining to the
    responsible person penalty assessment, and an explanation of the effect
    of consenting to an assessment. It should also be explained that these
    taxes are often not dischargeable in bankruptcy and will be vigorously
    collected. Further, the RO should explain to the taxpayer his payment
    options in the event he does agree to the assessment.
    Explanation of Rights and Procedures (Sections 352 and 354)
         Requiring revenue officers and other collection employees to
    review taxpayer rights and options at every contact will daily serve to
    remind IRS employees that these are not empty statements. They must be
    taken seriously if taxpayer confidence in the system is to be restored
    and maintained. Employees should be provided with a standard statement
    of rights in collections and another statement for 6672 investigations.
    Failure to cover this material with the taxpayer would result in some
    type of demerit to be considered in the employee's performance reviews.
    Such failure would also constitute grounds in support of a Taxpayer
    Assistance Order granting relief from proposed collection activities.
         Taxpayers in collections must receive a meaningful review of
    collection activities by supervisors. In my experience, any complaint
    to a supervisor has been answered by the offending rvenue oficer, i.e.,
    after I speak with the supervisor, the supervisor instructs the revenue
    officer to respond to the taxpayer with the results of the review. This
    is inappropriate because it leads to the perception that the supervisor
    has given only a perfunctory review of the revenue officer's actions.
    It also cuts off the taxpayer's ability to respond and provide to a
    third party additional supporting information about the RO's actions or
    proposed actions. Supervisors should be required to explain the results
    of their decisions to the taxpayers or their representatives and not
    delegate these explanations to the revenue officer involved.
    Supervisors should also be more willing to reassign cases where there
    is a clear personality clash between the taxpayer and the RO. (Such
    reassignment would only be available where the taxpayer has not sought
    to avoid or unreasonably delay paying the tax due.)
         When a taxpayer objects to the payment of the tax on the ground
    that there is an error of law, revenue officers should be trained to
    explain their role as tax collectors, not tax adjudicators. However,
    the RO should also receive training in the various avenues of
    substantive relief available, including refund claims, the problem
    resolution officer, and offers in compromise based on doubt as to
    liability. Although Collections employees do not need to know all the
    details of such procedures, they should be required to provide
    taxpayers with information about possible avenues for resolution of the
    substantive issues.
         Absent evidence indicating evasion of payment, collections
    activity should cease pending any of the above procedures. Taxpayers
    should be reminded that penalty and interest continue to accrue. The
    possibility of making a deposit to stop the running of penalties and
    interest should be discussed with the taxpayer.
         All collections employees should be provided with a list of Low
    Income Taxpayer Clinics accepting referrals of collection problems.
    Collection employees should encourage unrepresented taxpayers to
    contact these clinics.
                       earned income credit examinations
         As a result of Congress' concern about taxpayers' erroneous claims
    for the Earned Income Credit, the IRS is conducting frequent
    examinations of such claims. The Community Tax Law Project receives at
    least one call a week from a distraught taxpayer who has been denied
    the credit, dependency exemptions and/or head of household status even
    though she is clearly eligible. We have found that the correspondence
    ``audit'' is superficial at best. It is also not clear, where two
    individuals have claimed the same child, whether both individuals are
    being examined or only the last to file. It is my experience that the
    last to file is generally the one entitled to the credit.
         Examiners do not appear to allow for the fact that low income
    taxpayers eligible for this credit often (usually) do not have checking
    accounts. In fact, until recent changes in the welfare laws, AFDC
    recipients were not permitted to maintain checking accounts and
    continue to receive benefits. Thus these taxpayers are often unable to
    document purchases for food or clothing. The Service's employees have
    not attempted to suggest alternate forms of proof more relevant to
    these taxpayers' life circumstances. The review process is thus biased
    against the taxpayer. There is no reason why the Service cannot
    attribute reasonable standard allowances for food and clothing to
    taxpayers who are otherwise able to demonstrate that they are the sole
    or primary source of the dependent's support or of household
    maintenance.
         We have also noticed what appears to be automatic assessment of
    the IRC Sec. 6662(a) accuracy-related penalty on returns prepared by
    tax professionals. There does not appear to be any attempt to determine
    whether the taxpayer relied on professional advice before applying the
    penalty.
         The IRS should be instructed to develop procedures for determining
    eligibility that reflect the recordkeeping methods available to
    taxpayers in this income class; alternative documentation procedures
    should be explored and the revenue agents conducting such reviews
    should be trained to assist taxpayers in obtaining the information from
    a variety of sources. Although the burden of proof remains with the
    taxpayer, the revenue agents can adopt a helpful approach toward the
    taxpayer in arriving at a correct answer.
         Further, the revenue agents should be instructed not to
    automatically impose the Sec. 6662(a) penalty in all cases where the
    dependency exemption or earned income credit is disallowed. Where the
    penalty is imposed, revenue agents should also inform the taxpayer
    about the grounds available for abatement. Revenue agents must be
    trained to view earned income credit/dependency exemption examinations
    as opportunities to educate the taxpayer about these complicated code
    sections. Often these examinations are the taxpayer's first contact
    with an IRS employee and will influence the taxpayer's attitude toward
    future compliance.
         It should be noted that of the nine EIC cases I have personally
    taken to Tax Court or to Appeals over the last 18 months, the taxpayer
    has ultimately prevailed and the examining agent's proposed deficiency
    defeated. I am confident we will prevail in the five cases presently
    in-house or referred to our pro bono attorneys.
          offers-in-compromise and ``ordinary and necessary expenses''
         I support the ``reasonable living expenses'' approach ennunciated
    in H.R. 2676 Section 346. This provision should be extended
    specifically to the determination of installment payment amounts. The
    impact of the current standards is illustrated by a recent case in
    which I represented an individual who lived in a blighted inner-city
    neighborhood and used public transportation. The ACS employee refused
    to allow his busfare for travel to a grocery store at the shopping
    mall, although he needed to go there in order to keep his food expenses
    within the IRS guidelines. This ``catch-22'' approach to necessary
    expenses is completely indefensible in situations where the taxpayer is
    making efforts to pay the tax and is subject to interest and late
    payment penalties for failure to pay.
         The national and local guidelines developed by the Service should
    be adjusted annually with respect to inflation and other factors.
    Revenue officers must be trained to apply national and local standards
    as guidelines, not rigid categories.
         Low income taxpayers are unable to qualify for offers-in-
    compromise because they cannot raise a sufficient amount of funds to
    interest the Service in processing the offer. In my district, I have
    been advised that an otherwise acceptable offer would be immediately
    rejected as ``frivolous'' if it were to come in between $500 and
    $1,000, on the the ground that it costs the Service more than that
    amount to process the offer. Such a policy has the effect of permitting
    only affluent taxpayers to ``buy'' relief from tax liabilities through
    offers-in-compromise. Congress should make clear that there is no
    minimum offer amount required for consideration of an offer.
         Practitioners have long reported confusion on the part of IRS
    employees regarding the processing of offers-in-compromise based on
    doubt as to liability. Most offer specialists insist on processing an
    offer asserting doubt as to both liability and collectibility from the
    aspect of collectibility first, although reviewing the liability basis
    might in fact reduce the tax down to an amount which the taxpayer could
    full-pay. Admittedly, processing a ``liability'' offer requires a more
    detailed analysis than a ``collectibility'' offer. However, given the
    amount of time offers take to process, it would seem appropriate to
    begin the analysis at the place most likely to yield the correct
    answer. If the liability offer is accepted, there will be no need to
    process the collectibility offer. By processing the collectibility
    first, the Service may be collecting more than the correct amount of
    tax from the taxpayer.
         Many offer specialists refuse to review offers based solely on
    doubt as to liability without an accompanying offer of payment or an
    attached financial statement. This is a peculiar requirement where the
    taxpayer is saying that he or she does not owe any tax at all. The
    Service simply must do a better job alerting its offer specialists and
    managers to the Internal Revenue Manual provisions governing offers in
    compromise based on doubt as to liability. As in so many cases, no new
    statute or rules are required. Rather, the Service needs a directive
    that it follow the provisions already in place.
                                  wage levies
         It has never been adequately explained to me why, when the IRS is
    given proof of a taxpayer's inability to pay the tax, the IRS will not
    release a previously filed wage levy until one wage payment is levied
    upon. This is the case where the Service and the taxpayer agree that
    the taxpayer is ``currently not collectible'' and yet the Service still
    collects one period's wage levy before releasing the levy. The taxpayer
    should not be forced to seek a Taxpayer Assistance Order if all parties
    agree that the taxpayer cannot afford to pay any amount toward the tax.
                         burden of proof (section 301)
         I find the burden of proof provision, Section 301, unhelpful and
    quite possibly harmful to low income taxpayers. First, most problems of
    low income taxpayers involve substantiation issues, an area
    specifically excluded from the provisions of burden-shifting. This
    point has not been made clear in all of the pronouncements and
    announcements about this particular provision. Since the passage of HR
    2676, CTLP has received phone calls from prospective clients who are
    under the misunderstanding that (1) the law has already changed; and
    (2) they don't need to keep records any longer because the IRS must
    prove they owe more.
         Secondly, low income taxpayers are least likely to have
    representation and are therefore most likely to not respond
    satisfactorily to IRS ``reasonable'' requests for documentation or
    witnesses within a ``reasonable'' period of time. However, they are the
    most vulnerable targets of aggressive examination procedures that the
    Service is sure to adopt in the wake of any change in the burden of
    proof. One wonders (or dreads) how the Service will be forced to
    investigate a claim for innocent spouse relief once the burden shifts
    to the government.
         I believe that most taxpayers are generally able to understand the
    burden of proof and need only to be reminded on a regular basis that
    they must retain records to support their returns. Alternate procedures
    exist and could be expanded for circumstances where proof is
    unobtainable or destroyed. Rather than changing the burden of proof,
    the Service needs to train its employees to assist taxpayers in meeting
    the necessary burden as well as to better determine when the necessary
    quantum of proof has been offered.
                             innocent spouse relief
         The most appropriate solution to the problems raised by joint and
    several liability would be to establish proportional liability for
    additions to tax as proposed by the ABA Tax Section. In fact, I am
    leary of creating yet another procedure for taxpayers to navigate
    through. However, I support legislation providing a remedy to a spouse
    that learns of a liability arising from a joint return only after
    assessment of the tax. The procedure outlined in Section 321 will
    afford that taxpayer with access to the Tax Court.
         Section makes several major improvements to current IRC ' 6013(e).
    It removes any numerical floor for unreported income items as well as
    the percentage of income test for overstated deductions. The
    legislation also drops the requirement that an overstated deduction
    have no basis in law or fact.
         I would like to propose some revisions to this section. As a
    jurisdictional matter, the petitioner should be required to prove that
    he did not receive notice of and participate in any examination or
    appeals conference with regard to the assessment from which he is now
    seeking relief. This will preclude the circumstance of a spouse simply
    ignoring the notice or deferring to the other spouse's handling of the
    matter, only later deciding that he is an innocent spouse when an
    unfavorable assessment results from audit. This threshold, along with
    the consent to representation discussed below, will protect the Court
    from taxpayer abuse.
         Further, taxpayers are likely to miss their window of opportunity
    for filing in the Tax Court under this provision if the petition
    deadline is the earlier of (1) 90 days from the six month anniversary
    of filing the innocent spouse claim form or (2) 90 days from the date
    of the IRS notice of disallowance by certified/registered mail.
    Taxpayers have a hard enough calculating the 90-day filing deadline for
    Tax Court petitions (and in fact H.R. 2676 requires the IRS to specify
    the filing date on the statutory notice of deficiency because of this
    confusion). The section should be amended to provide for a permissive
    filing deadline of six months from filing the claim for relief and a
    mandatory deadline of 90 days from the date of the IRS notice of
    disallowance. These provisions track the filing scheme of IRC
    Sec. 6532. To further protect taxpayers from missing the deadline, the
    notice of disallowance should specify the final date for filing a
    petition in Tax Court.
         The statute should clearly state that the new timeframes apply
    only to the new Tax Court jurisdiction and do not override any avenues
    of relief available under other Code sections.
         I am also concerned about the provision in Section 321(d)(3)
    providing for removal of the Tax Court action where a refund suit is
    filed for the same tax year in a refund forum. The refund fora involve
    different opposing attorneys (Dept. of Justice instead of District
    Counsel); they employ much more extensive discovery; they do not settle
    out cases as frequently as the Tax Court; and they follow a more formal
    application of the Federal Rules of Evidence. All of these differences
    work against the taxpayer who has chosen the taxpayer-friendly forum of
    the Tax Court in which to litigate her claim. It is unfair for the
    taxpayer to be removed from this taxpayer-friendly forum into a more
    formal tribunal such as the district court not by her own actions but
    by someone else's. Such a provision only compounds the injustice that
    brought the taxpayer to the Tax Court in the first place.
         This provision also raises serious questions of limitation on the
    Tax Court's jurisdiction. Heretofore, the Tax Court has been viewed as
    the tribunal most favorable for the taxpayer to litigate tax claims;
    for example, if a refund suit is filed in a refund forum while the
    statute of limitations for assessment is still open and the IRS
    subsequently issues a statutory notice of deficiency, the taxpayer may
    then petition the Tax Court. In this case, it is the refund case that
    is removed to the Tax Court.
         Thus, Section 321(d)(3) should be amended to provide that the
    filing of a refund case in a refund forum by the other spouse should
    not impact on the Tax Court's jurisdiction over the first spouse's
    case. The mere fact that two different taxpayers would have two
    different results for the same tax year is not a serious problem. In
    the event that the innocent spouse wishes to bring a refund suit in a
    refund forum raising other issues while the Tax Court innocent spouse
    case is pending, then it is appropriate to remove the case to the
    refund forum, since the Tax Court jurisdiction over the innocent spouse
    claim is a limited one and should extend to only those situations where
    no other relief is available.
                          joint and several liability
         Section 351 of HR 2676 provides for taxpayer education about the
    effect of joint and several liability. This explanation should include
    a reference to innocent spouse relief under proposed IRC Sec. 6015. I
    would extend section 351 a bit further and require the Service to
    specifically highlight an explanation next to the Form 1040 check-off
    box for joint return status. A similar reminder should be included in
    the boilerplate language above the signature line.
         I would also require revenue agents and appeals officers to
    attempt to obtain the consent of an absent spouse to representation by
    the present spouse. This can be done by communicating directly with the
    absent spouse and by providing him with the explanation of joint and
    several liability and a power of attorney for the present spouse. This
    information should be delivered in person or by certified mail, return
    receipt requested. If the absent spouse fails to agree to such
    representation and also fails to appear, then a deficiency notice would
    be issued to the absent spouse based on the results of the present
    taxpayer's audit or appeals (even where the present spouse agreed to
    the results). This procedure would give the absent spouse one more
    opportunity to contest the results.
         Further, if the absent spouse refused to authorize the present
    spouse to represent him, failed to appear at the exam/appeals
    conference, and did not file a Tax Court petition in response to the
    Notice of Deficiency, the Service could use such facts in a Section 321
    Tax Court innocent spouse claim as evidence of knowledge of the
    deficiency and thus protect the jurisdiction of the Tax Court. The
    taxpayer could overcome the weight of these facts by showing that he
    never received the notices, etc.
         Note that I am not suggesting here that the IRS become involved in
    marital disputes. The proposed explanation/notification is designed to
    notify spouses about the impact of joint and several liability at the
    exam and collections level. It offers the spouses an opportunity to
    consider all possible defenses in a tax dispute and it attempts to
    raise the innocent spouse issue at the earliest stages of the dispute
    process.
         The above-described procedure should in not be interpreted to
    deprive a married taxpayer of their right to be represented
    individually by counsel or other tax professional. Every practitioner
    has encountered at least one IRS employee who refuses to communicate
    with the representative unless she represents both spouses. All IRS
    employees must be educated about possible conflicts of interest
    inherent in joint representation and must follow the Treasury
    Regulations and Internal Revenue Manual provisions regarding powers of
    attorney.
                             attorneys fees awards
         Section 311 provides for the award of attorney fees under IRC '
    7430 where the attorney represents the client on a pro bono basis or
    for a nominal fee. This section should be clarified to provide that
    where an attorney is a volunteer with a qualified nonprofit Low Income
    Taxpayer Clinic, then that clinic will be deemed the attorney's
    employer for the purposes of receiving the award granted under this
    section. As currently drafted, an attorney wishing to donate his award
    to the referring Low Income Taxpayer Clinic will have taxable business
    income (and self-employment income, where applicable) and then may not
    be able to offset the (self-employment) income with a charitable
    contribution deduction. Such a result would penalize both the attorney
    and the clinic, where in fact the reverse is intended.
                          low income taxpayers clinics
         I view Section 361 as the single most helpful provision of TBOR3.
    All of the problems discussed above will be lessened if not eliminated
    when low income taxpayers are able to obtain representation. The
    provision of federal funding on a matching grant basis is an
    appropriate incentive for the establishment of clinics.
         I am concerned, however, that one of the factors given special
    consideration in the awarding of grants is the level of service to
    individuals for whom English is a second language. I would add to this
    category a second targeted population, namely participants in welfare-
    to-work programs. These individuals are being thrown into the workforce
    without appropriate training in the matter of tax responsibilities and
    without access to representation. As a result, they are sure to face
    problems in a few years arising from dependency exemption claims and
    EIC audits.
         The section should also make clear that faculty salaries will only
    be considered as matching support to the extent that they are
    attributable to operation of the clinic. Further, some provision should
    be made for in-kind contribution of pro bono attorney hours. A program
    in an impoverished rural area may not be able to raise significant cash
    funds but may have the full support of its local attorneys by way of
    volunteer hours. A maximum in-kind contribution allowance for attorney
    time could be established. Pro bono involvement keeps overhead costs at
    a minimum for these programs and should be encouraged by Congress.
         Further, the maximum aggregate amount of funding should be
    increased from $3 million per year to $5 million. This will allow at
    least one clinic to operate in each of the fifty states, although in
    practice some states will need more than one clinic, based on
    population density and demographics.
                                   conclusion
         Thank you for inviting me to share my thoughts with you about this
    important piece of legislation. I hope that these comments are helpful
    to you as the Senate Finance Committee begins work on its version of
    H.R. 2676. True tax system restructuring not only protects taxpayer
    rights but also assists taxpayers in understanding the vital role that
    tax collection and compliance play in the proper functioning of our
    society. IRS employees must learn to see themselves as part of a
    process, in which they serve the two goals of taxpayer compliance and
    taxpayer education. Congress, in exercising its oversight function,
    must be careful to not send the Service contradictory messages, linking
    funding increases to greater tax collections. And tax professionals
    must volunteer to undertake representation of those unable to pay for
    their services in order to protect the overall fairness of the system.
         We must all begin to think in a new paradigm: that for the vast
    majority of taxpayers in this country there is no conflict between
    taxpayer compliance and taxpayer rights. The latter enhances the
    former. Access to justice and representation within the tax system
    brings these two goals into harmony.

                    Responses to Questions From Senator Roth

     30 June 1998

     Hon. William V. Roth, Jr.,
     U.S. Senate,
     Committee on Finance,
     Washington, DC.

         Dear Senator Roth: Thank you for providing me with the opportunity
    to testify before your committee in February of this year on the
    subject of taxpayer rights. I am delighted to be able to respond to
    your request for my views on your additional questions, set forth
    below.
        Question 1. Do you believe that taxpayers are afforded proper due
    process in the collection process as implemented by the IRS? If not,
    what are your suggestions that would protect the taxpayer while not
    harming our tax system?
        Answer. I believe that there are several mechanisms in place that,
    if applied in the spirit with which they were developed, would protect
    taxpayers' due process rights. At present, the Collection Appeal
    Request (Form 9423) provides an independent Appeals review of proposed
    collection actions. This method is utilized infrequently. The fact that
    it is an option is not clearly identified in publications or in
    conversations with IRS employees. Thus, the Service should much more
    aggressively inform taxpayers about the right to such a collections
    appeal.
         I do not, however, believe that a new layer of administrative
    review should be inserted into the collections process. For example, I
    do not think an ``administrative law judge'' proceeding pre-seizure, -
    lien, or -levy, is necessary; it would only further confuse the
    taxpayer.
         Revenue Officers should be required to orally inform the taxpayers
    of their rights to appeal a proposed collection action, even if the
    taxpayer does not protest it (some taxpayers may be afraid to protest).
    A simple card bearing a statement of taxpayer rights in collection
    actions could be inserted in each collections communication; this card
    need not be enormously detailed. Rather, it should be a checklist,
    providing the taxpayer with a ``heads-up'' about their rights. Revenue
    Officers should also be required to inform taxpayers about the
    availability of low income taxpayer clinics. Finally, they should be
    prohibited from discouraging the taxpayer from seeking representation
    by an authorized representative.
        Question 2.  I am also concerned that the IRS targets low income
    and disadvantaged taxpayers for audit. What can be done to ensure that
    these taxpayers who are attempting to comply with the complex tax laws
    are afforded protection from being targeted by the IRS?
        Answer.  The single most effective tool to combat targeting
    (intentional or unintentional) of low income and disadvantaged
    taxpayers is access to representation. Representation levels the
    playing field in audits, collections and litigation. It is imperative
    that funding be available for the establishment and operation of low
    income taxpayer clinics in every major city in each IRS district.
         Certain audit issues will of necessity ``target'' low income
    taxpayers. The most obvious example is initiatives directed toward
    better compliance with the Earned Income Credit. General substantiation
    requirements will also cause problems for low income taxpayers, many of
    whom live marginal existences and do not use checking accounts or have
    a mechanism for keeping records or saving receipts. They often live in
    multi-generational households and care for informal ``foster''
    children. They do not understand the complex and often contradictory
    laws governing dependency exemptions; head of household vs. married
    filing separately status; and the EIC ``qualifying child.''
         Similarly, self-employed low income persons do not retain receipts
    for otherwise deductible business expenses.
         During the course of a typical correspondence audit, the taxpayer
    is given thirty (30) days to respond to the Service, providing
    documentation supporting the taxpayer's position. This is too short a
    period of time for low income persons to gather the necessary
    information, since many low income persons do not have a telephone in
    their home; nor can they take off work to gather documents. Often the
    30 days elapse, the deficiency notice is generated and the 90-day
    window to Tax Court expires while the taxpayer is still gathering
    evidence.
         When taxpayers do call the IRS or submit some documentation, it is
    often insufficient because the taxpayers do not understand how to prove
    a specific deduction or credit. Correspondence audit workers often
    review the documentation superficially and do not work with the
    taxpayer to obtain more appropriate evidence. It is easier to close the
    case than it is to write a clear letter to the taxpayer suggesting
    additional documentary support.
         Low income taxpayers are not provided with a satisfactory
    explanation of the difference between the Audit and Appeals functions.
    Many taxpayers do not appeal their audit results because they think
    that Appeals will not give a fresh look at the documents. The pro forma
    letters explaining appeal rights are not eye-catching or informative
    enough to make someone think he will have a real second chance to
    present his case.
         Finally, unscupulous, untrained, or unregulated return preparers
    are a real problem for this population. Even the measures targeting due
    diligence are only effective if the preparer signs the return. In many
    low income communities today, inexpensive but unqualified preparers are
    setting up low income taxpayers for future audits.
         Thus, I would suggest the following initiatives:
       Fund low income taxpayer clinics. Require the exam branches
            of district offices and service centers to insert into audit
            and 30-day letters a list of all qualified low income taxpayer
            clinics eligible to receive federal funding under proposed
            Section 2576.
       Lengthen the response time period for correspondence audits,
            particularly in audits covering issues likely to affect low
            income taxpayers, e.g., the earned income credit.
       Train auditors to ask for specific additional information
            that might be helpful to the taxpayer, rather than assume the
            taxpayer is withholding information or cannot substantiate his
            or her position.
       Develop clear and easily understandable explanations of the
            audit process.
       Train auditors to show flexibility and sensitivity to the
            taxpayer's life situation, including her current financial
            status.
       Develop creative and helpful suggestions for establishing
            certain deductions, credits, filing status, other than through
            traditional methods such as cancelled checks.
       Provide clear and easily understandable explanations of the
            Appeals process. Require oral explanations of the Appeals
            process as a possible alternative for a taxpayer unhappy with
            the result at the exam level.
       Order a study of unregulated return preparers. The IRS
            should launch an initiative throughout the tax preparation
            community regarding return preparer requirements and need for
            self-monitoring by the profession.
        Question 3.  Are the Taxpayer Advocate and Problem Resolution
    Officers effective in quickly solving taxpayer problems?
        Answer.  I have had general success in resolving issues at the
    Taxpayer Advocate/Problem Resolution Officer level once the matter is
    referred to these offices. The difficulty lies in obtaining the
    referral. Often a case bounces around between collections and PRO. The
    taxpayer receives a letter from the PRO asking him or her to send the
    PRO all sorts of information supporting his position. Often the problem
    is that very lack of information. That's why the case is in PRO: to
    ferret out the information. If the taxpayer gives this response to the
    PRO, the case is sent back to collections.
         Many PROs are unwilling to use the tools currently at their
    disposal. This is particularly true with Taxpayer Assistance Orders
    (TAOs). It is my experience that the taxpayer has to be in extremely
    dire circumstances for such an order to be issued. I find myself
    requesting TAOs for clients most frequently when the system has failed
    to respond to earlier attempts at resolving an issue. Yet PROs are
    hesitant about using the TAO in such situations. This hesitancy is
    contrary to the purpose for TAOs.
         The only solution to this problem is a strong Taxpayer Advocate at
    the National Office level and strong Taxpayer Advocates in each region
    and district. Only with excellent leadership will a timid workforce
    fulfill their true function. Strong leadership will also encourage
    those demoralized members of the PRO staff who are out there in the
    field really trying to assist taxpayers.
        Question 4.  The current offer in compromise program does not seem
    to work. In too many instances, people go into the program, nothing
    gets resolved, and by the time they get out they are socked with
    horrendous interest and penalties. Is this program broken? How would
    you improve it?
        Answer.  I believe that the offer in compromise program is an
    excellent solution to the nagging problem of unproductive collections.
    However, the system does not work well or fulfill its potential because
    of a lack of flexibility in the rules governing the program, which is
    further reflected in the actions of the employees governed by these
    rules. Specifically, the national standards for allowable and necessary
    expenses are taken as rigid restrictions rather than guidelines.
         Further, there is little, if any, emphasis on the equities and
    reasonableness of the tax debt. For example, where a taxpayer has paid
    all of the underlying tax and is seeking to compromise penalties and
    interest, this fact should be relevant in the determination of the
    offer's acceptance. Offer examiners should weigh intangible factors
    such as the likelihood of repeat arrearages and the likelihood of
    bankruptcy. Is this a responsible person penalty arising from a
    business that is no longer in existence? Is the taxpayer 80 years old
    and disabled? These facts should weigh in favor of offer acceptance.
         The Service must undertake a significant commitment to keeping
    taxpayers within the system and helping them remain within it. I can
    only do so much as an attorney to convince my client to come forward
    and become compliant. I will be unsuccessful in convincing him to
    reenter if I cannot offer some sort of resolution to his back tax
    debts. To do this, I must have the Service's cooperation: it should
    attribute a high value to a promise of continued compliance.
         The Service should also remove the requirement of a minimum offer
    amount. A low income taxpayer may offer $500, which he has borrowed
    from family and friends, to pay a tax debt. Refusing this offer on the
    grounds that it is too little to cover even the costs of processing the
    offer is a complete distortion of the offer in compromise program's
    purpose. It limits participation in the program and the program's
    remedy to affluent taxpayers alone.
         The offer in compromise program could be a very successful vehicle
    for challenging the validity of the underlying tax liability. It is the
    only avenue available when all statutes of limitation (other than
    collections) have run. The Service in our district requires financial
    statements to be filed with doubt-as-to-liability offers. Financial
    status is irrelevant where the underlying tax is being challenged.
    Further, the Service should not expect any payment for this offer; the
    taxpayer is paying a significant price in submitting the offer because
    the statute of limitations on collections is extended upon submission.
    That fact alone, if publicized, will discourage meritless offers.
         Finally, tax practitioners need to be more careful about
    submitting offers and not abuse the process. The offer in compromise
    program is not the end-all panacea. I am aware of at least one
    organization that checks federal tax lien filings and contacts
    taxpayers about possible tax relief. I have represented clients who
    have paid this group $500 up front for IRS representation (by mail)
    only to receive (by mail) a copy of Form 656 (Offer in Compromise) and
    Form 433-A (Individual Financial Statement). The taxpayer is instructed
    to fill these forms out and return them to the company, which will in
    turn submit them to the IRS. Of course, the taxpayer could have done
    this themselves, for free. The Service, Congress and professional tax
    practitioners need to do a better job of policing the tax profession in
    the collections arena.
        Question 5.  Last September, one of our witnesses, Father Ballweg,
    indicated to all of us the importance of a system that is customer
    friendly. Shouldn't most correspondence be signed so that agency
    personnel are accountable? At some stage in the process, where a
    problem arises, should the taxpayer be given an employee to whom the
    taxpayer may turn to resolve the case?
        Answer.  I think it is vitally important that the IRS becomes more
    customer friendly. Employees must learn to adopt the attitude that the
    taxpayer is sincere in attempting to resolve a matter, even if they are
    incorrect. Employees must see their role as non-adversarial (with the
    exception of litigation personnel).
         I believe front-line people who have direct contact with the
    taxpaying public should be paid extremely well. These are the people
    most taxpayers have contact with and identify with the ``Government.''
    Respectful contacts at this level are vital to ensuring ongoing
    taxpayer compliance with the tax system. The Service should develop
    incentive awards for politeness, not collections levels. Because of the
    stress inherent in customer service jobs, split shifts and part-time
    shifts may be the most appropriate staffing approach. Private industry
    has worked with this problem for decades; the Service should study its
    methods and adapt them to the government function.
         I do not think collections employees should sign their full name
    to correspondence on a routine basis. There is a level, at
    correspondence audit, where contact employees are identified, and I
    believe this is an appropriate procedure given the nature of the cases.
    At the ACS level of collections, assigning one employee to a given case
    would work against current initiatives to provide customer service
    during extended office hours. This latter effort is a very important
    customer service feature.
         It is important, however, that IRS employees be held accountable.
    In telephone conversations, particularly in collections, not only
    should employees identify themselves by their last names but also by
    their employee numbers so that erroneous statements or advice can be
    traced to the responsible employee.
         Finally, I believe that the Service could benefit greatly from
    outsourcing its graphic design and communications efforts. Government
    publications do not need to be arcane, nor do they need to look like
    standard issue government documents. Particularly with the population I
    represent, visual elements and legibly displayed materials are key to
    getting any message across.
        Question 6.  I have a constituent who owns a small business in
    Delaware. . . . If the IRS audits or attempts to collect from a
    taxpayer and the taxpayer prevails either in court or in appeals,
    should the IRS pay the taxpayer's costs and attorney fees?
        Answer.  Two improvements should be made to current statutory
    scheme for recovery of attorney fees under IRC Sec. 7430. First,
    recovery should be extended to cover the cost of representation
    commencing with the 30-day letter advising the taxpayer of his or her
    right to an Appeals conference. Second, the statute should provide for
    recovery of (imputed) attorney fees and costs when a taxpayer is
    represented on a pro bono basis.
         I do not think that Sec. 7430 should be extended to the
    examination level, since it may limit legitimate inquiries into a
    taxpayer's return. Any society with a system of taxation must
    accomodate reasonable differences of interpretation between the
    taxpayer and the taxing agency. The key word here, of course, is
    ``reasonable.'' There are other methods available, including
    performance evaluations, that can increase ``reasonable'' positions at
    the audit level.
         When someone with settlement authority (Appeals) has a chance to
    look at the case, it should be that person's responsibility to identify
    any positions that are not substantially justified. Making Appeals
    subject to IRC Sec. 7430 will reinforce the independence of Appeals.
    Further, if an issue raised at audit is determined by Appeals to be not
    substantially justified, it should be taken into consideration during
    the revenue agent's personnel evaluation. If Appeals and the taxpayer
    cannot agree as to the applicability of IRC Sec. 7430, then the
    taxpayer should have an opportunity for review by an Appeals Officer
    not previously involved in the case.
        Question 7.  During the September hearings employee witnesses
    testified that many IRS employees ignore the Internal Revenue Manual
    and other official procedures with impunity. Should IRS employees be
    required to follow the Internal Revenue Manual and other official
    procedures? If IRS personnel do not follow IRS policies and procedures,
    what should happen to the taxpayer's case?
        Answer.  We as practitioners rely upon the Internal Revenue Manual
    (IRM) as a roadmap for what we can expect during IRS communications and
    proceedings. Indeed, the Service often justifies its actions by
    reliance on IRM provisions. I have had some second thoughts, however,
    about requiring the IRM be followed in all cases, since in a
    bureaucracy like the IRS, procedural guidelines tend to become set in
    stone (see, for example, the above discussion of the offer in
    compromise program).
         Rather than requiring IRS employees to follow the IRM, they should
    be required to explain and document why they are deviating from the
    Manual. The taxpayer should be provided access to this explanation upon
    request. This will still afford the employee the chance to deviate for
    good reason but will provide the taxpayer with some justification for
    the deviation from established and expected procedures. Adherence to
    IRM procedures (or adequacy of explanations for deviation) should be an
    element of performance reviews. Deviations may point to a need for
    changes in the IRM; for this reason, some mechanism for cataloging
    deviations should be developed.
         I hope the above responses prove helpful to you. Thank you again
    for your keen interest in IRS Restructuring and your particular
    interest in taxpayer rights and low income taxpayers. It has been a
    privilege to work with you and your staff in the development of this
    significant legislation.

               Yours very truly,
                                       Nina E. Olson,
                                       Executive Director,
                                       The Community Tax Law Project

                                   __________

                    Prepared Statement of Svetlana Pejanovic

        Thank you Chairman Roth and members of the Committee for this
    opportunity to tell you my story. Please excuse my English--I will do
    my best to be clear.
        My name is Svetlana Pejanovic. I came to the United States from the
    former Yugoslavia in 1980 on a student exchange program. I was only 23
    and spoke no English. Now, 18 years after my arrival in this great
    country, I am on the verge of losing everything that I have ever worked
    for. My salary has been garnished, and the Internal Revenue Service
    (IRS) has placed a lien on my home. One evening just last month, an IRS
    collection officer came to my home, unannounced, wanting to seize all
    of my personal belongings.
        I will now provide you with some background on me and how I arrived
    at this point. I married an American citizen in March of 1982. For the
    4 years I was married to him, my husband asked me to sign joint income
    tax returns. Because this type of tax did not exist in Yugoslavia. I
    relied on my husband to do the correct thing since he was familiar with
    such requirements in the United States. Our marriage did not last and
    we separated in 1986. I did not receive any financial help, at all,
    from him after the divorce.
        After that experience, I filed my own tax returns under the
    guidance of my former husband's accountant. I was able to purchase a
    modest apartment for myself and worked hard to pay my mortgage.
        At the end of 1993, I received a phone call from the IRS telling me
    I was in serious trouble as I owed over two hundred thousand dollars
    for back taxes from over a decade before when I was married to my
    husband. I was absolutely shocked. I was totally honest with the IRS
    officer during this telephone call and provided both my home and work
    address, and stated to him that I owned the condominium in which I
    lived.
        Immediately after this phone call a lien was placed on my home. I
    called my former husband about all that had taken place and he assured
    me that he would take care of the problem. I still trusted him since he
    was the one who handled all our finances while we were married. Roughly
    3 months after he assured me the problem would be resolved, I received
    an extremely embarrassing call from my company's payroll department
    informing me that my pay would be seized within 2 days unless I could
    make a ``deal'' with the IRS. It was only after I informed my former
    husband of this problem that he confessed that he had, in fact, been
    receiving mail from the IRS--addressed to both of us--for years.
        My former husband, the accountant we both had retained, even others
    at my former husband's company, all knew about this problem. They never
    told me! My former husband even admitted to me that he really did not
    think the IRS would ever go after me. He claimed he had no money for
    lawyers and that I was the stupid one for co-cooperating and being open
    and honest with the IRS! At this point he had now gone back to his
    former wife and had placed all his assets in both her name, and his
    children's names.
        Gentlemen almost 16 years after my failed marriage, my former
    husband is of no interest to the IRS for actions he alone is
    responsible for. Yet as his former wife--not current but former--I
    continue to be the target of the IRS' collection effort for the taxes
    he owes. In fact, as recently as 3 weeks ago this past, Monday, the IRS
    seized my checking account as well as my personal retirement account!
    Is it my fault that my former husband was faster at disposing of his
    assets than the IRS was in collecting from him? Am I to continue to be
    the victim of the IRS' rage? Senators, my former husband is living in a
    home with his family and has an income. Why doesn't the IRS go after
    him for the taxes he owes? Are they coming after me because I can't
    fight? Maybe I am just an easy target.
        I contacted a lawyer who advised me that I had 3 options to choose
    from given my situation (1) bankruptcy; (2) an offer in compromise; or
    (3) filing an innocent spouse petition. He claimed bankruptcy was the
    easiest and cheapest way to resolve the problem I responded, ``. . .
    but I'm not guilty of anything!'' I told him I would NEVER declare
    bankruptcy--to do so was against my principles' He then suggested I
    should stop working altogether until I solved this problem. After the
    lawyer charged me thousands of dollars and provided no solution. I
    turned to an accountant who was a former IRS employee. For  years he
    argued with the IRS that I should be ``let off the hook'' since I had
    never received, seen or known about any IRS notices that had been sent
    to my former husband, and he insisted the statute of limitations had
    run out. Regrettably this argument went nowhere. Friends and colleagues
    urged me not to fight the system. They told me not to fight the IRS but
    simply declare bankruptcy and to get on with my life.
        Just last year a lawyer informed me that the facts of my case made
    me a ``classic'' innocent spouse but, in order to prove this in court,
    I was told I would have to put up the entire amount of money the IRS
    claimed I owed based on my former husband's bungled finances. Senators,
    the amount by then was roughly $300,000  doubt if any of you can tell
    me how I can defend myself against the IRS. Alone, I am no match
    emotionally, or financially. against their power.
        Senators, I left a communist country in Eastern Europe many years
    ago to study in the United States and enjoy, even for a short time, the
    freedoms democracy bestows on its citizens. Today, I am still thrilled
    to be able to live and work in this great nation. However, I must tell
    you that the actions of the IRS against me were not unlike actions that
    took place in my former communist homeland. To me, the IRS is too
    powerful and is responsible to no one. They do not care who they hurt,
    or how they get their money. Do not be mistaken. I am willing to pay
    taxes--as I have been for all these years--to support this great nation
    but the way the IRS has gone after me for them is simply not fair.
        I am so grateful to be able to appear before the United States
    Senate to tell my story. My hope is that by doing so will be, in some
    small way, helpful to you as well as the many women who may be watching
    this today who, themselves, have been overpowered by the IRS.
        Thank you.

                                   __________

                     Prepared Statement of Hon. Rob Portman

         Thank you, Chairman Roth and Members of the Committee, for
    allowing me to testify today. As you know, I served as co-chairman of
    the National Commission on Restructuring the IRS along with your
    colleague and a respected Member of this Committee, Senator Bob Kerrey.
    His vision, creative ideas and commitment to reform were key to
    producing the comprehensive Commission recommendations and the
    legislation to implement them. And, another distinguished Member of
    this panel, Senator Charles Grassley, was an active member of the
    Commission and made valuable contributions to our work and final
    report, especially in the area of taxpayer rights.
         The Restructuring Commission was created by Congress and charged
    with ``auditing the IRS'' for the first time since 1952. We rolled up
    our sleeves, spent a year looking at the problems of the agency,
    conducted an extensive series of public hearings, and, last June, came
    up with a comprehensive plan to create a new IRS--more responsive to
    taxpayers and more respectful of their rights. In July, Senators Kerrey
    and Grassley and Congressman Ben Cardin and I introduced legislation to
    implement the major reforms embodied in the Commission's
    recommendations--legislation that was the subject of extensive hearings
    before the Ways and Means Committee and that passed the House by a vote
    of 426 to 4. But it was this Committee's hearings last September that
    focused all of America on the need to fundamentally reform this
    troubled agency, and for that, Mr. Chairman, this Committee deserves
    the gratitude of the Commission members, the Congress and, most
    importantly, the American taxpayer. I commend this panel for using the
    House-passed bill as the foundation for your reforms. I know I speak
    for Chairman Archer, Congressman Cardin and others in the House in
    saying that we are eager to work with you as partners in improving our
    bill and getting this legislation to the President as soon as possible
    this year.
         A number of questions were raised yesterday regarding the House-
    passed legislation, and I would be happy to try to respond to them. But
    first, I would like to discuss briefly a couple of the difficult issues
    that this Committee will be considering.
         As you have rightfully pointed out, Chairman Roth, we'll only have
    one shot at IRS reform in this Congress, so it's important to ensure
    that the IRS reforms we enact are comprehensive and sustainable. That's
    why the IRS Oversight Board we have proposed is so important. Long
    after these important hearings have ended, and the cameras and
    reporters have gone on to other stories, Congress and the American
    taxpayer should know that there is a mechanism in place to hold the
    IRS' feet to the fire--a mechanism that provides ongoing oversight with
    expertise, continuity and accountability.
         The Oversight Board's role, simply put, is to guide the
    development and oversee the implementation of long-term strategies at
    the IRS--a function that is sorely lacking now--and to hold IRS
    management accountable for its performance. In my view, to be
    effective, the Board must focus on the ``big picture'' strategic issues
    and allow the Commissioner to be responsible for the day-to-day
    operations of the IRS. The Oversight Board's job is to ensure that the
    train is running in the right direction and on time, not to micromanage
    the conductor. As envisioned by the House-passed legislation, the
    Oversight Board is focused on strategic tax administration--it is not
    intended to get into specific tax cases.
         The withholding of Section 6103 authority from the Board was
    deliberate, and it was done for two reasons. First, it serves to
    prevent actual or perceived conflicts of interest for board members.
    This is important for a number of reasons, but one of my concerns is
    that the potential for such problems may make it difficult to attract
    the kind of people we would want to serve on the Board.
         Second, the lack of 6103 authority will also keep the Board
    focused on the big picture problems of the IRS and prevent it from
    becoming mired in individual tax matters. There may be a way to grant
    something short of blanket 6103 authority to the IRS Oversight Board,
    without permitting access to individual taxpayer information.
         Finally, I would like to commend Chairman Roth and the Members of
    this Committee for their strong endorsement and confirmation of Charles
    Rossotti as Commissioner of the IRS. As I believe you witnessed in this
    hearing room yesterday, he brings the kind of credibility, expertise
    and new ideas that are clearly needed to guide the IRS out of these
    troubled waters.
         The plans he unveiled before this Committee yesterday for a
    comprehensive modernization of the IRS--focusing on helping people
    comply with the tax laws and ensuring fairness of compliance--are
    exciting and entirely consistent with the House-passed bill. Essential
    to this concept is designing, organizing and measuring the work of the
    IRS around major taxpayer groups with similar needs. I support this
    concept, which was recommended by the Restructuring Commission, and Mr.
    Rossotti deserves credit for moving forward to implement it. But, in
    order to be truly successful in his task, Commissioner Rossotti must
    have the expanded authority and the personnel flexibilities that the
    restructuring legislation would give him, and a strong Board to enhance
    and support the bold reforms that must be driven all the way through
    this agency.
         The era of big government may be over, Mr. Chairman, but we must
    now redouble our efforts to create more efficient and responsive
    government. The IRS, in its current form, represents the worst of
    impersonal, antiquated and inefficient Washington bureaucracy.
    Meanwhile, the private sector has redefined the standards of customer
    service over the last two decades, delivering world class products and
    responsiveness while achieving new levels of efficiency. We should
    expect no less of the IRS as we enter the 21st Century. Congress has a
    responsibility to give the IRS the tools and oversight it needs to get
    the job done. I commend you again for moving legislation forward to do
    just that, and look forward to working with you in the weeks ahead to
    provide this needed relief to taxpayers as soon as possible.

                                   __________

                Prepared Statement of Margaret Milner Richardson

        Chairman Roth and distinguished members of the Committee. I
    appreciate the opportunity to join you today to share some of my
    thoughts about restructuring the operations of the Internal Revenue
    Service, as well as some of my thoughts about the provisions in the
    Internal Revenue Service Restructuring and Reform Act of 1997
    (H.R.2676) passed by the House last fall. I commend you and your
    Committee, Mr. Chairman, for carefully considering the issues and
    various proposals for restructuring and reforming the Internal Revenue
    Service. I believe it is important to take the time to weigh the
    potential impact of these proposals on the future of tax administration
    and on our self-assessment tax system.
         I am currently a partner at Ernst & Young, LLP. From 1993 to 1997,
    I served as Commissioner of Internal Revenue. Those four years marked a
    period of great change as well as significant accomplishment at the
    Internal Revenue Service, although I would be the first to tell you
    that there was more that needed to be done. We set ambitious goals to
    improve service to taxpayers by providing more ways for them to obtain
    accurate and timely information, file returns and make payments. We
    were also addressing concerns expressed by many of you and your
    colleagues in the House of Representatives about eliminating refund
    fraud, particularly in the Earned Income Tax Credit program, closing
    the so-called ``tax gap,'' decreasing the accounts receivable, and
    improving compliance levels. In other words, the IRS tried to improve
    service to taxpayers, while at the same time improving compliance--not
    an easy task at any time, but especially not during a period of
    shrinking resources.
        I began my career in the Chief Counsel's Office of the Internal
    Revenue Service in 1969. At the time I left for the private sector in
    1977, I held the highest management position in the Chief Counsel's
    Office. Managing at that time in the public sector was often
    challenging and sometimes frustrating, largely because of a budget
    process that inhibited long range planning and personnel rules that did
    not always permit an agency to hire the best person for the job nor
    provide the flexibility to reward those who performed well.
        When I returned to the IRS as Commissioner almost 25 years later, I
    found some of the same people, some of the same systems and many of the
    same issues. Managing in the public sector was still challenging, but
    even more frustrating. Not only had the Internal Revenue Code grown
    lengthier and more complex, but the Internal Revenue Service had also
    been asked to shoulder responsibilities beyond just collecting taxes.
    In addition, everyone attempting to manage in the federal sector was
    struggling with the sometimes conflicting requirements of the Federal
    Managers' Financial Integrity Act, the Chief Financial Officers Act,
    the Government Performance and Results Act, the Paperwork Reduction
    Act, the Debt Collection Improvement Act, and the 1974 Congressional
    Budget Act (to name a few).
        It was also clear that the resources available to the IRS would not
    continue to expand as they had throughout the 1980's and that
    significant change in the way the IRS was organized and did business
    would be essential in order to provide efficient, effective, high
    quality tax administration. I found a number of employees who were
    concerned about finding ways to provide better service to taxpayers.
    They wanted to be better trained and better resourced so they could
    provide better service while enhancing compliance levels.
        Although there was a desire to implement change and many at the IRS
    spoke the language of change, often they did not have the training,
    tools, and resources to implement change. There was also a certain
    skepticism, and at times even cynicism, about whether or not change
    could be effected or that a consensus among the overseers could be
    reached on what kind of change should be undertaken. That was why many
    of us at the IRS welcomed the creation of the National Commission on
    Restructuring the Internal Revenue Service and looked forward its
    report. We believed that the Commission could examine a number of
    issues in a bipartisan atmosphere and that the recommendations would be
    taken seriously because of the stature of the Commission members.
        One of my privileges as Commissioner was to participate as an ex
    officio member of the Commission. The Commission examined many aspects
    of the IRS and its operations; the IRS provided extensive material to
    the Commission and unlimited access to IRS employees. The work of the
    Commission and its Report issued in June, 1997, formed the basis for
    H.R. 2676 and its Senate companion S. 1096.
    IRS Mission and Governance
        The subject that has captured the most attention in connection with
    discussions about restructuring and reforming the IRS has been that of
    governance. The specific focus has been whether or not there should be
    an Oversight Board with private sector members, and, if so, what
    authorities and responsibilities such a body should have.
        I do not believe that there is any one form of organization or
    governance that is perfect--whether it be for the Internal Revenue
    Service or any other organization. Nor do I believe that there is any
    one form of organization that will cause all of the concerns about the
    IRS--real and/or perceived--to evaporate. We have all heard repeatedly
    during the past year about the ``problems'' of the IRS, that they were
    a long time in the making, and that those problems would take a long
    time ``to fix.'' What those ``problems'' are must be identified with
    enough specificity so that the steps necessary to ``fix'' them can be
    specifically identified. Some of the problems at the IRS are no doubt
    present in any large organization; some of the same problems are
    present in many other government agencies; and some of the problems
    relate to the complexity of the Code that the IRS is charged with
    administering. You in the Congress--the elected representatives of the
    American people--must decide what you want to achieve through any
    reform and restructuring of the IRS. Your task is to identify those
    problems which can be fixed and try to identify the organizational
    structure and the changes that will most likely produce the fixes.
         It is also imperative that there be agreement among all of the
    various interested parties, particularly in the Executive branch and
    the Congress, what the mission of the IRS should be. The current
    Mission Statement of the IRS provides:
              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.
        If you as our elected representatives are not satisfied that this
    statement properly reflects the mission of the Service, then you should
    change it. Once there is agreement about the mission of the IRS, then
    there must be agreement about the governance and organizational
    structure most likely to accomplish that mission. Ideally, such a
    structure would be so streamline that there would be clear lines of
    authority and accountability throughout the organization, from the top
    all of the way to the front line employee.
        The goal of the proposal that Commissioner Rossotti discussed with
    this Committee yesterday for restructuring the IRS is intended to do
    just that. That proposal deserves very careful consideration--something
    I am certain the Congress will give it. The Commission considered such
    an approach, but did not have time to fully explore it, and recommended
    that it be given further consideration. Obviously, without more details
    about the Commissioner's proposal, it is difficult to predict whether
    that proposal will accomplish its intended goals. What I can predict
    with reasonable certainty is that any new organizational structure
    without the right kind of talent to perform the organization's mission
    will have little chance of success. Without maximum personnel
    flexibilities so that the best qualified people can be recruited,
    trained, and retained, any new structure will fail. In addition,
    without stable funding and focused, consistent, and constructive
    oversight, a new organizational structure will have little success.
        For those reasons, I strongly support the provisions in the House
    bill that would provide stable funding and coordinated Congressional
    oversight. There is also a provision that restricts GAO audits and
    investigations so that there will be close coordination of all GAO
    audits to prevent duplicate and overlapping investigations. Those
    restrictions should also apply to GAO audits that are ordered by
    Committee and Subcommittee Chairs and Ranking Members. In addition,
    section 7217 of the House bill prohibiting certain Executive branch
    employees from requesting the IRS to conduct or terminate an audit or
    investigation of any particular taxpayer should be expanded to cover
    the Legislative branch as well.
    IRS Governance and Organization
        Under H.R. 2676, the IRS would continue as a bureau of the Treasury
    Department, but the legislation provides for the establishment of an
    IRS Oversight Board comprised of 11 members, eight of whom would not be
    federal government employees. The remaining Board members would be the
    Secretary of the Treasury (or Deputy Secretary, if designated by the
    Secretary), the Commissioner of Internal Revenue, and a representative
    of an organization that represents a substantial number of IRS
    employees, currently the National Treasury Employees Union (NTEU).
        Under the House bill, the Board would have no responsibilities or
    authority with respect to the development of federal tax policy, IRS
    law enforcement activities, and specific IRS procurement activities.
    The Board would have specific authority to:
       review and approve IRS strategic plans, including the
            establishment of mission and objectives;
       review the operational functions of IRS, including plans for
            modernization of the tax system, outsourcing or managed
            competition, and training and education;
       review (but not approve) the Commissioner's selection,
            evaluation, and compensation of senior managers;
       review and approve the Commissioner's plans for major
            reorganization of the IRS; and
       review and approve the Commissioner's budget request and
            ensure that the request supports the annual long-range
            strategic plans of the IRS.
        The Commission originally recommended a seven-member Board with
    more authority than that provided in the House Bill. The Commission
    envisioned a Board with broad general powers to ``oversee the IRS in
    the management, administration, conduct, direction, and supervision of
    the execution and application of the internal revenue laws.'' In
    addition, the Commission would have charged the Board with certain
    specific powers, including the power to select, appoint, evaluate, and
    remove the IRS Commissioner and to review and approve the selection,
    evaluation, and compensation of senior IRS managers.
        While I agree with the change made to leave the power to appoint
    and remove the Commissioner with the President, I hope that in addition
    to carefully considering Commissioner Rossotti's proposal for
    reorganizing the IRS that this Committee will carefully focus on what
    the governance structure of the IRS should be. One approach considered
    by the Restructuring Commission, but not pursued because of concerns
    about its political feasibility, was whether the IRS should be an
    independent agency, perhaps like the Social Security Administration,
    with the Commissioner reporting to a governing board overseeing the
    agency's operations. In my opinion, such an approach could provide the
    most effective and least cumbersome governance structure for the
    agency. Such a structure, coupled with oversight, budget, and personnel
    reforms could make a significant improvement in the ability of the
    Service to carry out its mission more effectively and efficiently. An
    independent agency with cabinet-level status would also provide an
    advantage in recruiting and retaining top quality personnel.
        The IRS performs a unique function and should be treated uniquely.
    It is in effect the government's ``profit center,'' but currently it is
    subject to the discretionary budget caps. In the appropriation process,
    the IRS is often treated as ``just another spending program'' where it
    is forced to compete for resources with other programs that have far
    more political appeal.
        I cannot overemphasize the importance of stable funding sufficient
    to carry out the IRS mission. The IRS is responsible for collecting 95%
    of all federal revenues and for enforcing the nation's tax laws. In
    addition, the IRS has been charged in recent years with other, non-tax
    responsibilities ranging from enforcing child support payments to money
    laundering statutes. The lack of stable and sufficient funding directly
    affects the IRS's ability to provide quality service to taxpayers and
    directly affects the IRS's ability to enforce the tax laws. Providing
    quality service to taxpayers, while continuing to enforce the tax laws
    is vital to our self assessment system.
        Making the IRS an independent agency also would allow the IRS
    Commissioner to be an independent voice for tax administration
    concerns. The Treasury Department has an Assistant Secretary for Tax
    Policy who serves as the chief advocate for tax policy views, but there
    is no equivalent advocate for sound tax administration. I am convinced
    that the lack of such high level attention to tax administration
    concerns has contributed to the high degree of complexity in our
    current tax system. For that reason, I wholeheartedly support section
    421 of the House bill which indicates that the IRS should provide an
    independent view of tax administration to Congress about the
    administrability of proposed tax law provisions.
        I realize that establishing the IRS as an independent agency may
    not be politically feasible at this time, but I urge this Committee to
    give serious consideration to that approach. Short of making the IRS an
    independent agency, and if you determine that an Oversight Board is an
    appropriate form of governance to improve the efficiency and quality of
    tax administration, then I believe that the responsibility and
    authority of the Board cannot be ambiguous. As I read the House bill,
    the authority and responsibility of the Oversight Board is ambiguous
    and appears to overlap the authority and responsibility of the
    Commissioner. The Board has no authority to run the IRS and would have
    insufficient powers to hold the IRS Commissioner and senior IRS
    executives fully accountable for achieving the IRS's strategic goals.
    The only real authority bestowed on the Board appears to be to review
    and approve the annual strategic plan and any major IRS reorganization.
        It is vital for Congress to be clear about what it wants the role
    of the Oversight Board to be. If you want an Oversight Board to run the
    agency, you should expressly give it the authority it needs. If you
    want a Board to serve an advisory function, then you should be explicit
    that its role is merely advisory. The most difficult situation from the
    standpoint of the agency would be to provide a Board with an ambiguous
    role. The Board can be effective only if its role is clear.
        One issue not covered by the House bill that I think should be
    addressed by this Committee involves the Office of the Chief Counsel.
    Currently the Chief Counsel is an Assistant General Counsel of the
    Treasury Department, and the Office of the Chief Counsel is not a part
    of the IRS organization, although the funding for the Office comes from
    IRS appropriations. The Office of the Chief Counsel should be a formal
    part of the IRS organization and report to the Commissioner. It is an
    anomaly for an organization's lawyer not to be responsible to its
    client. That is the norm in the private sector, and, except for the
    IRS, I believe it is the norm in the federal sector. If a
    reorganization such as that suggested by Commissioner Rossotti were to
    proceed, then it would be even more important for the Chief Counsel's
    Office to be part of the IRS organization, so the organization could be
    aligned with each of the IRS' major business units.
    Appropriate Oversight
        Intertwined with consideration of how the IRS should be governed
    are questions about the appropriate form and amount of oversight. The
    IRS is currently subject to both external and internal oversight. The
    Office of Management and Budget and the Department of Treasury provide
    oversight within the Executive branch, while in the Legislative branch
    oversight is provided by three Committees in the House (the Ways and
    Means Committee; the Subcommittee on Treasury, Postal Service and
    General Government Appropriations; and the Committee on Government
    Reform and Oversight) and three committees in the Senate (the Finance
    Committee; Subcommittee on Treasury, General Government, and Civil
    Service Appropriations; and the Governmental Affairs Committee), as
    well as the Joint Committee on Taxation. Congressional committees also
    provide oversight from time to time, and the General Accounting Office
    routinely provides oversight on behalf of the Congress. The
    Restructuring Commission undertook a comprehensive review of the IRS,
    and the press, practitioners, and the general public perform oversight
    as well.
        To give you some idea of the levels and types of oversight the
    Service regularly receives, during my four years as Commissioner, the
    IRS testified at 60 hearings and was the subject of more than 140 GAO
    reports. Internally, the IRS' Internal Audit Function under the Chief
    Inspector, who reports directly to the Commissioner, initiates its own
    studies and audits. The results of these studies and audits are
    reported to IRS management and to the Treasury's Department's Inspector
    General, who, in turn, reports them to Congress. In addition, the
    Taxpayer Advocate, who also reports to the Commissioner, is required to
    submit a ``report card'' for the IRS and Congress each year.
        I am a strong supporter of constructive oversight. I believe such
    oversight is absolutely essential for all government agencies, but
    particularly for the IRS, since our self-assessment system relies
    heavily on taxpayers' confidence in how that system is run. I urge this
    Committee to seriously examine what level of oversight would be
    appropriate.
        The Committee also should be mindful when fashioning the role of
    the Board that when there is more than one overseer, conflicting
    priorities and direction are inevitable. Establishing priorities is
    made more difficult when the various oversight bodies do not agree. For
    this reason, I believe that the provisions in the House bill designed
    to better coordinate Congressional oversight of the IRS are critically
    important. While each of the Congressional committees responsible for
    IRS oversight has a shared interest in improving IRS operations, they
    typically act independently and frequently establish conflicting
    priorities for specific IRS actions.
        The challenge that this creates for the IRS is exemplified by the
    way various Committees responded to the growth in the IRS's Accounts
    Receivables Dollar Inventory, the inventory of accumulated delinquent
    taxes owed by individuals, corporations and other taxpayers.
        Over the period from 1990 to 1995, the IRS accounts receivables
    inventory grew from about $90 billion to $200 billion. (It is important
    to note that a large portion of this rapid growth was attributable to
    specific causes, such as the increase in the statute of limitations on
    tax collections from six to 10 years, the crisis in the savings and
    loan industry in the late 1980s and early 1990s, and provisions in the
    Chief Financial Officers Act of 1990 which mandated the IRS to include
    accrued interest and penalties in the inventory beginning in 1991.)
        Concerns about this rapid growth prompted both the General
    Accounting Office and the Office of Management and Budget to identify
    accounts receivables as a ``high risk'' area for the IRS. In response,
    the FY95 Treasury, Postal Service and General Government appropriation
    included $405 million in funds for the IRS to hire additional
    collection personnel for what was to have been a 5-year $2 billion
    ``compliance initiative'' designed in part to increase collection of
    delinquent taxes.
        During the first year of the initiative, the IRS collected an
    additional $803 million in taxes, more than double the amount expected.
    Despite this successful beginning, the compliance initiative was
    canceled the following year, and IRS budget resources were also reduced
    from the previous year. In addition, the FY 1996 appropriation directed
    the IRS to use $13 million to conduct a pilot project using private
    collection agencies to secure delinquent tax debt. During this same
    period, however, other Congressional committees were increasingly
    concerned about service to taxpayers particularly telephone service
    (although no monies for expanded service were appropriated). I cite
    this to illustrate how the IRS can be whipsawed between the conflicting
    priorities established by the various Congressional committees with IRS
    oversight jurisdiction.
        If the effort to reform the IRS is to succeed, Congress must better
    coordinate and rationalize the demands that it places upon the Service.
    The House bill would address this issue by requiring two annual joint
    IRS oversight hearings consisting of two majority and one minority
    member from each of the Senate Committees on Finance, Appropriations,
    and Government Affairs, and the House Committees on Ways and Means,
    Appropriations, and Government Reform and Oversight. The purpose of the
    first hearing would be to review IRS strategic plans and budget
    resources. The purpose of the second hearing would be to review the
    IRS's progress in meeting its strategic objectives, the improvement in
    taxpayer service and compliance, its progress on technology
    modernization, and the annual filing season.
        I think it would be beneficial to the oversight process to assemble
    the senior members from each of the appropriate Committees twice a year
    in the same room at the same time to hear the same information and have
    an opportunity to question the Commissioner and IRS representatives
    about IRS programs and operations. In the long run, I believe this will
    reduce the risk of the IRS being subjected to conflicting priorities
    and facilitate discussion and better coordination among the
    Congressional Committees.
    Ethics Restrictions on Board Members
        Another issue the Committee should consider carefully is the
    ethical and conflict-of-interest restrictions that would be applied to
    the private sector members of the Oversight Board. While it is vitally
    important to include measures that are designed to avoid potential
    conflicts of interest, it is also important that the ethics standards
    that come with service on the Board be commensurate with the Board's
    actual authority.
        Under the House bill, the private sector members of the Board would
    be treated as ``special government employees'' under Title 18 U.S. Code
    sec. 202, but with an important exception. The Board would be treated
    as serving continuously for 365 days a year. This apparently means that
    the private sector members of the Board would be prohibited from
    representing clients on specific matters before the Treasury Department
    and the IRS and from representing clients in litigation against the
    Treasury and IRS. My understanding is that the private sector members
    of the Board would also be subject to a one-year post-employment ban on
    contacting Treasury or the IRS, and would be required to make public
    financial disclosure.
        While these ethics requirements would be entirely appropriate for a
    Board which is fully empowered to govern the IRS and hold the
    Commissioner and senior executives accountable, they may not be
    appropriate to apply to members of an Oversight Board whose powers are
    only advisory in nature. Thus, the decisions that you make about what
    level of authority to give the Board with respect to IRS governance
    should be accompanied by thoughtful consideration of what ethical
    restrictions are appropriate to the Board's actual level of authority
    and the perceived risk of conflicts of interest.
        The Oversight Board's ability to effectively guide the IRS through
    the difficult changes to come will directly depend on the quality of
    its members. If there is a significant mismatch between the authority
    the Board would wield and the ethical restrictions imposed on the
    private sector members, this could potentially affect the willingness
    of high quality people to serve on the Board. I worry whether
    individuals with the skills and expertise to make a real contribution
    to the IRS would be willing to subject themselves to high level ethical
    restrictions and public financial disclosure in order to serve on a
    Board without any.
        I would also suggest that you make explicit whether the proceedings
    and activities of the Oversight Board are covered by the Freedom of
    Information Act, the Government in Sunshine Act, and the Federal
    Advisory Committee Act. The House bill's silence with respect to this
    issue has created some confusion as to whether the House intended for
    these statutes to be applicable.
    Personnel Flexibilities
        One of the most critical issues facing the IRS is how to recruit
    and retain a workforce with the competencies and skills to accomplish
    the mission it is and will be asked to perform.
        The Commission recommended that Congress, the IRS and the proposed
    Board of Directors make training, skills, and support of IRS personnel
    a priority. Further, the Commission recommended that the IRS place as
    high a priority on employee training and skills as it places on the
    filing season. The House bill contains a package of personnel
    flexibilities which help somewhat in this regard, but their
    effectiveness will be limited by the fact that members of the union,
    probably seventy-five to eighty percent of the workforce, are exempt
    from the bill's personnel flexibilities provisions. This is a major
    shortcoming which I urge the Committee to correct.
    Taxpayer Bill of Rights 3
        There are a few points about the proposals in the Taxpayer Bill of
    Rights 3, which was part of the House passed legislation about which I
    would like to comment.
                Burden of Proof
        The House bill includes a proposal that would shift the burden of
    proof to the government in any court proceeding with respect to any
    factual issue if the taxpayer asserts a reasonable dispute with respect
    to such issue, and if the taxpayer has fully cooperated with the
    Secretary, including providing within a reasonable amount of time,
    access to and inspection of all witnesses, information, and documents
    within the control of the taxpayer, as reasonably requested by the
    Secretary. Under this proposal one necessary element of ``fully
    cooperating'' is that the taxpayer must exhaust his or her
    administrative remedies. Also, the taxpayer must meet certain net worth
    limitations that apply under current law for purposes of awarding
    attorney's fees.
        I am in full agreement with the comments that the Chief Judge of
    the Tax Court, Mary Ann Cohen, made in a December 19 letter to Sens.
    Roth and Moynihan. Judge Cohen commented that the proposed change could
    encourage duplicate proceedings, where the Tax Court would have to
    decide whether the taxpayer is asserting a reasonable dispute, whether
    the taxpayer fully cooperated with the Secretary within a reasonable
    amount of time, and whether the taxpayer met the substantiation
    requirements. She rightfully pondered what this change might mean in
    terms of time and resources expended by the parties involved and by the
    Court.
        I do not disagree with the fundamental fairness of asking the IRS
    to prove its case against a taxpayer--provided, of course, that the
    Service has full access to all of the documentation in the taxpayer's
    control that would be necessary to determine the accuracy of the tax
    return. However, I seriously question whether the formulation of the
    shift in the burden proposed in the House bill will be of sufficient
    benefit to taxpayers to warrant the significant added complexity and
    costs associated with requiring the Tax Court to make a whole new set
    of factual determinations.
        The Committee should look carefully at all the implications that
    could result from making such a change. It might be prudent for this
    Committee to dedicate a separate hearing to this proposal, with a
    discussion of the cumulative effect on tax administration and on
    taxpayer burden of making this change in conjunction with other
    proposals contained in the bill.
                Extension of Privilege
        The House bill provides that the present law attorney-client
    privilege be extended to cover tax advice that is furnished by an
    individual who is authorized to practice before the IRS. The government
    has historically not supported the expansion of privilege in civil tax
    proceedings, because the IRS wants to maintain the ability to access
    all memos, records, and documents. A position I also supported as
    Commissioner.
        I understand that some taxpayers, however, may look at privilege as
    an issue of fairness. They cannot understand why tax advice provided by
    one tax advisor is treated differently from tax advice provided by
    another advisor. The Committee will have to weigh competing concerns.
    On the one hand the IRS has a strong interest in having access to any
    information that might be relevant to the taxpayer. On the other hand,
    taxpayers understandably want to provide the IRS only the information
    necessary to ascertain the correctness of their returns. They also want
    to choose their tax advisors without worrying about whether the advice
    they receive is protected by privilege.
                Study of Penalty Administration
        The House bill would require the Joint Committee on Taxation staff
    to conduct a study reviewing the administration and implementation of
    the overall civil penalty structure, which was reformed in 1989. The
    study would review the administration and implementation of the 1989
    penalty provisions and make any legislative and administrative
    recommendations as appropriate to simplify penalty administration and
    reduce the burden on taxpayers.
        The civil penalty structure is in need of serious review and
    simplification. I expressed concerns as Commissioner, concerns I
    believe you share Mr. Chairman, about the complexity of the civil
    penalty regime. I commend the House for including this in the bill, and
    I urge its support in the Senate.
                Electronic Filing of Tax and Information Returns
        The House bill contains a provision that requires the Treasury
    Department to establish a plan to promote electronic filing of tax and
    information returns, with a goal of limiting paper returns to 20% of
    all returns by 2007. The proposal requires that the Secretary establish
    a plan to eliminate barriers, provide incentives, and use competitive
    market forces to increase taxpayer use of electronic filing.
        As I did when I was Commissioner, I fully support the effort to
    promote electronic tax administration, and I continue to encourage any
    steps that would enhance completely paperless electronic filing and
    paperless tax administration. While I was Commissioner, the service
    issued Rev. Proc. 97-22 which provided for electronic maintenance of
    books and records. I suggest that the Committee consider eliminating
    the current barrier that exists with respect to electronic document and
    retention requirements.
        The current IRS document retention requirements will not allow
    complete conversion to an electronic system because the regulations
    require retention of paper tax returns with the original preparer
    destruction of the original hard copy of books and records, provided
    they are electronically stored, but the tax return itself and
    attachments still must be retained in hard copy. This seriously hinders
    a move to a completely electronic filing system for no apparent
    purpose.
        This road block can be easily removed by legislation that allows a
    scanned or electronically maintained copy of the originally signed tax
    return to meet the document retention requirements that already apply
    to electronic storage of records.
    Conclusion
        I doubt that I need to remind you that tax collectors have never
    been popular--at least in recorded history. As long as there is a need
    to raise federal revenue, I believe that there will be a need to have
    an agency to perform that vital government function.
        There is every reason to have serious discussions about what our
    tax collection agency should be like, and I hope that I have added to
    that discussion today. I want to leave you with one final thought: the
    type of tax system we have affects what the tax administration agency
    looks like. The issue at the top of everyone's list when discussing the
    tax system is the ever growing level of complexity. As our society and
    the economy have grown more complex, so has the Internal Revenue Code.
    The agency and its personnel should not bear the blame for complexity
    in the law. I urge the Congress to continue examining the causes for
    complexity and to seriously pursue legislative simplification of the
    Internal Revenue Code.
        Thank you for the opportunity to present my views. I would be happy
    to respond to any questions.

                Responses to Questions Submitted by Senator Roth

                            strengthening oversight
        Question 1. Should the Inspection Division be more independent?
    Should the IRS Inspections Division be transferred to the Treasury IG?
        Answer. I am not certain what is meant by ``more independent,'' but
    any change in the organizational placement of the Inspection Division
    should be given careful consideration. At the present time, the Chief
    inspector reports to the Commissioner, and the Inspection organization
    froth Internal Audit and Internal Security) in that sense is
    independent of the rest of the IRS organization. The question that I
    believe needs to be asked and answered is what role the Inspection
    organization should play in the IRS. by the answer is that Inspection
    should provide the Commissioner with the requisite information and
    insights to oversee and evaluate programs and to promote employee
    integrity, then the salient issue is not the ``independence'' of
    Inspection, but its ability to attract and retain high quality
    employees. Transferring Inspection to Treasury will not enhance its
    ability to attract and retain high quality employees.
        Question 2. One of the most important lessons learned from the
    Committee's oversight hearings last September is the need for greater
    oversight of the IRS. The Congress needs to do more oversight--which we
    intend to do. But also there must be more oversight of the IRS in the
    Executive Branch. There are, at least, two ways we can improve that
    oversight. The first is to vest significant oversight responsibility
    with the Oversight Board that is created in the House-passed bill. The
    second way is to substantially increase the power of the Treasury
    Inspector General. What are your views on both of these ideas?
        Answer. In my opinion, the problem is not that there is too little
    oversight of the IRS. The problem is that the oversight that does occur
    is uncoordinated and frequently ineffective. As I pointed out in my
    prepared testimony to the Committee, the IRS is currently subject to
    both external and internal oversight. The Office of Management and
    Budget and the Department of Treasury provide oversight within the
    Executive branch, while in the Legislative branch oversight is provided
    by three Committees in the House (the Committees on Ways and Means,
    Appropriations (Subcommittee on Treasury, Postal Service and General
    Government, and Government Reform and Oversight) and three committees
    in the Senate (the Committees on Finance, Appropriations Subcommittee
    on Treasury, General Government, and Civil Service, and Governmental
    Affairs), and the Joint Committee on Taxation. Other Congressional
    committees also provide oversight from time to time, and the General
    Accounting Office routinely provides oversight on behalf of the
    Congress. The Restructuring Commission undertook a comprehensive review
    of the IRS, and the press, practitioners, and the general public
    perform oversight as well.
        During the four years I served as Commissioner, the IRS testified
    at 60 hearings and was the subject of more than 140 GAO reports. Within
    the IRS, the Internal Audit Function under the Chief Inspector, who
    reports directly to the Commissioner, initiates its own studies and
    audits. The results of these studies and audits are reported to IRS
    management and to the Treasury's Department's Inspector General, who,
    in turn, reports them to Congress. In addition, the Taxpayer Advocate,
    who also reports to the Commissioner, is required to submit to Congress
    each year a ``report card'' for the IRS.
        I strongly support constructive oversight. Such oversight is
    absolutely essential particularly for the IRS, since this country's
    self-assessment system relies heavily on taxpayers' confidence in how
    that system is run. However, this Committee should focus on how to
    improve the coordination of oversight of the IRS and ways to assure
    more effective oversight rather than adding more layers of oversight.
        Conflicting oversight priorities and direction are inevitable when
    there is more than one overseer. Establishing priorities is made more
    difficult when the various oversight bodies do not agree. For this
    reason, I believe that the provisions in the House bill designed to
    better coordinate Congressional oversight of the IRS are critically
    important and should be enacted.
        The outside Board should not have additional oversight
    responsibility; its responsibilities should be limited to providing
    strategic guidance. (I suggest that ``Oversight'' be dropped from the
    Board's name and ``Governance'' be substituted.)
        Question 3. Is the Oversight Board created in the House bill an
    executive board, or merely advisory? Does the Board have legal
    authority to direct actions taken by the Commissioner?
        Answer. As proposed in the House bill, the Board is neither an
    advisory board nor an executive board. While it has some legal
    authority to hold the Commissioner accountable for certain aspects of
    IRS management, it does not have full legal authority to govern the
    agency. As conceived by the National Commission on Restructuring, the
    Board was never intended to be involved in the day-to-day management of
    the agency. Rather, the Board was to bring both expertise and
    consistency of direction to the IRS's long-term strategic planning
    process and to help ensure that the IRS both received sufficient
    resources to fulfill its strategic mission and deployed those resources
    appropriately. As the Commission noted, many of the key issues that
    need to be addressed in order for the IRS to better serve the needs of
    taxpayers (e.g. reengineering its business processes, modernizing its
    information technology, revamping performance measures, etc.) will
    require expertise, commitment and long-term focus. The Commission
    believed that a Board consisting largely of experts from the private
    sector would help focus the attention of senior executives, Congress
    and the Administration on the agency's long-term strategic needs. From
    this perspective, it seems immaterial to me whether the Board has
    actual legal authority over some IRS functions, or whether its
    authority is merely advisory. The point is to bring additional
    expertise to bear on the challenges facing the agency.
        Question 4. If the Oversight Board is created and Commissioner
    Rossotti is able to turn the agency around, should the Board be
    sunsetted?
        Answer. It is not clear how one would measure ``turning the agency
    around'' in order to judge whether the Board has fulfilled its mission.
    Therefore, I would reserve any judgment about the wisdom of sunsetting
    the Board.
                            protecting the taxpayer
        Question 5. Our hearings have also indicated a need for the
    Committee to consider protection for the taxpayer in a number of very
    specific areas.
        (a). What are your thoughts on changes the Committee ought to
    consider in the penalty and interest area?
        Answer. Interest and penalties serve different purposes. Interest
    is a charge for the use of money; it is intended to compensate
    taxpayers or the government for money owed either to or by the
    taxpayer. It is not intended to penalize, although it is often
    perceived that way.
        Penalties should be imposed to affect behavior and encourage
    compliance. In recent years, a number of penalties have been enacted or
    increased primarily by a desire to raise revenue, rather than to
    encourage compliance. Penalties should be clear and understandable.
    Fundamental penalty reform has not been undertaken in almost a decade;
    the current penalty regime needs to be subjected to a thorough review
    with input from taxpayers, tax practitioners, and the IRS, which has to
    administer penalties.
        (b). The Committee's oversight hearings showed considerable
    problems with the IRS's exercise of its lien, levy, and seizure
    authority. This has to be fixed. I'm concerned about taxpayers who do
    not receive real notice and wake up in the morning only to find that
    the IRS has taken their bank account, business or other assets. Should
    the taxpayer have a right to judicial hearing before seizure?
        Answer. The current procedures governing liens, levies, and
    seizures contain a number of built-in protections for taxpayers, but
    adding judicial review of seizures of a personal residence or other
    significant assets certainly would be appropriate. It is important to
    distinguish between liens and levies. Currently, a lien for federal
    taxes arises as a matter of law upon assessment of tax. The primary
    purpose of filing a Notice of Lien is to establish the federal
    government 's priority vis-a-vis the taxpayer's other creditors.
    Therefore, it does not seem necessary or even appropriate to require
    judicial review before the IRS can file a lien.
        (c). The current Offer in Compromise program doesn't seem to work.
    In too many instances, people go into the program, nothing gets
    resolved, and by the time they get out they are socked with horrendous
    interest and penalties. Is this program broken? How would you improve
    it?
        Answer. Ironically, the Offer in Compromise program works better
    today than it has in its many-year history, although that is not to say
    that some changes are not needed. Considering the time and attention
    the IRS and various advisory groups have spent looking into the OIC
    program in the past two years, I recommend that this Committee have the
    IRS and these advisory groups report on their recommendations before
    trying to legislate specific changes.
        (d). The IRS has the power to label a taxpayer as an ``illegal tax
    protester.'' Such a label is important for the IRS in its efforts to
    protect its agent. But such a label also brings serious consequences
    for the labeled taxpayer. It is important to protect IRS employees.
    However, our investigation has revealed that some taxpayers may have
    been labeled as illegal tax protesters merely because they wrote an
    article in a newspaper. Should there be a review of such labeling to
    prevent abuse of the labeling system to the detriment of law abiding
    taxpayers?
        Answer. There is a section of the Internal Revenue Manual that
    discusses ``Potentially Dangerous Taxpayers'' (PDT), but I am not aware
    of any official designation of ``Illegal Tax Protester.'' The PDT
    system has been operated by the Inspection Division since 1984. It
    involves information gathering on potentially violent taxpayers, a
    streamlined reporting system enabling employees to make referrals by
    telephone, and immediate notification to all unctions once a complaint
    is received. The PDT indicator appears on documents generated to
    Collection, Examination, Taxpayer Service, and Criminal Investigation
    personnel. The system provides access to a national database containing
    details on PDTs, has information based on specific assaults and
    threats, and has information from other federal agencies and from
    undercover information about tax protester groups.
        The designation of a taxpayer as a PDT must be based upon
    verifiable evidence or information. It is not subjective. Among the
    specific criteria are a physical assault against an IRS employee, a
    threat of bodily harm, intimidation with a show of weapons, and active
    participation in tax protest groups that advocate violence against IRS
    employees. Taxpayers who write critical articles in the newspaper are
    not designated as a PDT by the IRS. Designation as a PDT means that
    there is a verifiable reason to believe that IRS employees--or other
    federal law enforcement personnel--who come into contact with these
    taxpayers could be in physical danger.
        After a taxpayer has been designated a PDT for five years, a review
    is done to determine if the designation should be removed. Taxpayers
    who have assaulted employees remain in the system until they are
    deceased. A taxpayer who originally made a threat will be removed if
    there has been no subsequent incident.
        (e). The case of Father Ballweg indicated to all of us the
    importance of a system that is customer friendly. Shouldn't most
    correspondence be signed so that the agency personnel are accountable?
    At some stage in the process, where a problem arises, should the
    taxpayer be given an employee to whom the taxpayer may turn to resolve
    the case?
        Answer. I agree that all individually prepared correspondence
    should be signed by an IRS employee; the Internal Revenue Manual
    already contains such a requirement. However, I strongly question
    whether adding a signature requirement to computer generated notices
    would be in the best interest of either taxpayers or the IRS. The
    Service generates in excess of 1 million computer notices each year.
    Reprogramming IRS computers to include the name and telephone contact
    of an IRS employee would impose a monumental computer reprogramming
    burden on the IRS. More importantly, over the past several years, the
    IRS has invested hundreds of millions of dollars in a telephone call
    routing system that allows taxpayers with questions to be routed to the
    next available telephone assistor. This investment was made to improve
    telephone access for taxpayers and to emulate the best practices in the
    private sector, where the trend in customer service has been to
    increase the speed of response to customers. Placing the name and
    telephone number of a specific IRS employee on every computer generated
    notice would run in exactly the opposite direction and lead taxpayers
    to believe that the only person in the IRS who could answer their
    questions with regard to the notices they receive is the person listed
    on the notice.
        I do agree that at some appropriate point, before a case gets ``too
    old,'' a ``caseworker'' should be assigned to resolve it and the name
    and phone number of that caseworker should be made available to the
    taxpayer.
        Question 6. Should the Taxpayer Advocate and problems resolution
    officers be independent from the IRS?
        Answer. The effectiveness of the Taxpayer Advocate program does not
    depend on whether Taxpayer Advocate personnel are independent, but
    rather depends on the quality and attitude of the individuals who serve
    in those positions.
        Question 7. Are you aware of any instances of IRS employees who
    were abusive to taxpayers or retaliate against other employees who were
    not disciplined because management believed the disciplinary process is
    too burdensome?
        Answer. I am not aware of any specific situations where employees
    were not disciplined because the disciplinary process was viewed as too
    burdensome. However, I am aware of instances involving unauthorized
    access of taxpayers' accounts (sometimes referred to as ``browsing'')
    where management was frustrated in its attempt to discipline employees.
    Although a clear policy, communication, training, and effective
    detection are important ways of institutionalizing a policy against
    unauthorized access, strong disciplinary and judicial support are
    essential to reinforce the seriousness and consequences of violating
    the policy. However, in pursuing strong disciplinary actions before
    administrative tribunals, the results have been mixed, such as with the
    First Circuit's reversal of an IRS employee's conviction on wire and
    computer fraud charges because the employee did not intend to deprive
    the IRS of property and obtained nothing in of value from the browsing
    (See United States v. Richard W. Czubinski, No. 96-1317).
        Question 8. The Committee's hearings last September dramatically
    demonstrated the need to institute greater taxpayer protection. I think
    we were all very disappointed by the poor performance of the taxpayer
    advocate's office. The idea, though, of a tax ombudsman-someone who has
    the knowledge to guide taxpayers and the power to resolve snafus-seems
    to me to be a good one. On the other hand we should be striving for an
    IRS where problems are solved right for the first time by the front
    line agency personnel that deal with the public.
        Until we achieve such a happy state, one avenue open to the
    Committee is to increase the resources devoted to the advocate's
    office, develop a separate professional career path for the people who
    work in it, and have the office report to both the Commissioner and the
    Oversight Board. What is your reaction to that?
        Answer. Increasing the resources devoted to the Advocate's office
    is an excellent idea. Before making any changes to the career path of
    the people working for the Taxpayer Advocate function, though, I
    suggest that this Committee assure that any changes are coordinated
    with other IRS reorganization plans.
                              changing the culture
        Question 9. Improving oversight and protecting the taxpayer are not
    the only things we need to be doing to respond to the problems
    uncovered by the IRS. We need to change the very culture of the agency
    itself. That will require a complete new look at its organizational
    structure, its managerial rules, its performance measures, and its
    training programs.
        (a). One of the surprises of the Committee's investigation into the
    IRS is how fearful many employees are at how they are managed. They
    paint a picture of the IRS as a vindictive and unhappy place to work.
    What changes would you like to see in personnel rules and other
    procedures to change the culture of this organization?
        Answer. One of the most critical issues facing the IRS how to
    recruit and retain a workforce with the competencies and skills to
    accomplish the mission the agency is and will be asked to perform. The
    Commission recommended that Congress, the IRS, and the proposed Board
    of Directors make training, skills, and support of IRS personnel a
    priority. Further, the Commission recommended that the IRS place as
    high a priority on employee training and skills as it places on the
    filing season. I urge this Committee to study how the personnel rules
    could be changed so that the people best suited for the job can be
    recruited and retained. I also believe that this Committee should look
    into the role the union plays in the culture of the organization.
    Unfortunately, the Commission did not have time to examine this issue;
    however, with almost three quarters of the workforce represented by the
    union, its role in the agency needs to be examined.
        (b). There are a considerable number of people who feel that it is
    not possible to reform the culture of the IRS without dismantling the
    agency. For these people, a whole new tax system that isn't dependent
    on a collection agency is the way to go. What is your response to
    people who, because of their experiences with the IRS, believe this is
    an agency beyond saving?
        Answer. To my knowledge, there has never been a tax system in the
    history of the world that has not had some agency or body to collect
    the revenues. Despite the criticisms and concerns and the need for some
    improvements, the IRS is one of the most efficient agencies of the
    federal government, collecting more than $1.7 trillion dollars in taxes
    each year on a budget of approximately $7 billion. If any other
    organization (government or private sector) had received the same level
    of scrutiny the IRS has in recent years, I doubt that many of them
    would measure up as well. During my time as Commissioner, the
    organization took very seriously the concerns expressed by its critics.
    For example, when the CFO Act imposed the requirement on federal
    agencies to prepare financial statements that could be audited and the
    IRS as a pilot agency did not ``pass'' its first audit, a serious and
    thus far successful effort to address the issues raised by the GAO was
    undertaken. The good news is that the IRS has made substantial progress
    in meeting the GAO's criticisms; the unfortunate fact is that the
    agency gets no credit for the many things that it does right. The vast
    majority of taxpayers have little to no contact with the agency outside
    of their annual filing requirement. In other words, millions of
    contacts with taxpayers take place without any problems.
        (c). In 1994, Congress passed the Government Performance and
    Results Act (GPRA). This was an effort to get the Congress and the
    Executive Branch to focus on performance standards. Do you support such
    standards for the IRS? If you do, what do you think the performance
    standards should be?
        Answer. There should be performance measures, but great care needs
    to be taken to assure that those measures do not produce undesirable
    behavior. However, it is important to recognize that accurate measures
    for assessing customer satisfaction in an agency with the mission of
    collecting taxes will not be easy to develop.
        (d). During the September hearings employee witnesses testified
    that many IRS employees ignore the Internal Revenue Manual and other
    official procedures with impunity. Should IRS employees be required to
    follow the Internal Revenue Manual and other official procedures?
        Answer. Of course, employees should generally follow the Internal
    Revenue Manual and be subject to appropriate disciplinary actions for
    noncompliance. I would caution the Committee to consider carefully,
    however, what those sanctions should be. Any disciplinary action taken
    against an employee should affect that employee, not taxpayers.
                           oversight board questions
        Question 10. The House bill establishes a board ``to oversee'' the
    IRS in its ``administration, management, conduct, direction, and
    supervision'' of the administration of the tax laws. What does
    ``oversee'' mean to you? What should be the relationship between the
    Commissioner and the Board?
        Answer. As I said in my written testimony to the Committee, one
    approach considered by the Restructuring Commission, but not pursued
    because of concerns about its political feasibility, was whether the
    IRS should be an independent agency, perhaps like the Social Security
    Administration, with the Commissioner reporting to a governing board
    overseeing the agency's operations. In my opinion, such an approach
    could provide the most effective and least cumbersome governance
    structure for the agency.
        Short of making the IRS an independent agency, and if Congress
    determines that an outside Board is an appropriate form of governance
    to improve the efficiency and quality of tax administration, then I
    believe that the responsibility and authority of that Board cannot be
    ambiguous. The authority and responsibility of the Board should be
    clear and should not overlap the authority and responsibility of the
    Commissioner.
        It is vital for Congress to be clear about what it wants the role
    of the Board to be. If you want the Board to run the agency, you should
    expressly give it the authority it needs. If you want a Board to serve
    an advisory function, then you should be explicit that its role is
    merely advisory. The most difficult situation from the standpoint of
    the agency would be to establish a Board with an ambiguous role. The
    Board can be effective only if its role is clear.
        Question 11. I am troubled that the bill prohibits the board from
    exercising any authority over ``law enforcement activities'' such as
    collections--an area which our hearings have shown to be rife with
    taxpayer abuse.
        Answer. The Board should not have specific oversight
    responsibilities with regard to collection functions. As I previously
    indicated, I believe that the role of the Board is to bring both
    expertise and consistency of direction to the IRS's long-term strategic
    planning process and to help ensure that the IRS both receives
    sufficient resources to fulfill its strategic mission and deploys those
    resources appropriately.
        Question 12. If an IRS Oversight Board is established within
    Treasury, should Board members be part-time or full-time employees?
        Answer. I believe that the Board's members should be part-time.
        Question 13. What is your opinion regarding who should serve on the
    proposed IRS Oversight Board? Should a union representative be
    guaranteed a slot on the Board? Should the Commissioner and Secretary
    of Treasury be on the Board?
        Answer. I think that an advisory board with no more than seven
    members to advise the Commissioner and Secretary would be the most
    effective. I see no reason to guarantee Board membership to a union
    representative, and I understand that such membership would raise
    significant conflicts with government ethics rules. There is no reason
    for the Secretary or the Commissioner to be official members of the
    Board.
                              simplifying the code
        Question 14. I think that we would probably all agree that a
    significant part of taxpayers' problems with the IRS stem from the
    complexity of the Code. What parts of the Code do you think are prime
    candidates for simplification?
        Answer. The prime candidates for simplification are the penalty
    provisions; the capital gains rules; rules relating to dependents,
    qualifying children and other rules relying on relationships, which
    could be standardized; rules relating to IRA's and pensions, both
    contributions and distributions; and worker classification rules--the
    provisions that probably produce the most controversy with small
    business owners.
        These provisions were simplified, the lives of many individual and
    small business taxpayers would be much less complicated.

                                   __________

                 Prepared Statement of Hon. Charles O. Rossotti

         Mr. Chairman and Distinguished Members of the Committee:
         When I appeared before this Committee in October, I had already
    confirmed for myself two things: that the IRS must do a far better job
    of serving taxpayers, and that achieving a goal of consistent first
    rate service would require a major shift in the IRS's focus. I
    committed to you that I would improve the work of an agency that
    directly affects so many people and do so to the best of my ability.
         Since my appearance here in October, I have read thousands of
    pages of studies and reports, met with over 500 IRS employees, reviewed
    the ongoing audits conducted by the IRS Chief Inspector, visited
    offices all across the country, spoken with taxpayers at Problem
    Solving Days and met with all of the practitioner and professional
    groups who will testify before you tomorrow. I have learned a great
    deal from the work of this Committee and from the work of the Committee
    on Ways and Means. Drawing upon these sources, the report and
    recommendations of the National Commission on Restructuring the IRS,
    and my own 28 years of experience as a manager, I have reached a clear
    and inescapable conclusion: the IRS must shift its focus away from its
    own internal operations and think about its job from the taxpayers'
    point of view.
         I am pleased to be here today to outline for you how I plan to do
    what I said I would do back in October, how the legislation you are
    considering will help in this endeavor, and how concrete measures will
    be taken to address the kinds of problems you, Mr. Chairman, brought to
    light in your hearings in September.
         But, before I outline my concept of a new IRS, let me discuss two
    important issues of concern to this committee. First, the hearings you
    held in September prompted the IRS to take stock of itself in a number
    of key areas, and I'd like to take this opportunity to review the
    actions the agency has taken since. Second, I'd like to make a few
    points with regard to the restructuring legislation that has passed the
    House and that will soon be marked up in the Senate.
                    actions since finance committee hearings
         Mr. Chairman, your September hearings were a call to action and
    have caused the IRS to begin a period of self-examination on a number
    of fronts. We have initiated internal audits on the use of statistics
    in Examination and Collection and begun reviewing the conduct of
    managers and employees so that we can detect and correct abuses. In
    addition to these specific actions, I want to take a moment to review
    some of the other major commitments we have made to improve our
    treatment of taxpayers. I would also like to assure you that we will
    continue to fulfill our current commitments and for the longer term
    strive to prevent these situations from occurring in the first place.
         Both before and after the hearings last September, the IRS worked
    closely with the Finance Committee staff and the Treasury Department to
    identify the problems that must be resolved in order to end abuses,
    protect taxpayers' rights, and make the IRS more customer focused.
         The IRS and the Treasury Department have jointly developed action
    plans to address each of the problem areas which have surfaced over the
    last few months. The issues that could be resolved quickly have been.
    Others will take more time. There are approximately 100 detailed
    actions being taken by the IRS to honor commitments made during and
    after the September hearings, and just last week we delivered our
    second progress report to the Committee. There are three general
    categories of actions that I highlighted in my report to you and also
    would like to address today:
       Resolution of problem cases;
       Enforcement statistics and employee misconduct; and
       Employee education.
     Resolution of Problem Cases
         IRS staff, both at the National Office and in the field, have been
    working on several efforts related to resolving problem cases. Some of
    these efforts are direct consequences of the Senate hearings, whereas
    others are more proactive steps to identify and solve taxpayer concerns
    before they become intractable problems.
         We have completed a comprehensive review of the cases involving
    the four taxpayers which testified at Septembers hearings. Our findings
    and the reports prepared by the responsible field office executives
    were sent to you last week.
         In addition to addressing the cases for these four taxpayers, the
    IRS has established new procedures to monitor complaints received as a
    result of the hearings. The Chief Inspector is also tracking any
    complaints generated by the hearings. The Taxpayer Advocate has been
    working closely with field executives to review correspondence received
    by the IRS in the first quarter of this fiscal year (October 1, 1998
    through December 31, 1998). In this review, field offices analyzed
    roughly 25,000 pieces of correspondence and provided a summary of those
    results to your staff last week. We are currently undergoing a similar
    review for the second quarter. Through these types of extensive
    reviews, we will be are able to better understand the types of
    correspondence we are receiving and more readily identify potential
    systemic and individual problems early on.
                 Problem Solving Days
         On September 25, 1997, Deputy Commissioner Mike Dolan announced
    that each IRS district would begin holding monthly Problem Solving Days
    to provide taxpayers an opportunity to meet with Service personnel to
    resolve special tax problems they might be encountering. On Saturday,
    November 15, 1997, we held our first Problem Solving Day. Since then,
    we have held many more Problem Solving Days throughout the country. I
    was pleased to spend time with you, Mr. Chairman, in Wilmington,
    Delaware, and with you, Sen. Grassley, in Des Moines. As of January 16,
    1998, more than 16,200 people have been assisted during Problem Solving
    Day events throughout the country.
         We are pleased with the initial success of Problem Solving Days.
    According to the customer satisfaction survey distributed at the
    November Problem Solving Day, taxpayers were extraordinarily pleased
    with the quality of service they received. With a 55 percent response
    rate, customers gave the day an average rating of 6.46 on a scale of 1
    to 7, with 7 being ``completely satisfied.'' Approximately 75 percent
    of respondents gave the IRS the top rating of 7 for ``overall
    service.'' The highest overall rating of 6.66 was for employee
    courtesy.
         In our second round of Problem Solving Day events, held in
    December, the IRS received even higher ratings for ``overall service.''
    For ``overall service,'' the IRS received an average rating of 6.54 as
    compared to the November rating of 6.46. Again, our highest overall
    rating was for ``employee courtesy;'' however, the rating improved
    (from 6.66 to 6.81).
         During the two Saturdays prior to April 15, 1998, IRS will hold
    ``Problem Prevention Days.'' Local offices will assist taxpayers in
    preparing returns and in voluntarily complying with tax laws.
                 Problem Resolution Program
         The IRS is increasing the National Office Problem Resolution staff
    by one-third and is conducting a workload review to determine how many
    additional resources are needed in field offices. Additionally, the IRS
    has begun a national search, using a well known executive search firm,
    for a new Taxpayer Advocate with experience representing and advocating
    for individuals and small business taxpayers. I also plan to expand the
    position to include significantly increased opportunities for educating
    the public about the Taxpayer Advocate program and the remedies it
    offers.
                 Improve Written Communications With Taxpayers
         During fiscal year 1997, the IRS issued roughly 10 million letters
    and 111 million notices to taxpayers. Letters are issued by a specific
    employee to provide detailed information regarding a taxpayer's
    account. Notices are standardized forms which are categorized by issue
    and sent to taxpayers which require that type of notification. To
    improve the taxpayer's ability to respond to letters we have issued a
    reminder alert to field offices to emphasize that all letters must be
    signed by the appropriate contact person.
         We also have been working to redesign our notices, and plan to
    procure the services of an outside contractor, in an effort to increase
    their clarity. These improvements should help taxpayers understand more
    clearly why they have received a notice and how they need to respond to
    that notice without the need for further explanation. Many of our
    generated notices already include names.
         Although we continue to evaluate the viability of adding names to
    more notices, we have reservations. For example, the IRS has invested
    considerable resources to emulate private sector best practices by
    enhancing customer access to toll-free telephone services. To improve
    access, we have implemented systems that enable us to route incoming
    calls to the next available assistor located in any of our call sites
    across the nation. We are concerned that a taxpayer, calling the
    employee identified on a notice, may have to stay on hold for longer
    than if he or she had been transferred to the first available employee.
    We are continuing to explore ways to make employees more accountable
    for solving problems while ensuring that taxpayers get the most
    efficient service we can deliver.
                 Provide Better Telephone Service
         On January 2, 1998, the IRS expanded telephone service over one
    third--from 5 days a week, 12 hours a day to 6 days a week, 16 hours a
    day. In addition to increasing our hours of operation, the IRS has
    several key initiatives designed to improve the Level of Access to our
    telephone service to 70% during the 1998 filing season.
     Enforcement Statistics and Employee Misconduct
         Last September's Finance Committee hearings raised a number of
    questions about how the IRS uses enforcement statistics. Since the
    hearings, senior IRS executives have made a determined effort to
    communicate to the entire organization that enforcement statistics are
    not to be used in evaluating employees. We have stopped ranking the 33
    district offices and 10 service centers on revenue and enforcement
    results and stopped issuing these kinds of performance goals to
    regions, districts, and service centers. Because of concerns that
    including penalties in our examination assessments created incentives
    for our employees to propose unwarranted taxpayer penalties, we have
    also decided to exclude all penalty data from the statistics used for
    examination assessments.
                 IRS Seizures
         On December 2, 1997, the IRS announced an interim policy requiring
    higher level management approval before an employee can seize tangible
    property. This higher level of approval is a prudent step to ensure
    that, while we complete our analysis of the use of these enforcement
    authorities, collection enforcement tools such as seizures are only
    used in appropriate cases.
                 Internal Audit Reports
         Subsequent to the Committee's September hearings, in which
    allegations of violations of taxpayers' rights surfaced, the Inspection
    Service and the General Accounting Office (GAO) were asked to
    investigate the IRS's use of enforcement tools and statistical
    indicators. To date, two Internal Audit reports have been issued. The
    first audit report focused on the Arkansas-Oklahoma district and
    concluded that the district permitted, and in some cases encouraged,
    inappropriate use of enforcement statistics and tools. The second
    report reviewed the use of enforcement statistics in the Collection
    function at the national and regional levels, and in 12 districts. On
    January 13 this report was issued and concluded that the IRS created an
    environment driven by statistical accomplishments that placed taxpayer
    rights and a fair employee evaluation system at risk. In response to
    both audit reports, the IRS has taken the following steps:
       On December 16, 1997, the Deputy Commissioner initiated a
            review of the lien and levy procedures currently being followed
            by field offices. This review will result in recommendations
            for improving current processes with a particular emphasis on
            ensuring that these collection tools are utilized in a way that
            correctly balances the individual rights of taxpayers with the
            organization's responsibility to collect the correct amount of
            tax.
       On December 22, 1997, Deputy Commissioner Dolan recalled
            Document 9429, Managing Statistics Within the Collection
            Function. Collection personnel were directed to rely on the
            overall guidance contained in Document 7300, Managing
            Statistics (1992). New guidance revisions are scheduled to be
            available by March 30, 1998.
       At the request of the IRS, GAO is currently conducting an
            overall review of the quarterly certification process.
       The IRS will expand its longstanding policy prohibition on
            the use of enforcement statistics to bar their use in
            evaluating front-line managers of enforcement officers and
            apply the TBOR Certification process to all enforcement
            activities, not just collection.
       The procedures that govern the clearance of documents
            containing reference to interpretation of Service policy will
            be strengthened so that any legal concerns raised by Chief
            Counsel will be adequately addressed.
         Additionally, I announced on January 13, a panel will be created
    to objectively determine disciplinary actions to be taken in cases
    arising from the Chief Inspector's investigation.
     Employee Education
         Finally, during the September hearings, a commitment was made to
    engage the IRS in discussions about the organization's obligation to
    provide high-quality customer service to taxpayers. IRS management has
    conducted several video conferences with employees to discuss lessons
    learned from the hearings; conducted meetings with all IRS executives
    and field office division chiefs; issued several formal statements to
    employees announcing corrective actions being taken; and this week we
    will be conducting focus group interview sessions with over 2,000
    employees to solicit employees' concerns regarding barriers to proper
    treatment of taxpayers and to offer suggestions for improving taxpayer
    treatment.
         The IRS is working on other initiatives to formally educate
    employees. One of these initiatives is titled ``Working with
    Taxpayers'' and is designed to help employees throughout the
    organization understand how to treat taxpayers fairly and courteously.
    Another critical aspect of providing the proper level of customer
    service is accurate technical knowledge. There have been several
    significant changes to the tax code over the last year, the most
    significant being the Taxpayer Relief Act of 1997 (TRA 97). The IRS is
    currently providing training to Customer Service personnel on TRA 97
    issues that impact the 1998 filing season.
                            restructuring legislation
         Mr. Chairman, this hearing marks the start of the Finance
    Committee's deliberations to draft its own version of IRS restructuring
    legislation. As Secretary Rubin stated earlier, we support the Internal
    Revenue Service Restructuring and Reform Act of 1997, as passed by the
    House of Representatives, and are committed to working with the
    Congress, along with the Department of Treasury, to implement it. As
    currently drafted, the Act provides for, among other things, additional
    taxpayer rights, more effective oversight of the IRS and greater
    continuity of leadership at the agency. This Act can be the impetus for
    bringing additional change to the IRS--change that will help to
    accomplish the shift in focus that I have mentioned. I would like to
    take this opportunity to comment on some of the key provisions.
     Taxpayer Rights
         The House-passed bill includes a number of taxpayer rights
    provisions that we support including:
       relief for innocent spouses,
       the expansion of our authority to issue ``taxpayer
            assistance orders,''
       providing taxpayers with additional information on a variety
            of matters, including a taxpayer's rights in interviews with
            the IRS,
       equitable tolling of the statute of limitations for refund
            claims of disabled taxpayers, and
       matching grants for the development, expansion or
            continuation of certain low-income taxpayer clinics.
         We also support the provision which would allow taxpayers to sue
    the government for up to $100,000 in civil damages caused by IRS
    employees who disregard provisions of the Internal Revenue Code or
    Treasury regulations in connection with collection Federal tax with
    respect to taxpayers, but believe the standard should be ``gross
    negligence.''
         The House-passed bill also contains two provisions that cause us
    concern. As currently drafted, the section on burden of proof could
    have the unintended consequence of providing taxpayers with an
    incentive not to keep records that support their tax return positions
    and could make audits more intrusive. We are also concerned that the
    provision extending a privilege to accountants could give rise to
    disputes and interfere with our efforts to resolve issues quickly and
    correctly. These are highly technical issues that we would like to have
    our staff work with the Committee staff to resolve.
     Electronic Filing
         The expansion of alternative methods of filing is of vital
    importance to America's tax system and the House-passed bill
    establishes a long-range goal for electronic filing. While IRS's
    electronic filing programs have been successful to a degree, the
    public's use and acceptance of electronic alternatives to paper has not
    grown as rapidly as once hoped. For these reasons, the encouragement
    provided under the House-passed bill is important. As the Committee
    knows, current law already authorizes paperless filing, but the policy
    statement in this bill could be the catalyst for its successful
    expansion.
         The legislation also provides us with needed authority to pursue
    such developments as the ability to accept taxpayers' signatures in a
    digital or other electronic format. During 1998, the IRS will be
    formulating a broader strategy for electronic service delivery through
    partnerships with private industry. Priorities for 1999 include
    implementing paperless filing, accepting electronic payments, and
    continuing to increase taxpayers' and practitioners' understanding of
    the benefits of electronic filing.
     Governance Arrangements
         As Secretary Rubin indicated to the Committee, the bill contains
    new governance arrangements that will ensure critical input from the
    private sector, provide for outside oversight, and maintain authority
    and accountability with respect to the IRS within the existing
    structure of the federal government. We support the provisions in the
    final bill that retain executive branch accountability under the
    Constitution, as well as the Secretary's authority to administer and
    enforce the internal revenue law. We also support granting the
    Oversight Board the authority to consult on strategic plans and review
    operational functions.
         I should also note that I believe it is critical that we are able
    to attract the right people to fulfill the Board's important role. To
    avoid a prohibitive time commitment that an attractive candidate might
    not be able to fulfill, or, conversely, not allow for enough time to
    make a substantial contribution, I encourage a change to the
    legislation that would allow the Chairman of the Oversight Board
    maximum authority concerning the functioning of the board on matters
    such as the frequency of meetings and the possibility of appointing
    subcommittees. In addition, I support the technical changes to the
    conflict of interest provisions applicable to the Board. The current
    provisions are unclear and may inadvertently discourage service on the
    Board. We understand that the Office of Government Ethics is willing to
    work with Committee staff to ensure that these provisions are clear and
    fair.
     Personnel Flexibilities
         Mr. Chairman, critical to achieving the goals that I will lay out
    for you today is my ability to recruit and retain a top notch
    leadership and technical team, and to re-tool the existing workforce
    for the new challenges that await them. Therefore, we will be seeking
    your support for several additional flexibilities, particularly in the
    areas of compensation and workforce restructuring. Also, so that our
    employees may make the best choices for their futures, we seek
    reauthorization of the buyout authority that expired in December.
    Flexibility to reposition the current IRS workforce will be critical to
    implementing a new organization that is designed around the needs of
    the taxpayers. The Committee's support for these changes will be
    appreciated.
         Mr. Chairman, the actions we have taken since your September
    hearings and the ongoing discussion of the restructuring legislation
    point the direction for the IRS into the next century. Let me now turn
    to my concept for modernizing the nation's tax agency.
                  concept to modernize the nation's tax agency
         Mr. Chairman, I noted at the outset that your hearings were a call
    to action for the IRS. As you begin to consider restructuring
    legislation, I want to lay out my concept of how we can modernize the
    IRS. Let me stress at the beginning that enactment of restructuring
    legislation is crucial to the effort I am about to outline. The
    legislation is a necessary and critical enabler of the change that the
    IRS must undertake.
         How can the IRS shift its focus and become the customer-oriented
    agency it must become?
         I have carefully reviewed the work done by the National Commission
    on Restructuring the IRS, read many thousands of pages of internal
    studies of IRS business practices, technology and organization, and
    have met with hundreds of IRS employees as well as others who are
    vitally interested in our tax system. I have consulted with the
    Secretary of the Treasury and benefitted by the work of the Treasury
    and National Performance Review task force on customer service.
         A clear sense of direction has emerged from this work and from the
    problems brought to light by this Committee. The IRS must shift its
    focus from its own internal operations and think about its job from the
    taxpayers point of view.
         The IRS today does a remarkable job of processing 200 million tax
    returns, collecting with great integrity over $1.5 trillion and
    providing service to millions of taxpayers. These capabilities
    represent great strengths for our country.
         To meet the public's legitimate expectations in the future,
    however, we in the IRS must fundamentally change the way we think about
    our agency. We must become fundamentally committed to customer service.
    We must shift our focus, as many large companies have already done,
    from expecting our customers, the taxpayers, to understand and navigate
    the IRS according to our internal operations, to thinking about
    everything from the taxpayers's view. We must gain a greater
    understanding of taxpayers' problems and how we can best help them meet
    their obligations under the tax laws.
         From the taxpayer's viewpoint, we provide service in two ways.
         We serve each taxpayer with whom we deal directly, one at a time.
    These interactions with taxpayers range from the routine, such as
    providing forms and information, to the complex, such as when a
    taxpayer may be thought to owe more money as a result of an
    examination. In each and every one of these interactions with
    taxpayers, we should provide first quality service and treatment that
    is prompt, professional and helpful based on what we know to be their
    particular needs.
         Secondly, we serve all taxpayers by ensuring that compliance is
    fair. Our tax system depends on each person who is voluntarily meeting
    his or her tax obligations having confidence that his or her neighbor
    or competitor is also complying.
         I believe that the IRS, over time, can greatly improve both kinds
    of service to the public. Furthermore, I believe that we can accomplish
    this, while also processing an increasing workload with the workforce
    we have. Our workforce is competent and dedicated, but handicapped by
    outdated practices and technology.
         In the near term, we are taking action to move forward toward
    these goals.
         As I mentioned earlier, the Problem Solving Days that we have been
    holding monthly across the country are excellent examples of the way we
    should be serving taxpayers. We are extending the hours of telephone
    service this filing season to 16 hours a day 6 days a week. We are
    setting up a special process to resolve the particularly difficult
    taxpayer cases that we are identifying through your Committee and our
    internal programs. We have taken steps to raise the level of management
    review on enforcement actions such as seizures and to see that
    inappropriate use of enforcement statistics is ended. These are only a
    few of the hundreds of actions we are taking this year to improve
    service and provide proper treatment to taxpayers.
         We are also closely managing our enormous and challenging program
    to update our computer systems for the century date change and the tax
    law changes required by the 1997 Taxpayer Relief Act. Most of this work
    must be completed in the next 12 months prior to the 1999 filing
    season.
         As important as these steps are, they will not enable us to meet
    our goals unless we make more fundamental changes to our way of doing
    business. These changes will take time but are essential for the IRS to
    meet the public's legitimate expectations for service from its tax
    agency.
     Five Key Elements
         The concept that I will outline today includes a renewed mission
    with emphasis on service and fairness to taxpayers and practical goals
    and guiding principles which define the path forward. We will reach our
    goals of service to each and to all taxpayers through changes in five
    key areas, each complementing the others. These five areas, along with
    the goals and guiding principles are summarized on Chart C.
     Revamped IRS business practices that will focus on understanding,
            solving and preventing taxpayer problems
         Each of the IRS's business practices, from customer education to
    filing assistance to collection, holds great promise for improvement by
    our gaining a greater understanding of the particular problems that
    taxpayers have and focusing continuously on solving them. In most
    cases, there are very close parallels in the private sector that we can
    draw on.
         For example, our business practices should make filing easier for
    all taxpayers by providing easily accessible high quality assistance to
    those taxpayers who need help in filing and by having more returns
    filed electronically. Just as companies develop very particular
    marketing programs to reach customers with differing needs, we can help
    taxpayers more effectively by tailoring our publications, education,
    communications and assistance programs to taxpayers with particular
    needs. College students who often can file with a simple 1040EZ form
    and a 10 minute phone call have very different needs from senior
    citizens with social security and investment income who may be best
    served through a network of volunteers who specialize in the needs of
    seniors.
         This principle of tailoring our services to the needs of
    particular groups of taxpayers is a cornerstone of how we can
    dramatically improve our service to taxpayers as well as our internal
    productivity.
         As another example, some of our most difficult interactions with
    taxpayers occur when additional money may be due and collection
    activity is required. Today, 90 % of the active collection activity by
    the IRS telephone and field collectors is on accounts that are more
    than 6-months old, and most are much older than that. This is the
    reverse of practices in the private sector. The proven keys to
    effective collection are to identify as promptly as possible customers
    who may present risk of non-payment and to work out a payment program
    that addresses the particular payment problem of that customer. This
    helps the customer as well as the collecting agency and minimizes the
    need for enforcement actions.
     Organizational structure built around taxpayer needs
         The IRS organizational structure no longer enables its managers to
    be knowledgeable about and take action on major problems affecting
    taxpayers nor is it capable of modernizing the business practices and
    technology needed to achieve our goals. The principal IRS organization
    today, as shown in Chart A, is built around 33 districts and 10 service
    centers. Each of these 43 units is charged with the mission of serving
    every kind of taxpayer, large and small, with simple or complex
    problems, in a defined geographical area. If a taxpayer moves, the
    responsibility moves to another geographical area. Further, every
    taxpayer is serviced by both a service center and a district and
    sometimes more than one. Service centers and districts each perform
    customer service, collection and examination activities for the same
    taxpayer.
         For example, in the collection area, there are three separate
    kinds of organizations, spread over 43 organizational units, that use
    three separate computer systems to support collection. Each of these
    three types of units collects from every kind of taxpayer, from small
    businesses to wealthy individuals.
         There are 8 intermediate levels of staff and line management
    between a front line employee and the Deputy Commissioner, who is the
    only manager besides the Commissioner who has full responsibility for
    service to any particular taxpayer. Although important improvements
    have been made in this structure over the last few years, notably the
    reduction in the number of districts, the fundamental problem remains:
    the structure is far too complex and accountability is weak.
         Fortunately, there are solutions to this organizational problem
    which are widely used in the private sector and may enable us to better
    serve the American taxpayer. The approach I am discussing today is to
    organize around the needs of our customers, the taxpayers. Just as many
    large financial institutions have different divisions that serve retail
    customers, small to medium business customers, and large multinational
    business customers, the taxpayer base falls rather naturally into
    similar groups. This fact simply reflects the structure of the US
    economy.
         Therefore, as shown in Chart B, one logical way to organize the
    IRS is into four units, each charged with end-to-end responsibility for
    serving a particular group of taxpayers with similar needs. These units
    could replace the four regional offices and a substantial part of the
    national office, allowing the national office to better fulfill its
    responsibilities of oversight and broad policy rather than operations.
    As I noted at the outset, this is a concept--a concept that will
    require outside validation. I am initiating a review of this concept
    because I believe we need to refocus and realign the efforts of the IRS
    on our customers--the American taxpayers. Of course, during and after
    the review, we may need to revise this proposal, depending on the
    results.
         By organizing in this way, the management teams for each unit
    could learn a great deal about the needs and particular problems that
    affect each group of taxpayers. The tax code is extremely complex but
    most of it does not apply to each group of taxpayers.
         There are 100 million filers, comprising about 140 million
    taxpayers, who have only wage and investment income. For this very
    large group, almost 80% of all taxpayers, the primary needs are
    improved assistance in filing or in getting information about an
    account or a refund. Collection problems are relatively limited since
    most of their taxes are paid through withholding by employers.
    Compliance problems are concentrated in the area of dependent
    exemptions, credits, filing status, and deductions, many of which can
    be addressed in part by better education of taxpayers with the
    assistance of volunteer groups and preparers. Improved phone service
    and more walk-in ``retail'' sites where taxpayers can get quick, in-
    person assistance are also important.
         Another very important group of taxpayers are small businesses,
    including sole proprietors and small business corporations. There are
    about 25 million filers in this category. Compared to other individual
    taxpayers, this group has much more frequent and complex filing
    requirements and pays much more directly to the IRS, including tax
    deposits, quarterly employment returns and many other types of income
    tax returns and schedules. Providing good service to this group of
    taxpayers is more difficult than wage and investment filers, and
    compliance and collection problems are also much greater. Small start-
    up businesses in particular need special help. By dedicating a fully
    responsible unit to providing all IRS services for the self employed
    and small business, this unit will be able to work closely with
    industry associations, small business groups and preparers to solve
    problems for the benefit of all.
         Larger businesses, although few in number, pay a substantial share
    of their tax in the form of withholding, employment and excise taxes,
    and corporate income taxes. Complex tax law, regulatory and accounting
    questions, including many issues arising from international activities,
    dominate the work of the IRS in serving this group. A management team
    and unit dedicated to serving these taxpayers will be able to
    understand and solve these problems more effectively than at present.
         Finally, the tax exempt sector, including employee plans, exempt
    organizations and state and local governments, represents a large
    economic sector with unique needs. Although generally paying no income
    tax, this sector pays over $190 billion in employment taxes and
    withholding for employees and manages $5 trillion in tax exempt assets.
    This huge sector will benefit from a dedicated unit that understands
    its special problems.
     Management roles with clear responsibility
         Since each unit will be fully responsible for serving a set of
    taxpayers with like needs, the management teams responsible for each of
    these units will be able to become knowledgeable about the needs and
    problems of their customers, and be held fully accountable for
    achieving specific goals in serving them. Furthermore, having learned
    about problems, managers can cut dramatically the time required to
    communicate with the workforce and implement solutions. Because the
    organization would be ``flatter,'' there would be fewer layers of
    management. Front-line employees and first-line managers would have a
    much closer identification and communication channel to people with
    general management responsibility.
         For each unit, a cohesive management team will be established
    which will be able to organize internally in ways that are appropriate
    to the particular needs of the taxpayers they are serving. I believe
    that highly qualified managers, from internal or external sources, will
    be far more attracted to these kinds of management jobs than those in
    today's complex structure .
     Balanced Measures of Performance
         It is essential to have measures of organizational performance
    that balance customer satisfaction, business results, employee
    satisfaction and productivity. It is particularly important that
    performance measures do not directly or indirectly cause inappropriate
    behavior toward taxpayers, and that they provide incentives for
    service-oriented behavior.
         The establishment of management teams with clear responsibility
    for serving large groups of taxpayers with reasonably common
    characteristics and needs will help make it possible for the first time
    to develop realistic and meaningful measures of organizational
    performance in the areas of customer satisfaction and overall
    compliance on a continuing basis. This will help eliminate the problem
    that has plagued the IRS for decades, namely the use of ``enforcement''
    results as a key measure of success.
     New Technology
         One of the limiting factors in our ability to modernize our
    business practices at the IRS today is our computer systems, which are
    extremely deficient in their ability to support our missions and goals.
    But computer systems essentially represent a detailed codification of
    the business practices and organization structure that exist. Building
    new computer systems to support the old business practices and complex
    organization structure will not work.
         The recently issued technology modernization blueprint and the new
    CIO organization provide an outstanding and professional basis for
    managing the evolution of our technology. The revamped business
    practices and rationalized organizational structure I discussed earlier
    will provide a sound basis for completing and implementing the modern
    systems envisioned in the blueprint.
         The management teams in each unit will be able to act as
    knowledgeable and responsible business owners to work with the
    centralized professional information systems organization and outside
    contractors. For the first time, this will establish all the critical
    elements needed to manage a large-scale technology/modernization
    program successfully.
                                     summary
         The comprehensive modernization concept I have outlined includes a
    renewed mission with emphasis on service and fairness to taxpayers,
    practical goals and guiding principles which define the path forward,
    revamped business practices that focus on solving taxpayer problems, a
    new organizational structure built around serving groups of taxpayers
    with like needs, more accountable and attractive management roles,
    balanced measures of performance tied to achievement of goals, and a
    workable way of modernizing our technology. All this is summarized on
    one page in Chart C.
         I want to emphasize that much study is required to validate this
    concept and to decide on hundreds of details. Much consultation will be
    involved, internally and externally, during this study process which we
    hope to complete by early summer. While an enormous job is ahead of us,
    I am confident that, given time and support from Congress and the
    public, this path will lead us to the goal we all seek: an IRS which
    provides consistently first quality service to taxpayers.
         Let me also stress that this concept is fully consistent with and,
    in fact complements, the Oversight Board that is created in the
    Restructuring Bill. Under the structure proposed, the Commissioner and
    the National Office will be better able to fulfill their appropriate
    top management roles and will be able to be accountable to the Board
    for the achievement of overall organizational goals as approved by the
    Board.
         In conclusion, I want to assure the Committee that it is a new day
    at the IRS. The agency is committed to moving forward in ways that keep
    up with a changing world and the increased expectations of the American
    taxpaying public. Restructuring legislation will help us get there, and
    the work of your Committee has served as one of our catalysts for
    change. Thank you, Mr. Chairman, and I will be happy to answer any
    questions.
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                   Prepared Statement of Hon. Robert E. Rubin

         Mr. Chairman, distinguished members of this Committee, it is a
    pleasure to speak with you today. Soon after becoming Secretary of the
    Treasury, I began to see that the IRS was greatly in need of change.
    Just as many of you in this committee have been strongly focused on IRS
    reform, I became involved out of my concern that there were deep
    problems at the IRS, problems that developed over years, even decades,
    and problems that will take years to fully solve. The phones weren't
    being answered, the computers didn't work, and American taxpayers were
    too often being treated improperly and too seldom getting appropriate
    service. As a consequence, we started a highly intensified process of
    reform and change about two years ago. Though we have begun to make
    progress in some areas, there is an enormous challenge ahead including
    internalizing the commitment to change and reform. We must all work
    together constructively to meet this challenge.
         Many have already contributed to the irreversible process of
    change under way at the IRS. We at Treasury are committed to continuing
    to provide our full assistance and support. The Vice-President's
    National Performance Review, in conjunction with Treasury and the IRS,
    produced an important set of recommendations on customer service. The
    Commission on IRS Restructuring, co-chaired by Senator Kerrey of this
    Committee and Congressman Portman, has been an important forum for
    analysis and an effective catalyst for IRS reform. And this Committee,
    in its hearings last fall, brought to light serious and intolerable
    abuses at the IRS--abuses that have now been vigorously explored in the
    IRS' two recent reports, and will be further explored in one report not
    yet completed.
         I am deeply troubled by the reports' conclusion that the
    inappropriate use of enforcement statistics has put taxpayer rights in
    jeopardy in districts around the nation. This is an unacceptable
    situation and strong steps have been taken by the IRS to end this
    practice. We at Treasury and Commissioner Rossotti are committed to
    fundamentally changing the agency to one that respects taxpayer rights
    while collecting the taxes due. And in recent months, significant steps
    have been taken to address these problems, including stopping the use
    of revenue goals in field offices, beginning to develop a new set of
    performance measures that address customer service and taxpayer rights,
    establishing more independent reviews of each district's compliance
    with the taxpayer bill of rights, and initiating monthly Problem
    Solving Days.
         Despite the many, far-reaching problems, and fully recognizing the
    immensity of the challenge, I think there is good reason to expect
    substantial progress in the years ahead. The IRS is now guided by the
    firm hand of its new Commissioner, Charles Rossotti--an individual
    quite unlike any previous Commissioner--who brings with him 28 years of
    private sector management experience in the area of information
    technology and who has already begun to bring changes at the IRS. Our
    reform efforts over the past two years--in addition to producing
    Commissioner Rossotti--have resulted in setting technology on a new
    course, increased electronic filing and telefiling, and improved
    telephone service. The GAO recently released a report that praised the
    IRS' performance during the 1997 filing season, citing ``substantial
    improvement'' in two critical areas: telephone accessibility and the
    use of alternative filing methods. And the legislation passed with
    bipartisan support in the House last November promises to help bring
    the IRS into a new era.
         Congress can continue to contribute vitally to reforming the IRS
    through adequate funding, effective oversight, and, most immediately,
    through passing the bill passed by the House as soon as possible.
         This bill contains important measures that will help build the IRS
    we all want to see:
       it provides for increased continuity and leadership at the
            IRS, by providing that the Commissioner serve a fixed five-year
            term, and it provides a range of personnel management reforms,
            although we would like to go further in improving managerial
            flexibility in selecting and managing personnel;
       it contains additional steps to strengthen taxpayer rights,
            including many of the President's taxpayers' rights proposals
            announced last year;
       it has important measures to expand electronic filing, which
            will decrease paperwork, increase efficiency, and save money;
       finally, the bill contains new governance arrangements
            providing for valuable input from the private sector and
            effective outside oversight, while maintaining the authority
            and accountability with respect to the IRS within the existing
            structure of the federal government, with the on-going
            oversight and synergies that that can provide. We would also
            recommend semi-annual testimony be required of the Secretary
            and Deputy Secretary of the Treasury, on the IRS, to use public
            accountability to see to it that future Secretaries and Deputy
            Secretaries take their responsibilities with respect to the IRS
            with the greatest seriousness.
         In short, Mr. Chairman, this bill will help continue the process
    of change at the IRS in the months and years ahead, including an
    intense focus on eliminating the abuse of taxpayers that has been
    brought to light in recent months. It is clear that the IRS must focus
    more on taxpayer rights and quality customer service, while at the same
    time collecting the revenue due. In that regard, we must remember that
    those who cheat on their taxes increase the burden on all the rest of
    us.
         Mr. Chairman, IRS reform is an issue of immense national
    importance, and one which we take with the utmost seriousness. We can
    debate whether to continue with the current progressive income tax
    system, or change to some other system, but we should not let that
    debate affect our support for the absolutely vital task of serving the
    American taxpayer and collecting the revenue due. Our society depends
    on effective tax collection to fund 95 percent of the services of the
    Federal Government, from defense to Social Security, and there are
    large numbers of hard-working employees at the IRS who are committed to
    doing the job properly--as was demonstrated to me when I visited one
    regional office on the first nationwide Problem Solving Day last
    November.
         The new IRS will need to be the work of many hands. As we go
    forward we must all work together in a constructive spirit in helping
    the IRS meet the many serious challenges it faces, including each years
    tax collection, the fundamental transformation now underway, and
    dealing with the year 2000 conversion, a subject which I know is of
    particular interest to members of the Committee.
         I believe that in Charles Rossotti we have a Commissioner who both
    symbolizes the transformation under way and is exceedingly well-suited
    to provide transforming leadership. He needs your constructive
    engagement to get the required tools--and I believe an important step
    would be to adopt IRS reform legislation that will shortly be before
    you. I look forward to working with you, Mr. Chairman, the members of
    this Committee, the men and women of the IRS, the National Treasury
    Employees' Union, and all other interested parties as we take the steps
    necessary to transform the IRS into and institution that meets the
    needs of the American people. I would now welcome any questions.

                                   __________

                   Prepared Statement of Michael I. Saltzman

        Mr. Chairman and Members of the Finance Committee: I am pleased to
    appear before you today at your request. I have been asked to give you
    my views on the Report of the Restructuring Commission on the Internal
    Revenue Service, S. 1096, the ``Internal Revenue Service Restructuring
    and Reform Act of 1997,'' and H.R. 2676, the ``Internal Revenue Service
    Restructuring and Reform Act of 1997'' passed by the House of
    Representatives. My testimony represents my own views and is not on
    behalf of any client, nor my law firm.
        My experience is as a practitioner and tax lawyer with over thirty
    three years of experience in handling all kinds of tax disputes, from
    civil to criminal cases, from collection cases to sophisticated
    substantive tax cases, from representing individuals and corporations
    before the IRS, to appearing in the U.S. Tax Court, federal district
    courts, bankruptcy courts, the Court of Claims, and circuit courts of
    appeals. I have been a government attorney, a sole practitioner for
    more than 10 years, as well as a member of a large international law
    firm. I have worked as a Justice Department Tax Division trial attorney
    (1964-69), and an Assistant U.S. Attorney in charge of tax cases in the
    Southern District of New York (1970-1972). I also am the author of a
    treatise on IRS procedures as well as the law of tax procedure,
    entitled ``IRS Practice & Procedure,'' which was first published in
    1981, with a second edition in 1991. I supplement that treatise three
    times a year to keep subscribers abreast of developments in the IRS's
    procedures and court decisions. For about 18 years, I have also been
    teaching courses in tax procedure at the New York University Law
    School's Graduate Tax Program. I have also been active for many years
    in the American Bar Association's Tax Section, and during my tenure as
    Chair of the Tax Section's Civil & Criminal Penalties Committee was one
    of the principal drafters of a 1989 Report on Civil Penalty Reform.
    This report became part of the proceedings before the House of
    Representatives Ways & Means Committee's Oversight Subcommittee. In
    that capacity, I participated in various groups Chairman Pickle
    selected to study civil penalty reform. This effort led to the
    important civil penalty reforms enacted in 1989.
        There are several issues on which I would appreciate your
    considering my views.
               the goal of reform and an approach to achieving it
        In setting about reforming the operations of the Internal Revenue
    Service, it is worth keeping in mind, as one historian has observed,
    that taxes, including penalties, ``must not merely be imposed; they
    must be justly imposed. Their efficient, comprehensive, and equitable
    collection is the foundation of a healthy and stable government.'' P.
    Johnson, A History of the English People, p.47 (1989). It is not enough
    that taxpayers subject to various tax obligations, penalties, and
    interest, are also protected by a range of remedies in an effort to
    ensure that the IRS treats them fairly. Unless structural reforms and
    protections added to the Code result in taxpayers' feeling that they
    have been treated fairly, popular attitudes toward the IRS will not
    change and statutory changes will do nothing more than add sterile
    complexity to an already complex law. I suggest that if the IRS shares
    the goal of fostering taxpayer trust that the IRS will treat them
    fairly, the need for structural reforms of the IRS will be reduced.
        One way to make statutory changes more effective, however, is to
    view them as part of a coordinated strategy. Statutory reforms should
    not be made in isolation. Changes to the penalty provisions of the Code
    are related to the interest provisions and to collection procedures.
    Burden of proof changes must be seen in the context of the IRS's
    summons authority. The proposed protection of tax advice non-attorneys
    give to taxpayers should be considered in relation to the reasonable
    cause defense, which a taxpayer has to an accuracy-related penalty when
    the taxpayer proves reliance on the advice of a tax advisor.
        With this approach to IRS reform in mind, I offer the following
    comments regarding certain provisions in H.R. 2676 and S. 1096, as well
    as certain other recommended reforms.
                      i. comments on s. 1096 and h.r. 2676
    A. Privilege of Confidentiality extended to taxpayer's dealings with
            non-attorneys authorized to practice before the IRS (sec. 341
            of H.R. 2676).

                                  Present Law

        Under common law, the privilege of confidentiality exists for
    confidential communications between an attorney and client made during
    the course of the attorney's representation that have not been revealed
    to a third party. This privilege is limited to communications between
    clients and attorneys. This privilege is not extended to communications
    between a client and other professionals, such as CPAs or enrolled
    agents authorized to practice before the IRS.

                                Proposed Change

        Under the bill, the present common law privilege of confidentiality
    will be extended to tax advice given to a client-taxpayer (or potential
    client-taxpayer), in a noncriminal proceeding before the IRS, by an
    individual who is not an attorney but who is authorized to practice
    before the IRS.

                          Comments on Proposed Change

         In the explanation of this provision, it is stated that extending
    the confidentiality privilege in this context will allow taxpayers to
    consult with other qualified tax advisors in the same manner they
    currently may consult with tax advisors who are licensed to practice
    law.
         Confidentiality for communications made to non-attorneys is not
    necessary. As a practical matter, the attorney-client privilege is not
    as broad in the tax area as many lawyers believe. The new provision
    assumes that the attorney-client privilege protects all information a
    client provides to the attorney. However, when an attorney either
    prepares or assists in preparation a tax return, the attorney's tax
    advice is not privileged where the advice is disclosed on the tax
    return in the form of a return position. This results in the waiver of
    the attorney-client privilege by disclosure. Thus, the new privilege
    for non-attorneys would also be waived in this circumstance.
         Suppose an attorney gives advice to a client, and the client later
    claims that he or she relied on this advice to avoid an accuracy
    related penalty. Again, the client-taxpayer has waived the attorney-
    client privilege because the advice has been disclosed. The same waiver
    will occur if this privilege is extended to non-attorneys.
         Attorneys and accountants also differ in their roles. An attorney,
    representing a taxpayer, and acting within the bounds of law, owes a
    duty of loyalty to a client when providing tax advice. A full-service
    accounting firm, which attempts to provide both auditing services
    (where a duty of independence is owed) and tax services (where a duty
    of loyalty is owed), will have conflicting duties.
        In short, the problem with this ``protection'' is that it may
    delude taxpayers into believing that greater confidentiality exists in
    their dealing with non-attorneys than presently exists with attorneys.
    B. Offers in Compromise (sec. 346 of H.R. 2676 and sec. 308 of S. 1096)

                                  Present Law

         Section 7122 of the Code permits the IRS to compromise a
    taxpayer's liability for all types of federal taxes, including
    penalties and interest. An offer-in-compromise is a proposal by the
    taxpayer to settle its tax liabilities for less than the full amount of
    the assessed balance due on the basis that there is doubt as to the
    fact of the liability or doubt as to the taxpayer's ability to pay in
    full. If a taxpayer proposes an offer-in-compromise on the basis of
    doubt as to his or her ability to pay, the taxpayer must make certain
    financial disclosures concerning assets and liabilities and must
    observe all IRC provisions relating to the filing of returns and paying
    taxes for five years from the date the IRS accepts the offer. Failure
    to obey this requirement permits the IRS to begin immediate collection
    efforts for the original amount of the unpaid assessment.

                                Proposed Change

        Both S. 1096 and H.R. 2676 will require (1) that the IRS develop
    and publish schedules of national and local allowances designed to
    provide taxpayers entering into offers-in-compromise adequate means to
    provide for basic living expenses and (2) the IRS to prepare a
    publication or statement providing taxpayer guidance regarding the
    rights and obligations of both taxpayers and the IRS in entering into
    an offer-in-compromise, including an explanation of the rights of
    married taxpayers should their marital status change. In addition, H.R.
    2676 will require that if an offer-in-compromise is terminated due to
    the actions of one spouse or former spouse, the complying spouse may
    apply for reinstatement of the offer.

                          Additional Suggested Changes

         I am concerned that national and local expense standards will
    complicate the process of obtaining financial information in order to
    evaluate installment payment agreements and offers-in-compromise.
    National and local expense standards will not eliminate confrontations
    between revenue officers and taxpayers who inevitably believe that the
    government is telling them how to live their lives.
         Recognizing that there is no panacea for this issue, I recommend
    several approaches. First, a third party should be interposed in the
    process to help the taxpayer pay and the IRS to receive as much of the
    taxes owed as is practical. The problem with the current system and the
    proposal is that taxpayers who are unable to pay their tax obligations
    need financial planning advice, not instructions from revenue officers
    on how much they can spend for what taxpayers consider to be necessary
    expenses. By the very nature of their role with the IRS, revenue
    officers are not equipped to give that advice. The third party should
    have a background in financial planning and should have as his or her
    objective, the development of a practical and attainable plan to pay as
    much of the tax as possible. The individual who serves in this capacity
    as financial advisor/mediator may come from a specialized group in the
    IRS's Appeals Division, the Taxpayer's Advocate Problems Resolution
    function, or outside private practitioners, who have these skills. I
    believe that retired professionals and business people should be
    considered to serve in this role.
         Second, there must be recognition that, under an offer-in-
    compromise or installment payment agreement, the IRS will not receive
    full payment for tax, penalties, and interest. The focus should be on
    the collection of the unpaid tax. In a significant number of cases,
    full or even substantial payment of the tax is all that can reasonably
    be expected. Because interest is market sensitive and compounded daily
    (therefore often twice or three times the amount of tax), the failure
    to collect interest should not be an obstacle to agreement. Penalties,
    such as the failure to pay penalty, should not be imposed when a
    taxpayer is complying with the terms of an installment payment
    agreement or offer-in-compromise.
         I recognize that some will say that this approach will reward
    delinquent taxpayers and be unfair to taxpayers who are compliant. I
    agree with this criticism. However, my experience tells me that it is
    no reward to have to deal with the tax collector and that it benefits
    the tax system as a whole to avoid the taxpayers' return to a system
    full of past tax debts and the IRS' having ever-increasing,
    uncollectible delinquent accounts. Some radically reduced expectations
    are necessary if this is to happen.
    C. Burden of Proof (sec. 301 of H.R. 2676 and sec. 321 of S. 1096)

                                  Present Law

         Under present law, the IRS Commissioner's determination of a tax
    deficiency is presumed correct, and the taxpayer bears the burden of
    proving that the Commissioner's determination is erroneous. This
    general rule recognizes (1) that the taxpayer who engaged in a
    particular transaction, which is the subject of the Commissioner's
    determination, is in the best position to produce evidence relating to
    the transaction and (2) that the taxpayer is required to maintain
    adequate books records to substantiate any position taken on a tax
    return. Under specific circumstances, however, including the imposition
    of the fraud penalty, a determination of transferee liability, untimely
    assertion of new matters, worker status, etc., the burden of proof is
    placed upon the Commissioner.

                                Proposed Change

         Proposed Code section 7491 provides that the Commissioner shall
    have the burden of proof in any court proceeding with respect to a
    factual issue if (1) the taxpayer asserts a reasonable dispute with
    respect to any factual issue relevant to ascertaining the taxpayer's
    income tax liability, (2) the taxpayer fully cooperated at all times
    with reasonable requests from the IRS, including providing, within a
    reasonable period of time, access to and inspection of all witnesses,
    information, and documents within the control of the taxpayer, (3) the
    taxpayer meets all applicable substantiation requirements, and (4) the
    taxpayer meets the net worth requirements that are currently in place
    as a prerequisite to an award for attorney's fees.

                       Comments on Proposed IRC Sec. 7491

         Proposed Code section 7491 was based on the concern that
    individual and small business taxpayers frequently are at a
    disadvantage when forced to litigate with the IRS, and that all other
    things being equal, facts asserted by individual and small business
    taxpayers, who fully cooperate with the IRS and satisfy all relevant
    substantiation requirements, should be accepted.
        First, as a practical matter, cases that turn on the burden of
    proof generally do not involve taxpayers who have fully satisfied the
    substantiation requirements; most of these cases are settled with the
    IRS prior to litigation. In making factual findings, courts generally
    do not consider what occurred during examination, before the issuance
    of the notice of deficiency to a taxpayer. Rather, courts render
    decisions based upon the evidence produced and offered at trial. In
    this context, cases where taxpayers lose on the burden of proof are
    cases in which a taxpayer is either (1) relying on evidence other than
    substantiating books and records, such as his or her own testimony, or
    (2) is pro se (representing himself or herself) and simply does not
    know what evidence to put forward or fails to put evidence forward on
    every issue presented, as a consequence of being unrepresented. For
    example, a taxpayer may be facing a number of issues including asserted
    penalties for negligence. The taxpayer may come to court prepared to
    present evidence on the primary issue of the underlying deficiency and
    simply fail to present evidence with respect to the penalties. In this
    case, with no evidence in the record, the Commissioner will be
    sustained on the burden of proof. It is respectfully suggested that in
    these cases, and in fact all cases, the Commissioner should not be
    permitted to simply rest its case on the burden of proof with respect
    to any issue until and unless the Commissioner's position on that issue
    is set forth, and the taxpayer is alerted to his or her responsibility
    to rebut that position with sufficient evidence.
        Secondly, it can be reasonably anticipated that proposed section
    7491 will significantly increase the scope of litigation necessitating
    the need for mini trials on statutory interpretation issues in order to
    determine if the taxpayer has met the statutory predicate to shifting
    the burden of proof to the Commissioner, including the meaning of
    ``full cooperation,'' ``reasonable period of time,'' and what is a
    ``reasonable request'' on the part of the IRS. These inquiries will
    prolong the length of the trial process and necessarily increase the
    cost of litigation to both the government and the taxpayer.
        Finally, it is unclear the effect that this legislation will have
    on the audit and settlement process and how this legislation may affect
    situations where the burden of proof is currently on the Commissioner.
                    ii. other comments and suggested changes
    A. Penalties.
    1. The Failure to Pay Penalty.

                                  Present Law

        Under current law, unless reasonable cause is shown, a delinquency
    penalty is imposed by Code section 6651 for failure to pay an amount of
    tax shown on a return when due. Section 6651(a)(2) of the Code imposes
    a penalty in an amount equal to 5 percent of the amount of tax per
    month if the failure is not for more than one month, with an additional
    5 percent for each month or fraction thereof for which such failure to
    pay continues, not to exceed 25 percent in the aggregate.

                             Comment on Present Law

        The current failure to pay penalty was added to the Code in 1969 to
    discourage taxpayers from ``borrowing'' from the Government because at
    the time the cost of borrowing money was ``substantially in excess of
    the 6 percent interest rate provided by the code, [and] it [was] to the
    advantage of taxpayers in many cases to file a return on the due date
    but not to pay the tax shown owing on the return.'' Senate Report 91-
    552, Tax Reform Act of 1969, PL 91-172, 1969-3 C.B. 429, 611. In other
    words, by delaying the payment of tax, taxpayers before 1969 could
    ``borrow'' from the Government at 6 percent simple interest, when the
    prevailing market rates were in excess of that 6 percent interest rate.
        Under the current interest provisions in the Code, interest rates
    are market sensitive and adjusted quarterly, and interest is not
    calculated as simple interest, but is compounded daily. Sections 6621,
    6622(a). Despite changes in the rate and computation of interest, that
    eliminate the interest rate differential incentive for a taxpayers'
    failing to pay the reported tax, the failure to pay penalty of up to 25
    percent of the net unpaid amount remains in the Code. Although the
    failure to pay penalty no longer serves as a disincentive for taxpayers
    who can pay their reported tax from playing a tax arbitrage game with
    their taxpaying obligations, the penalty has serious adverse
    consequences for taxpayers, especially individual taxpayers who simply
    do not have the funds to pay their taxes. For individual taxpayers,
    interest on the unpaid tax is nondeductible, and so the failure to pay
    penalty operates as a second penalty on taxpayers who cannot timely pay
    their tax obligations. These taxpayers are not taking advantage of low
    delinquency interest rates. When a financially-pressed taxpayer files a
    return reporting a tax due, but does not include full payment, the
    failure to pay penalty is automatically imposed. If the taxpayer
    attempts to work out a part-payment agreement, the amount the taxpayer
    will have to pay is not only the unpaid tax, plus interest compounding
    at a daily and market sensitive rate, but the taxpayer will also face a
    25 percent failure to pay penalty, which itself draws interest. When
    the 25 percent failure to pay penalty is added to the already
    overwhelming tax bill (and that penalty itself draws interest), these
    taxpayers feel that they are unfairly punished for their inability to
    pay, locked in a kind of IRS prison for debt.
        There are at least three types of conduct that follow from this
    situation. First, it should come as no surprise that taxpayers in this
    predicament find it difficult to deal with collection officers, and
    thus meetings between them can be explosive. Secondly, feelings that
    there will be no way to pay off a tax debt increases taxpayers'
    recourse to bankruptcy. For those who calculate the potential tax bill
    in advance of filing a return, the third course of conduct can be the
    failure to file a return and to start down the road to criminal
    conduct.

                                Suggested Change

        One way to make the penalty provisions reflect the reality of
    failure to pay situations is to eliminate the failure to pay penalty.
    To reflect the reality of the interest rate and computation, instead
    imposing a penalty for failure to pay a reported tax, the taxpayer
    should be subject to a higher than normal interest rate. The additional
    interest rate should not be equivalent to the failure to pay penalty.
    It should be intended to strike a balance between encouraging taxpayers
    to timely pay and recognizing that the taxpayer who files a return
    reporting tax due, but who cannot pay the full amount is attempting to
    comply with the tax system. In other words, the taxpayer should not be
    punished and feel as though he has engaged in misconduct merely because
    financial hardship prevents timely payment.
        If, on the other hand, the taxpayer intentionally fails to pay or
    the taxpayer refuses to act as a reasonably responsible taxpayer would,
    which results in a determination of a deficiency, then the taxpayer may
    be punished by the 20 percent penalty for negligence or intentional
    disregard of rules or regulations under section 6662 on the portion of
    the underpayment attributable to such conduct.
    2. The Substantial Understatement Penalty.

                                  Present Law

        The substantial understatement penalty is one of the accuracy-
    related penalties (Sec. 6662), which subjects a taxpayer to a 20
    percent penalty of the underpayment. A taxpayer is liable for this
    penalty if the taxpayer understates income tax by the greater of 10
    percent of the tax the taxpayer is required to pay, or $5,000 ($10,000
    in the case of corporations). In other words, the penalty is
    automatically imposed when there is a relatively small error in the
    return.
        The taxpayer may attempt to avoid the penalty by showing that there
    was ``substantial authority'' for the treatment of the item on the
    return, or make a disclosure to the IRS of the basis for the treatment
    of the item by attaching a disclosure statement to the return. When
    this penalty provision was adopted, the term ``substantial authority''
    was said to be a new one, the meaning of which was to be articulated by
    the courts. Regulations define ``substantial authority,'' and set out
    rules regarding what is and what is not qualifying authority. Tax
    professionals do not necessarily agree with the limitations the
    regulations impose, however. The IRS also believes that substantial
    authority is a quantitative term (meaning a one-in-three chance of
    success), not a qualitative term.

                             Comment on Present Law

        The substantial understatement penalty was added to the Code in
    1982 in order to combat the spread of investments in tax shelters. S.
    Rep. No. 97-494, vol. 1, at 272-274 (1982), reprinted in 1982
    U.S.C.C.A.N. 781, 1019-1021. Taxpayers were taking advantage of the
    IRS's difficulty in identifying tax shelter returns and playing the
    audit lottery. Id. Also, when the IRS selected a tax shelter return for
    audit, taxpayers were said to be claiming that they were avoiding
    negligence penalties because they had relied on so-called reasonable
    basis opinions of tax professionals. Id.
        The substantial understatement penalty, however, applies broadly to
    all taxpayers, not just tax shelter investors. This penalty presents
    serious difficulties and uncertainties for taxpayers in general.
    Because of the uncertainty about the meaning of the term ``substantial
    authority,'' the substantial understatement penalty can easily be
    abused by IRS agents and be frustrating to taxpayers. Since substantial
    authority is a unique term, it sets up a standard, which is difficult
    for the IRS to articulate and for taxpayers to follow. The penalty is
    imposed on the taxpayer, but the misconduct of failing to have
    sufficient authority really applies to the taxpayer's return preparer,
    unless the taxpayer is supposed to second guess the preparer. Moreover,
    it is hard to understand just how and why taxpayer conduct amounting to
    negligence or intentional disregard of rules and regulations differs
    from an absence of authority of substance for the taxpayer's position.
        In practice, the penalty has become a penalty for ``being wrong''
    in the opinion of the revenue agent. Many practitioners also believe
    that the penalty is asserted at the district level solely to gain some
    bargaining advantage at the Appeals level. This creates additional
    expense for taxpayers in fighting the penalty when all that may truly
    be in dispute is a frank difference of opinion as to what the law
    requires.

                                Suggested Change

        Accordingly, I respectfully recommend the elimination of the
    substantial understatement component of the accuracy-related penalty.
    Misconduct amounting to negligently taking a return position, or
    intentionally disregarding rules and regulations, can be punished under
    the negligence and intentional disregard component of the accuracy-
    related penalty. Particularly abusive intentional disregard misconduct
    should be punished by an increased penalty. I also believe that
    taxpayers should be encouraged to disclose return positions, not
    discouraged by limiting qualifying disclosures to those having a
    reasonable basis. Accordingly, I would permit a disclosure statement to
    avoid a penalty if it is supported in fact and law or by a good faith
    extension of existing law.
    3. Reasonable Cause.

                                  Present Law

        One of the contributions of the 1989 penalty reform was a uniform
    waiver standard for reasonable cause and good faith. Section 6664. If
    the taxpayer can establish reasonable cause and good faith, the
    accuracy-related penalty is not due. Reasonable cause is a concept
    which has its roots in the tort law. It exists when a taxpayer acts in
    a way that a reasonably prudent taxpayer would under the circumstances.
    See Restatement (Second) of Torts Sec. 283 (1965). Similarly, the
    Supreme Court in Boyle defined reasonable cause and an absence of
    willful neglect as ``ordinary business care and prudence.''

                            Comments on Present Law

        Despite these relatively simple statements of the standard, the IRS
    and Treasury have defined and re-defined when the IRS will consider
    reasonable cause to exist. The regulations under the reasonable cause
    provision even define what form a tax professional's advice must take
    to permit a taxpayer to rely on that advice to avoid the penalty.
    Moreover, the term reasonable cause has been given a special meaning
    for IRS regulations purposes, a somewhat different meaning in the IRS's
    Consolidated Penalty Handbook for its personnel, and still another
    meaning by the courts.

                                Suggested Change

        Accordingly, I respectfully recommend that the reasonable cause
    exception be restated to recognize the Supreme Court's definition of
    the term as ordinary business care and prudence. I also recommend that
    the statute specifically list the recognized defenses, such as reliance
    on a competent tax advisor's advice, mistake, and physical or mental
    disability.
    4. Interest on Penalties.

                                  Present Law

         Generally, under Code section 6601(e), for tax returns due after
    December 31, 1996, interest begins to run on penalties and additions to
    tax on the date the IRS makes ``notice and demand,'' i.e., when the IRS
    gives the taxpayer notice of an assessment and makes demand for payment
    of the amount assessed. This general rule does not apply to all
    penalties, however. For example, on penalties for failure to file
    (Sec. 6651), fraud (Sec. 6653), negligence (Sec. 6662(b)(1)),
    substantial understatement of tax (Sec. 6662(b)(2)), and others,
    interest is imposed from the date the tax return is required to be
    filed until the date of the payment of the penalty.

                            Comments on Present Law

        The purpose of imposing interest on amounts due and owing to the
    IRS is to compensate the IRS for the loss of the use of money, not to
    impose a penalty. As the IRS itself has put it, ``the underlying
    objective [of the interest provisions] is to determine in a given
    situation whose money it is and for how long the other party had use of
    it.'' Rev. Proc. 60-17, 1960-2 CB 942, modified by Rev. Proc. 84-66,
    1984-2 CB 637. It should be recognized that this rationale fails when
    applied to interest on penalties, which in effect creates a penalty on
    a penalty. It should also be recognized that taxpayers are often
    crushed under the financial burden of owing the tax due, interest on
    the tax, penalties, and interest on penalties, a reality which results
    in a taxpayer's inability to pay amounts owed. The goal of interest and
    penalties is to make the government whole. Interest is due in order to
    compensate the government for the loss of the use of money. Penalties
    are due in order to punish a taxpayer and create a deterrent effect.
    The deterrent effect of penalties is diluted if the burden is so great
    that taxpayers cannot pay.

                                Suggested Change

         Accordingly, I respectfully recommend that, if interest on
    penalties remains in effect, the interest should begin to run, for all
    penalties, no earlier than the date the IRS makes notice and demand. In
    many cases, it can be many years after a taxpayer has filed a return
    that a determination as to the imposition of penalties is made. A
    taxpayer should not pay interest on a penalty from the date the return
    is required to be filed. It is simply inequitable from the standpoint
    of the taxpayer, that interest on the penalty is imposed before
    notification of the imposition of the penalty is made, i.e., when the
    debt for the penalty is created.
    B. Taxpayer Protections: Seizures and Disclosure Cases.

                                  Present Law

        Section 6331(a) generally authorizes the IRS to levy on all
    property and rights to property of a taxpayer who neglects or refuses
    to pay tax. Sections 6331(b) and 7701(a)(21) define the term ``levy''
    as including ``the power of distraint and seizure by any means.'' In
    G.M. Leasing Corp. v United States, 429 U.S. 338 (1977), the U.S.
    Supreme Court held that, in the absence of valid consent and exigent
    circumstances, a warrantless entry into a taxpayer's premises for the
    purpose of seizing property pursuant to section 6331(a) violated the
    Fourth Amendment's prohibition of unreasonable searches and seizures.
        Following the Court's decision in G.M. Leasing Corp., the IRS
    adopted procedures for obtaining a writ of entry ex parte. Section
    56(12)4.5 of the Internal Revenue Manual provides that the revenue
    officer who seeks the writ must prepare an affidavit, which is to be
    reviewed by District Counsel and forwarded to a U.S. Attorney for
    handling. Generally, a district court judge or magistrate judge will
    issue a writ of entry upon a showing of ``probable cause.''

                         Comments and Suggested Change

        The IRS should not be permitted to obtain an order of entry from a
    magistrate judge ex parte, which permits the IRS to enter the
    taxpayer's residence or business in order to seize and sell property.
    The taxpayer should be able to have a pre-deprivation hearing, or at
    least a prompt post-deprivation hearing before any sale of property.
    The hearing would be similar to a jeopardy assessment review proceeding
    (Sec. 7429) before some subordinate judicial officer who would be
    empowered, not only to review the IRS's prospective seizure, but to
    order the taxpayer not to transfer property.
         Section 7431 of the Code permits a taxpayer to institute a civil
    action for damages if an officer or employee discloses the taxpayer's
    confidential return information in violation of the tax return
    confidentiality protections of section 6103. My experience is that this
    civil action is an incomplete remedy. Although attorney's fees may be
    received, the cost of litigation has been greater that the taxpayer can
    bear. Litigation also raises the prospect of repeating the disclosure
    in court papers and raises the possibility of publicity.
         I recommend that the taxpayer, the IRS, and its attorneys in the
    Justice Department, be required to use alternative dispute resolution
    procedures in these cases. Mediation, because of its confidentiality
    and low cost, appears to me to represent an appropriate ADR procedure
    in these cases. Only if resolution cannot be achieved without a trial,
    should further discovery and trial proceedings be permitted.
    C. Proposed Study
         If taxpayer remedies, such as review of jeopardy assessments and
    seizures are to be effective, some court other than federal district
    court must handle them. In my experience, federal district courts are
    so overburdened by criminal cases that expedited review in certain
    types of tax cases is unlikely to occur.
        Accordingly, I respectfully recommend that a study be conducted
    with respect to the efficacy of pre-deprivation administrative review
    of significant seizures of taxpayer property. This could be
    accomplished by establishing field offices where administrative judges
    or U.S. Tax Court special trial judges could make determinations as to
    whether seizure of significant taxpayer property in any given situation
    is an appropriate remedy. In addition to this task, many other actions
    could be heard in these field offices, such as issues surrounding
    jeopardy assessments, John Doe summonses, and similar matters. This
    alternative will allow for the quick handling of these issues at a
    local level and at a considerably lesser expense than resort to the
    district courts.
                                   conclusion
         I thank the Chairman and the Members of the Finance Committee for
    giving me the opportunity to express my views on these important
    matters. I hope my comments will assist the Committee in its
    consideration of the provisions affecting taxpayer rights and
    protections.

                    Responses to Questions From Senator Roth

        Question 1. You have asked whether I believe that taxpayers are
    afforded proper due process in the collection process, as implemented
    by the IRS, and if not what my suggestions I might have that would
    protect the taxpayer without harming our tax system.
        Answer. The simple answer to your question is that as implemented
    by the IRS, taxpayers are not afforded proper due process in the
    collection process because, in general, a taxpayer has no or little
    opportunity for independent review of IRS collection actions. Taxpayers
    may be denied due process at both the service center and at district
    levels in the collection process.
    1. IRS Service Center Collection Action.
        The IRS's collection process begins at its regional service
    centers, where, using a computer-driven system called the Automated
    Collection System (``ACS''), the IRS will generate levies and liens to
    collect an unpaid tax assessment. Taxpayers do not have direct access
    to IRS personnel at service centers, who control the collection
    process. They must attempt to communicate with IRS service personnel by
    letter or telephone to resolve a problem. While the IRS has procedures
    intended to assist taxpayers having difficulties in dealing with the
    service center collection action, such as Taxpayer Service and Problems
    Resolution personnel, there is no statutory procedure for the IRS to
    suspend collection action while the propriety of the collection action
    is independently reviewed. Instead taxpayers have the burden of
    attempting to convince IRS personnel to halt the process. Taxpayers
    find this burden difficult, time-consuming, and frustrating. In the
    meanwhile, taxpayers fear that the IRS will take collection action and
    find, that for one reason or another, the computerized collection
    process works inexorably against them and defeats their ability to stop
    it. Thus, because the IRS's initial collection actions are computer-
    driven at inaccessible service centers, if a taxpayer believes that an
    IRS assessment notice is erroneous, or wishes to resolve a liability
    without the IRS's taking collection action, the taxpayer runs a race
    with the ACS computer program.
        The service center collection process starts with the assessment of
    a tax. After an assessment is made, if the taxpayer has failed to remit
    the amount assessed, the service center is required by law to send a
    notice of the assessment and a demand for its payments (a ``notice and
    demand''). If in response to the notice and demand, the taxpayer fails
    to make full payment to the service center, service center computers
    are programmed to send one or more notices to the taxpayer, and if no
    payment is received and credited, an ACS-generated notice of intention
    to levy is sent to a levy source.
        Once this computer-driven collection process has begun, the
    taxpayer's only recourse is to attempt to correspond with or to
    telephone the service center. If the taxpayer reaches a service center
    representative, the taxpayer may be able to resolve the issue, succeed
    in securing a hold on collection, or be unable to stop the collection
    process. In any event, the taxpayer has the burden of reaching some
    service center employee and succeeding in persuading that employee to
    take some action to stop the collection process or the collection
    process will continue.
        In the usual case, the taxpayer attempts to correspond with the
    service center about a notice, but does not include full payment of the
    amount billed. The correspondence is not acted upon and the automated
    collection process continues. Accordingly, the service center computer
    generates another notice threatening collection action, and the
    taxpayer, now frustrated and fearful that the IRS will levy on a bank
    account or other property, writes another letter. Service center
    personnel either fail to act on this correspondence, or act on it by
    contacting the taxpayer, but they sometimes fail to see to it that a
    hold on collection is input. As a result, a levy is sent to the bank or
    even to an employer.
        Taxpayers can also become frustrated when they attempt to telephone
    the service center at the general number indicated on dunning notices.
    When the taxpayer telephones the service center, the taxpayer listens
    to a menu of possible extensions linked to particular problems, but the
    taxpayer then must have the patience to stay on the line for long
    periods before a representative becomes available. Even when the
    taxpayer reaches a service center representative, the service center
    representative may unilaterally reject the taxpayer's request, the
    taxpayer may have to provide correspondence or substantiating data
    before collection is suspended, or the representative fails to input a
    hold on collection in time to stop further collection action.
        The IRS's Problems Resolution Program (``PRP'') can assist the
    taxpayer in resolving a service center problem, however, the assistance
    is provided in only in cases involving limited criteria. Problems
    Resolution has the authority to issue a Taxpayer Assistance Order, a
    kind of administrative injunction, to halt the collection process. But
    the Problem Resolution Program's criteria for accepting a taxpayer's
    case have been based on the premise that jurisdiction is limited to
    instances where the taxpayer is unable to resolve the problem with the
    appropriate function. Although the IRS relaxed the PRP's restrictive
    criteria in 1995, taxpayers still must persuade the problems resolution
    officer that they will suffer significant hardship if the collection
    action continues.
        Computer foul-ups cannot be legislated away, but there are a number
    of possible changes that can be made:
              a. The IRS should provide more complete information to
            taxpayers about the alternative procedural solutions available
            to them to resolve problems they may have with a notice. The
            information should have a checklist of problems, specific
            solutions (and alternative solutions where appropriate), the
            specific requirements to be met in order for the solution to be
            available, telephone numbers of IRS offices, and the data that
            the IRS office will require. A preprinted envelope(s) should be
            provided, which is designed to permit taxpayers to complete the
            service center address with the code or stop number for
            specific problems.
              b. Procedures the IRS already has in place to deal with
            taxpayer problems should be expanded to permit greater taxpayer
            access. This means restrictive criteria should be eliminated or
            revised. Furthermore, taxpayers should be permitted to request
            that a manager review a problem.
              c. Taxpayers should be given easier access to taxpayer
            assistance personnel and the PRP. Specifically, taxpayers
            should not have to wait until the service center or other
            collection office fails to respond to taxpayer inquiries or
            requests before PRP intervenes. The PRP should be given
            statutory authority to temporarily stop the collection process
            as soon as the IRS fails to respond to a taxpayer complaint.
              d. Once contact has been made with a service center employee,
            correspondence should include the particular employee's name
            and telephone number.
    2. District Office Collection Actions.
        As your hearings have confirmed, revenue officers in IRS district
    Collection Divisions have enormous discretion in taking collection
    action against taxpayers, including the filing of notices of federal
    tax liens against their property, serving levies, and seizing and
    selling their property. Taxpayers are deprived of their property
    without due process because there is no statutory procedure for any
    independent review of the revenue officer's collection decision.
        Under the Collection Appeals Program, a taxpayer may obtain review
    of certain collection actions, proposed levies, seizures, and the
    filing of notice of lien. However, it is not clear that taxpayers are
    informed of their opportunity to appeal proposed collection action, and
    I suspect that revenue officers do not explain the procedure to
    delinquent taxpayers.
        Accordingly, I recommend adoption of the following procedures:
              a. There should be a statutory procedure for the review of
            IRS collection action.
              b. The model for this review procedure should be Section
            7429, which permits a taxpayer to obtain administrative and
            judicial review of a jeopardy assessment or jeopardy levy. The
            IRS must give the taxpayer notice of the jeopardy assessment or
            jeopardy levy New York within 5 days after the date of the
            assessment, after which the taxpayer has 30 days within which
            to request administrative review of the jeopardy assessment. In
            part, the purpose of the administrative review is to determine
            whether the making of the jeopardy assessment or levy was
            reasonable under the circumstance. The taxpayer may also obtain
            judicial review in a federal district court or the Tax Court.
            If the court determines that the making of the levy was
            unreasonable, the court may order the IRS to release the levy
            or to take such other action the court finds appropriate. The
            Code already provides a civil remedy (Section 7432) if the IRS
            erroneously fails to release a lien, and this statutory
            provision requires the taxpayer to exhaust his administrative
            remedies. The new lien and levy review procedures can provide
            this administrative remedy.
              c. I believe that threatened liens and levies should be
            reviewed by an Appeals officer. Unlike the jeopardy levy review
            procedures, I recommend that judicial review be conducted by
            special trial judges of the Tax Court, who will hear the case
            on an expedited basis.
        Question 2. The IRS targets low income and disadvantaged taxpayers
    for audit. You asked how these taxpayers can be given adequate
    protection from being targeted.
        Answer. The IRS has misallocated its examination resources by
    targeting low income taxpayers. For example, individual taxpayers
    filing income tax returns, with Schedule Cs reporting less than
    $25,000, are audited far more frequently than the overall audit
    coverage percentage. I suggest the following steps might be taken:
              a. Because targeting low income taxpayers is a management
            problem, at least one way to deal with the unfair audit
            coverage of low income taxpayers is to require that the
            Taxpayer Advocate be given the opportunity to review and object
            to the IRS annual audit plan to prevent the targeting.
              b. Another way to protect low income taxpayers, whose returns
            have been selected for audit, is to require IRS Examination
            personnel to refer these taxpayers to legal clinics and
            available professionals supplied by state bar associations,
            state societies of certified public accountants, and enrolled
            agents so that they may have adequate representation during an
            examination.
        Question 3. Are the Taxpayer Advocate and Problem Resolution
    Officers effective in quickly solving taxpayer problems?
        Answer. I recognize that the Problems Resolution Program handles a
    substantial number of taxpayer complaints, over 300,000 in fiscal year
    1996, according to the Taxpayer Advocate. However, I believe that the
    usefulness of the PRP to taxpayers is reduced by the restrictive
    criteria it uses in deciding whether to accept a case. Merely because a
    taxpayer cannot convince a problem resolution officer that collection
    action will cause the taxpayer significant harm does not mean that the
    taxpayer should be subjected to erroneous collection action.
        Even if PRP takes a case, it frequently resolves the problem merely
    be seeing to it that the taxpayer's problem is or has been assigned to
    the appropriate office. The problems resolution officer does not
    determine whether the action of the office is proper or reasonable. In
    short, I do not believe that the PRP solves taxpayer problems. It
    merely acts as a gate keeper.
        Furthermore, whether because of restrictions on their actions or
    possibly the incompleteness of their training, problem resolution
    officers often seem more intent on closing a case than in solving
    taxpayer problems.
        Question 4. You have asked how the current offer and compromise
    program can be improved.
        Answer. Recognizing that there is no panacea for this issue, 1
    recommend several approaches.
              a. A third party should be interposed in the offer in
            compromise process to help the taxpayer and the IRS collection
            officer work out an agreement. The problem with the current
            system and the proposal is that taxpayers who are unable to pay
            their tax obligations need financial planning advice, not
            instructions from revenue officers on how much they can spend
            for what taxpayers consider to be necessary living expenses. By
            the very nature of their role with the IRS, revenue officers
            are not equipped to give that advice. The third party should
            have a background in financial planning and should have as his
            or her objective, the development of a practical and attainable
            plan to pay as much of the tax as possible.
              b. The individual who serves in this capacity as financial
            advisor/mediator may come from a specialized group in the IRS's
            Appeals Division, the Taxpayer's Advocate Problems Resolution
            function, or outside private practitioners, who have these
            skills. I believe that retired professionals and business
            people should be considered to serve in this role. However,
            because many offers in compromise are agreed upon at Appeals
            offices already, I recommend that taxpayers be given the
            statutory right to have an Appeals officer assist in the offer
            in compromise process, and that Appeals officers be detailed to
            local district offices to deal with offers.
              c. There must be a different approach to the evaluation of
            the taxpayer's financial condition as part of the offer in
            compromise process. At the present time, the IRS Collection
            Division will not agree to an offer in compromise unless the
            taxpayer demonstrates that there is doubt as to collectibility;
            that is, doubt that the liability can be collected from the
            taxpayer.
              However, doubt as to collectibility is determined to exist
            only after the taxpayer pays the maximum amount that can be
            paid. The IRS's financial analysis forces the taxpayer to pay
            an amount which approximates the liquidation value of the
            taxpayer's property before the IRS will agree to the offer in
            compromise. This makes the offer in compromise process similar
            to a liquidating bankruptcy under Chapter 7 of the Bankruptcy
            Code. It is unrealistic to expect that taxpayers will sell
            their assets and pay the IRS the net proceeds in order to
            obtain an offer in compromise. I suspect that one of the
            reasons that the number of taxpayer bankruptcies has increased,
            with the IRS as the single or major creditor, is the IRS's
            approach to an acceptable offer. Taxpayers simply choose to go
            through a reorganization proceeding under Chapter 11 or wage
            earner's plan under Chapter 13 of the Bankruptcy Code, rather
            than an offer in compromise, which will require them to
            liquidate their property. It should be noted that under Chapter
            13 a debtor has 6 years to pay a tax debt. Accordingly, I
            recommend that the offer in compromise procedure be coordinated
            with Chapter 13 of the Bankruptcy Code with the ultimate
            objective of giving the delinquent taxpayer the fresh start
            that the Bankruptcy Code contemplates for all debtors.
              d. The focus of the offer in compromise procedure should be
            on the collection of the unpaid tax. In a significant number of
            cases, full or even substantial payment of the tax is all that
            can reasonably be expected. Because interest is market
            sensitive and compounded daily (therefore often twice or three
            times the amount of tax), the failure to collect interest
            should not be an obstacle to agreement. Penalties, such as the
            failure to pay penalty, should not be imposed when a taxpayer
            is complying with the terms of an installment payment agreement
            or offer-in-compromise.
              e. I do not believe that standardized expenses will help the
            compromise process. Revenue officers will apply standardized
            expenses inflexibly, and taxpayers will perceive them as the
            revenue officer's way of intruding into their personal affairs.
            For this reason, I believe the focus should be on assisting the
            taxpayer to develop a financial plan to pay off the delinquent
            tax debt (principally the tax) while paying timely current
            obligations. The Appeals officer should help the taxpayer in
            this process, or volunteer assistance should be provided.
         I recognize that some will say that this approach will reward
    delinquent taxpayers and be unfair to taxpayers who are compliant. I
    agree with this criticism. However, my experience tells me that it is
    no reward to have to deal with the tax collector. It benefits the tax
    system as a whole, moreover, if the delinquent taxpayer, who honestly
    is unable to pay to the full amount of past tax debts, is given a fresh
    start, and the IRS is relieved of ever-increasing, uncollectible
    delinquent accounts. Some radically reduced expectations are necessary
    if this is to happen.
        Question 5. You have asked whether, for purposes of accountability,
    all IRS correspondence should be signed by IRS personnel, and whether
    an IRS employee should be assigned to taxpayer when problems arise.
        Answer.  I agree that to have a specific IRS employee contact a
    taxpayer may be helpful. However, many IRS notices already have a
    contact person and a telephone number. Some IRS notices have the names
    of a non-existent person with a contact number. My understanding is
    that the reason why a non-existent person is used is to protect IRS
    personnel from tax protesters or other problem taxpayers who might
    contact an IRS employee personally. I recognize that this may be a
    legitimate concern.
         One way to reconcile the taxpayer's need for speedy resolution of
    a problem and the IRS employees' personal interests is to require the
    assignment of a single IRS employee after the first contact with a
    taxpayer. The expectation would be, that in the first contact, the bona
    fides of the taxpayer's problem could be determined and an appropriate
    assignment made.
        Question 6. You have asked whether taxpayers should be entitled to
    attorney's fees and costs if they prevail in Appeals.
         The award of attorney's fees to taxpayers who prevail in Appeals
    seems appropriate because a taxpayer necessarily is forced to incur
    expense to establish that the district's adjustment was improper. On
    the other hand, I am concerned that the settlement process in Appeals
    will be undermined if an Appeals officer knows that he or she will be
    exposing the IRS to the cost of attorney's fees if an adjustment is
    substantially reduced. This may cause the Appeals officer to be more
    reluctant to concede an issue or settle it substantially in the
    taxpayer's favor.
         Also, the limitations on the benefit of awards of attorney's fees
    under Section 7430 should be recognized. First, there must be a
    determination as to whether the taxpayer has substantially prevailed,
    and whether the IRS's position is substantially justified. Secondly,
    litigation over the entitlement to fees is not a satisfying remedy to a
    taxpayer who has been successful, but must chance further expense to
    secure only partial reimbursement for any fees.
         Accordingly, I do not recommend further enhancing the recovery of
    reasonable administrative costs.
        Question 7. You have asked whether IRS employees should be required
    to follow the Internal Revenue Manual, and if so what remedies a
    taxpayer should have if these procedures are not followed.
        I believe that IRS personnel should be required to follow the
    Manual. As a general matter of administrative law, an administrative
    agency is required to follow its own procedural rules. While a number
    of courts have held that the IRS's Procedural Regulations and Manual
    are directory and not mandatory, these courts have failed to recognize
    decisions of the Supreme Court that have held that an agency is bound
    by its own procedural rules when some personal interest of an affected
    person is involved. In general, a taxpayer should have the same right
    he or she would have had if the IRS employee had followed its Manual,
    and the IRS should be required to return the situation to the status
    quo ante; that is, the situation before the violation of the Manual
    provision.
         For example, if the IRS makes an assessment of a penalty before
    the taxpayer has had an opportunity to appeal the penalty in pre-
    assessment status, the IRS should be required to abate its assessment
    and permit the taxpayer to appeal the proposed penalty to the Appeals
    office. Similarly, if the IRS sends a notice of deficiency without
    giving the taxpayer an opportunity to appeal the district's deficiency
    determination, the IRS should be required to rescind the notice so long
    as there is sufficient time remaining on the statute of limitations to
    permit the administrative appeal. If there is insufficient time on the
    statute to permit the taxpayer's appeal, the IRS should not be required
    to rescind the notice unless the taxpayer agrees to extend the statute.
    Also, if the IRS takes collection action in violation of the Manual, it
    should be required to release a levy or lien and follow the procedure
    the Manual requires.

                                   __________

                Prepared Statement of Dr. Ronald P. Sanders [1]

                                 i. introduction
         Mr. Chairman, I appreciate the opportunity to appear before the
    Senate Committee on Finance to discuss proposed legislation to
    restructure the Internal Revenue Service (IRS). While the Service has a
    long and venerable history, nearly everyone agrees that the time has
    come for major changes in the way the agency does business with the
    American taxpayer, and both Houses of the Congress have responded with
    multifaceted legislation designed to usher the IRS into the 21st
    century. At the request of your staff, I would like to concentrate on
    two major aspects of that legislation this morning: (a) the proposed
    establishment of a new management and oversight structure for the IRS;
    and (b) proposed ``upgrades'' to the various internal management
    systems that are critical to the agency's mission--especially its human
    resource management system. In each instance, I will use the various
    provisions of the Senate bill (also known as the Kerry Substitute) as a
    benchmark.
                          ii. management and oversight
         First, with respect to the management and oversight structure of
    the IRS, the President and the Congress now seem to agree that some
    sort of Oversight Board, variously composed of internal and external
    stakeholders, is necessary. As first stated in the Report of the
    National Commission on Restructuring the Internal Revenue Service--
    hereafter referred to as the National Commission--such a body (it was
    initially to be called a Board of Directors) was to `` . . . guide the
    direction of long-term strategy at IRS, appoint and remove its senior
    leadership, and hold IRS management accountable,'' and its
    ``experience, independence, and stability . . . (would) give Congress
    more confidence in IRS operations.'' [2] These are all laudable
    objectives, but as presently configured, the Oversight Board may not be
    up to achieving them.
         Oversight or Operations? First, there is the fundamental question
    of its role. Is it one of oversight or operations? In both House and
    Senate versions of the legislation, the Board's title is clear, but its
    reach and responsibilities are not at all. Is it truly to be an
    oversight body, as its name implies, a surrogate of the Congress,
    standing apart of the Service and sitting in judgment of its managerial
    efficacy? Or is its function principally operational, adding yet
    another layer in an organization that already has too many (seven at
    last count), further attenuating the accountability it was expressly
    designed to improve? As it now stands, the Board seems to be a little
    of both--at best its responsibilities in this regard are unclear; at
    worst, they are schizophrenic, with the Board forced to blend and
    balance potentially conflicting and confusing responsibilities. This
    ambiguity has all sorts of implications for the Board's jurisdictional
    purview and efficacy, as well as the size and composition of its
    membership.
         Nowhere is this schizophrenia more evident than in the Board's
    jurisdictional charter. The Board's title notwithstanding, that charter
    suggests a body (albeit a part-time one) deeply involved in the day-to-
    day minutiae of running an agency, approving the Service's strategic
    plans and internal reorganizations, even determining--and thereafter
    submitting--the agency's annual budget request. Thus, instead of
    clarifying the Commissioner's accountability in this regard, the
    Board's presence clouds it. Does it advise or approve? In the case of
    the agency's strategic plan, or its budget, who does the Congress hold
    responsible for their ultimate execution? What happens if the Board and
    the Commissioner disagree, say on priorities within the Service's
    various business plans, or on matters of resource allocation within its
    overall operating budget? Who decides? One could easily envision this
    Committee becoming embroiled in such operational questions, and they
    are best handled up front--decide whether the Board's mission is
    oversight or operations, one or the other.
         In my view, the Oversight Board should stick to oversight. It
    should review, not approve; advise, not decide. Any other path is
    slippery. For example, take the issue of Board access to individual
    taxpayer information. The legislation suggests that the Board should
    have such access (to taxpayer and employee files and records, internal
    audits, etc.) on grounds that it is essential to its oversight role--
    that is, that access would prevent just the sorts of abuses uncovered
    by this Committee several months ago. This is fine in theory but
    difficult in practice, where the Board will be tempted to correct what
    it finds, and in so doing, become a de facto court of first resort for
    taxpayers, one more administrative appeal procedure. The IRS already
    has plenty of investigatory, advocacy, and appellate avenues, and while
    we could debate their effectiveness, the point is that providing one
    more is hardly the answer. Thus, access to individual files and
    records, sanitized where appropriate to accommodate privacy interests,
    should be for the purpose of identifying adverse or abusive patterns
    and practices. And where such patterns are identified, the Board should
    direct the IRS to correct them, rather than intervene in its own right.
         Advise or Approve? The Board's somewhat ambiguous role also bears
    on the issue of its membership. To the extent that the Board takes on a
    greater role in the day-to-day management of the Service, its proposed
    composition is problematic, particularly with respect to two of its
    principal prospective members: the Commissioner and the representative
    of the National Treasury Employees Union (NTEU). As it now stands in
    the Senate bill, the former is not a member of the Board, presumably on
    the theory that the latter must remain independent of the Service's
    chain of command. This ``separation of powers'' approach has historic
    legitimacy, but it works only if the Board remains an oversight body,
    deliberately detached from the day-to-day executive functions of the
    Service. To the extent that it begins to suffer from ``mission
    creep''--that is, a gradual but greater intrusion into the
    administrative and management operations of the IRS--that separation
    may come to undermine the Commissioner's authority, as well as the
    Board's.
         In short, the Board (and the Congress) must maintain a clear
    distinction between management oversight and management operations.
    Otherwise, who exactly will be in charge? If the Board disagrees with
    an operational decision of the Commissioner, say in the delicate area
    of personnel, will it overrule--or will the Board let the Commissioner
    act, holding him or her accountable after the fact? One is operational,
    the other oversight, and it is difficult to mix the two. Indeed, we are
    all familiar with the old expression ``going native''--applied to those
    administrative reformers who come to be captured by the very
    bureaucracies they were intended to tame--and there is some risk that
    an operationally-oriented Oversight Board would fall into this trap.
    After all, to the extent that it becomes part of the Service's internal
    decision-making process, it will (and should) take responsibility for
    those decisions--even as it is charged with independently determining
    their efficacy.
         In my view, the answer here is straightforward, an either/or
    choice for the Congress: if the Oversight Board is to have any
    operational authority whatsoever, the Commissioner should be a full-
    fledged member--perhaps even its chair. At least then, there would be a
    single chain of command and accountability (albeit by committee). On
    the other hand, if the Board is to remain an oversight body,
    independent of the IRS, then the Commissioner should not be a member;
    rather, he or she should answer to the Board on management matters,
    much as the Secretary of the Treasury and the Commissioner must answer
    to the Congress on matters of tax policy. The boundary here must be
    drawn clearly, on the difference between advise and approve, one or the
    other. Is it to be an Oversight Board, or an Operations Board?
         This critical distinction between operations and oversight would
    seem to bear on other administrative issues involving the Board, such
    as its size and structure. I have no views on the number of Board
    members--the more the merrier--so long as the Board remains focused on
    management oversight. A Board involved in management operations,
    however, is another thing altogether; here, ``size does matter.'' We
    all know how hard it is for a committee to make operational decisions,
    and according to the Commission, this is especially the case with the
    IRS and its Executive Committee.[3] This difficulty would only be
    compounded by a large Oversight Board involved in approving major
    management decisions. I would view questions concerning the Board's
    authority to constitute subcommittees much the same way: where such
    appendages may be necessary for oversight, they would impede
    operational effectiveness, complicating an already-far-too-complex
    management structure. It all turns on clarity of mission and function.
         Union Representation. The distinction between oversight and
    operations also bears on the controversial question of union
    representation on the Board. I would urge the Congress to apply the
    same rule of thumb here: that is, if the Oversight Board is to become
    involved in day-to-day management decisions, then NTEU representation
    on the Board is redundant--and may even constitute a potential conflict
    of interest:
       Redundant in the sense that the union presently enjoys
            exclusive recognition for most of the Service's 100,000
            employees, entitling it to speak for (and bargain on behalf of)
            their collective interests; it also enjoys one of the most
            effective labor-management partnerships in the Federal
            government. Thus, by law and custom, NTEU would be intimately
            involved in any matter affecting IRS employees long before it
            ever reached an operationally-oriented Oversight Board. And to
            the extent that those matters that may require Board review (or
            approval) , the union ought to be going with the IRS
            Commissioner to seek it--as a partner--rather than sitting in
            judgment of the Commissioner on the Board itself. In this
            regard, union membership constitutes a ``second (or maybe even
            third) bite of the apple.''
       A potential conflict of interest, in that a union
            representative on an operationally-oriented Oversight Board
            would be privy to information adverse to the interests of his
            or her constituency--for example, a confidential Board decision
            to close a facility or conduct a reduction-in-force (RIF). What
            does the union representative do with that information? On the
            one hand, as a Board member, he or she would be obliged to
            maintain the confidentiality of that information until it is
            released. On the other, that union official has a statutory
            duty to represent employee interests, and that duty may argue
            for disclosure. If my friend Mr. Tobias is to be the NTEU
            representative on the Board, I do not envy him in this
            position.
         In my view, union representation on the Board is particularly
    problematic when it comes to personnel decisions involving individual
    IRS executives and employees. First of all, I believe that an Oversight
    Board should not become embroiled in that level of detail. It is one
    thing to oversee and assess the overall performance of business lines
    and units within the IRS--that is clearly within an Oversight Board's
    purview--but it is quite another to deal with individual personnel
    actions that may derive from those assessments. By definition, such
    matters are strictly confidential, and while the Board may review them
    in the aggregate (in order to determine pattern or practice, or even to
    appraise the Commissioner's performance in this regard), I do not
    believe a true Oversight Board--with or without union representation--
    should be in the business of making, or even reviewing, those
    decisions. Add a union official to that mix, even in the context of the
    IRS-NTEU partnership, and you make an already ``risk-averse''[4]
    management culture even more so. Can you picture a union official
    bargaining with the Commissioner's senior staff one day, and then as a
    Board member, judging their performance the next?
         In matters involving IRS personnel, let me suggest another general
    rule of thumb here: if the proposed Oversight Board is to be concerned
    with such personal matters--that is, if individuals can be identified--
    then the union should not have a seat on it. On the other hand, if the
    Oversight Board is to be strictly concerned with management oversight,
    in a programmatic sense, I believe that union membership is
    permissible, potentially giving the Board access to a point of view
    that it needs to accomplish its mission. Indeed, in many respects,
    Federal employee unions generally (and NTEU in particular) have
    traditionally played an effective role in government oversight, so
    formalizing that role in this particular case is not particularly
    problematic--and entirely compatible with the Board's oversight
    responsibilities. However, to belabor the point, insofar as those
    oversight responsibilities are diluted and diverted by extensive
    operational involvement, union membership should be carefully
    considered--by the Congress and the NTEU.
                             iii. management systems
         If the IRS is to be transformed, it needs more than a new vision
    and management structure; while these are no doubt crucial, it also
    needs new management systems--human, information, financial, etc.--that
    give its leadership the wherewithal to realize that vision and
    structure. In my view, the most important of these is the Service's
    ability to manage its human resources more effectively, for without the
    right people in the right places, the vision of the Commission and the
    Congress will remain just that. Accordingly, I would like to spend the
    remainder of my time addressing the various personnel flexibilities
    proposed for the IRS by the Administration and the Congress. They come
    in two types--those dealing with the Service's senior executive corps,
    and those that address its civil service work force more generally--and
    I will take each in turn.
        New Tools at the Top. It is clear that the IRS needs an infusion of
    new leadership at the top. This is not to say that the present corps of
    senior career executives is somehow deficient or lacking in this
    regard. To the contrary; as a general matter, Senior Executive Service
    (SES) members in the IRS are among most respected in the Federal
    government, and the Service has long had one of the most effective
    executive development strategies anywhere. However, like most Federal
    agencies, senior executives in IRS tend to come ``up from the ranks''
    and may need to be augmented with outside talent and experience from
    time to time. This is one of those times--it is often hardest for those
    who have grown up in an organization to see the way clear to radically
    transform it--and nothing less than a paradigm shift is required among
    the agency's senior executive, technical, and professional leadership.
         The Congress and the Administration propose a number of provisions
    that would help bring that paradigm shift about. For example, one such
    proposal would give the Commissioner ``fast track'' authority to
    establish and fill up to 40 critical technical, professional, and
    managerial positions for up to four years apiece--and pay those who
    occupy them (by law, from outside the IRS) up to $172,000 per annum.[5]
    Other proposals would (a) expand the Treasury Secretary's discretion,
    on behalf of IRS, to request similar compensation for other senior
    executive and equivalent positions under existing ``critical pay''
    authority; (b) eliminate certain limitations (in the total amount, as
    well as in the method of payment) on existing authority to pay
    recruiting, relocation, and retention allowances; (c) increase the
    number of emergency and limited-term SES appointments the Service could
    make--up to 10% of its total SES allocation (not just its career-
    general allotment)--and permit extensions of those appointments for up
    to two additional three-year terms; and (d) increase the amount of
    bonuses payable to the Service's top senior executives, where they
    manage to meet pre-established performance goals.
         I would urge the Senate to include all of these in its final bill.
    They offer just the kind of targeted tool kit that the IRS needs to
    reinvent and revitalize its senior leadership cadre. None of the tools
    represent such a radical departure from current law, and in some cases,
    the proposals follow precedent already established in other agencies by
    the Congress. Absent such tools--especially those dealing with
    compensation--the Commissioner will have a difficult time attracting
    and motivating the kind of ``cutting edge'' executive, professional,
    and technical talent that he needs, talent that is essential to the
    transformation of the IRS. And while some may suggest that now is not
    the time to be so generous to IRS executives, or that such generosity
    will inevitably be subject to abuse, this is precisely the reason for
    having an Oversight Board: not to review individual salaries and
    bonuses, but to ensure that overall, IRS executive compensation is
    justified by its bottom line performance.
         An Alternative Personnel System. A similar case may be made for
    the more general human resource management (HRM) flexibilities proposed
    by both the House and the Senate. Here again, there is nothing very
    radical--indeed, the proposals generally track a model Congress first
    applied to the Federal Aviation Administration in 1995--that is, they
    authorize the IRS to develop and deploy an alternative personnel system
    customized to meet its unique circumstances and needs, but presumably
    within the broad principles and guidelines of Federal civil service
    law[6]--in effect, a ``system within a system.'' There is ample
    precedent for this. According to a 1996 General Accounting Office
    report on the state of the Federal civil service, the Congress has
    approved similar, customized HRM arrangements for over half of all
    Federal employees--without any apparent ill effects--and this proposal
    is no more than the latest chapter in that larger trend away from a
    unitary, ``one size fits all'' Federal civil service.
         As part of that alternative system, the Senate would grant IRS
    expanded personnel demonstration project authority, without regard to
    the numerical limitations currently established by chapter 47 of title
    5; however, the IRS would still be subject to existing restrictions on
    the content of such demonstrations (for example, the agency could not
    experiment with employee health benefits). That same provision would
    allow such projects to become permanent--that is, statutory--upon
    notice to the public and the Congress, and would also eliminate a
    proposed House requirement to consult with the Office of Personnel
    Management in project design; however, agencies with similar expanded
    demonstration authority have not found OPM consultation especially
    onerous, particularly where statutory waivers are involved; moreover,
    it is not clear that such a waiver, once granted under such authority,
    could automatically become law without congressional action.
    Accordingly, the Senate may wish to reconsider these provisions.
         In addition, the Senate would grant IRS authority to establish a
    paybanding job classification and compensation system, so long as it
    meets general OPM criteria.[7] While I caution against the level of
    detail contained in the legislation (any fine-tuning would literally
    require an act of Congress!), in concept, such a system would provide
    the Service with the kind of flexibilities it needs--in how it
    structures work and jobs, and how it pays people to restructure, this
    in sharp contrast to the rigidities engendered by the Federal
    government's half-century old General Schedule classification scheme.
    In this regard, most experts agree that that GS system is obsolete, out
    of step with the requirements of a more team-based, customer-focused
    government, and paybanding has long been identified as its most
    feasible heir apparent. Indeed, the concept is not new--the Department
    of the Navy's China Lake demonstration project first pioneered
    paybanding in the early 1980's,[8] and several years ago, the Congress
    authorized DoD to expand its use to other research and development
    facilities; FAA is also in the process of implementing its own
    paybanding system, under authority comparable to that contemplated by
    the Senate.
         Impasse Resolution. The design and deployment of an alternative
    personnel system in the IRS requires some discussion about the extent
    of union involvement in that effort--that is, in the form of formal
    collective bargaining, as opposed to more informal, interest-based
    partnership discussions. Under normal circumstances, existing
    bargaining rights and obligations have worked reasonably well in this
    regard. When it comes to standard demonstration project authority,
    those rights and obligations (generally established by 5 USC chapter
    47) have heretofore required labor and management to agree on the
    substantive aspects of the project before it is allowed to proceed.
    This provides a necessary safeguard, given the fact that such projects
    typically involve exceptions to governing personnel laws and
    regulations that are otherwise beyond the power of either of the
    parties to amend. Does this give the union a potential veto? Perhaps,
    but the same applies to the agency, and the general assumption is that
    both have a compelling motivation to find common ground.
         However, these are not normal circumstances. By some accounts, the
    IRS is in a state of crisis--it is certainly in need of some
    restructuring--and if left to the legislation and the law as they now
    stand, the agency's restructuring efforts (not to mention the
    intentions of Congress) could be impeded if labor and management cannot
    reach agreement on the parameters of an alternative personnel system.
    Such a laissez faire approach may suffice when the only objective of a
    demonstration project is research, but here the consequences of
    impasse--that is, inaction and the status quo--are much more serious.
    Accordingly, in the event that the IRS and NTEU cannot come to terms on
    an alternative personnel system for the agency, the Senate should give
    either party access to the Federal Service Impasses Panel (FSIP); the
    Panel, established by the Federal Labor-Management Relations Statute (5
    USC chapter 71), has a long and effective history of resolving
    bargaining impasses, and its expertise should be available in a matter
    as important as this.
         Reshaping the Work Force. Separately, these approaches (including
    those dealing with collective bargaining) should be made an integral
    part of the Service's restructuring legislation. Taken as a whole, they
    would provide the IRS with a state-of-the-art human resource management
    system better fitted to the requirements of its intended
    transformation. However, getting there is easier said than done, and
    this maxim suggests that one additional tool is necessary--buyout
    authority. By providing the IRS with standard Voluntary Separation
    Incentive Pay (VSIP) authority through 2002--perhaps subject to an OMB-
    approved strategic plan--the Senate would go far to ease the
    organizational pain that will most certainly be engendered by this
    effort. Thus, even while the IRS may be able to keep its promise of
    relatively stable employment level throughout the transformation
    process, that ``flat line'' masks the need for massive internal
    displacements and redeployments (functional as well as geographic), as
    the existing work force is retooled to the Service's new structure and
    culture.
         VSIP can ease the trauma of these redeployments, for employees and
    the organization alike. Obviously, buyouts offer those retirement-
    eligible workers and managers who cannot (or will not) change an easy
    way out, but significant advantages accrue to the IRS as well. If
    properly targeted at surplus skill areas, they can provide an extremely
    effective way to ``reshape'' the agency's work force; only reductions-
    in-force are more effective at such surgery, but most consider their
    price too high. In this regard, buyouts are also quite cost-effective;
    compared to the costs of retraining, relocating, or RIFing surplus
    employees, it is often much less expensive to ``buy them out'' and hire
    new ones. And this infusion of new skills and talent hastens the
    transformation process. In sum, when it comes to the sort of
    restructuring envisioned for the IRS, VSIP authority is more than worth
    the price--it is an essential means to the end that Congress and the
    Administration both seek.
         Mr. Chairman, the challenges associated with restructuring the
    Internal Revenue Service are considerable, but they are neither
    unprecedented nor insurmountable. Other Federal agencies have faced
    similar challenges, and they have successfully transformed themselves.
    However, they required a compelling vision, a solid implementation
    strategy, congressional support, and the right tools. From my vantage,
    the Senate bill seems to have these just about right (indeed, in some
    cases, the IRS would enjoy advantages over those agencies that have
    come this way before) and with some clarification and modification,
    your legislation will serve the Service--and the American public--well.
         I would be pleased to answer any questions the Committee may have.
                                    endnotes
     [1]: Not for release until February 25, 1998. The statements contained
            herein reflect the personal views and opinions of the witness
            and do not constitute or represent the official position of the
            University or any other organization
     [2]: Report of the National Commission on Restructuring the IRS
            (Washington, DC; June 1997--page 5)
     [3]: ibid; Commission Report, page 7
     [4]: ibid; Commission Report, page 12
     [5]: Note that incumbents would not be entitled to normal civil
            service protections under 5 USC chapter 75
     [6]: For example, the merit principles set forth in title 5, United
            States Code
     [7]: Note that while the House does not provide for paybanding, the
            Kerry Substitute bill would
     [8]: Congress subsequently made the system permanent there

                               Ronald P. Sanders

         Dr. Ronald P. Sanders (DPA 1989) is an Associate Professor of
    Public Administration with the George Washington University's School of
    Business and Public Management. In that capacity he also serves as
    Director of the School's new multi-million dollar Center for Excellence
    in Municipal Management, a unique public-private partnership with the
    District of Columbia and the area's business and professional
    communities chartered (by mayoral proclamation) to help Washington, DC
    rebuild its leadership and management capacity. Prior to returning to
    GWU, Dr. Sanders held a faculty appointment as Eminent Professor of
    Public Administration Practice with Syracuse University's Maxwell
    School of Citizenship and Public Affairs, where he also founded and
    directed Maxwell's Washington, DC Center for Advanced Public
    Management. He has been an elected member of the Board of Directors of
    the Senior Executives Association since 1990, and an officer
    (Secretary) from 1995-1997. He is also Faculty Chair of the Brookings
    Institution's Government Affairs Institute and a Principal with the
    Council for Excellence in Government.
         In his present capacity, Dr. Sanders conducts research, teaches,
    and consults on government reinvention and change, civil service
    reform, public human resource management, privatization, and public-
    private competition. He has worked with public organizations at all
    levels of government in the US and abroad. He has testified before
    Congress on numerous occasions--most recently in 1997 on civil service
    reform--and has been appointed co-chair of the District of Columbia's
    Council on Privatization and Managed Competition; he is also a member
    of its Personnel Reform Advisory Committee and co-chairs the National
    Performance Review's Privatization Roundtable. In addition, he is a
    regular lecturer at the Peoples Republic of China's National School of
    Administration and has provided expert advisory services for such
    foreign governments as the Ukraine, Korea, and the Kingdom of Jordan.
         Dr. Sanders is the co-author of Civil Service Reform: Building a
    Government That Works (Brookings Institution Press, 1996), as well as
    Transforming Government: Lessons from the Reinvention Labs (Jossey-
    Bass, 1998). He has also been published in several professional and
    academic journals--most recently in the Public Productivity and
    Management Review (``Strategies for Reinventing Federal Agencies'')--
    and is a regular contributor to Government Executive Magazine and The
    Public Manager, where he serves as an associate editor. He has also
    contributed chapters to several books, including ``Gainsharing in
    Government: Group-Based Performance Pay for Public Employees'' in New
    Strategies for Public Pay (Jossey-Bass, 1997) and ``Reinventing the
    Senior Executive Service'' in New Paradigms for Government; (Jossey-
    Bass, 1994). In addition, his doctoral research, ``The Best and
    Brightest: Can the Public Service Compete?'' was published as part of
    the Volcker Commission's final report, Leadership for America:
    Rebuilding the Public Service (1989).
         A career member of the Federal Senior Executive Service, Dr.
    Sanders was awarded the Presidential Rank of Meritorious Executive in
    1994. From 1990 to 1995, he served as the U.S. Defense Department's
    senior career human resource management (HRM) executive, with
    responsibility for personnel and equal employment opportunity policies
    and programs covering the Department's one million civilian employees.
    Dr. Sanders also founded the Defense Civilian Personnel Management
    Service (DCPMS), a $46M organization employing 360 people worldwide,
    and he served as its first Director and CEO. While at DoD, Dr. Sanders
    led the Department's historic civilian drawdown, pioneering the use of
    civilian separation incentives (``buyouts'') in the Federal Government
    and using them to reduce the Department's employment rolls by over
    230,000 people in four years--with less than 12,000 involuntary
    separations; he also spearheaded a landmark restructuring of DoD's HRM
    business area, automating and regionalizing world-wide operations to
    achieve projected savings of over $100M annually. Prior to his
    appointment in the Office of the Secretary of Defense, he served as
    Deputy Director of Civilian Personnel (SES) for the Department of the
    Air Force.

                                   __________

                   Prepared Statement of Robert S. Schriebman

        Mr. Chairman, Senator Moynihan, and members of the Committee, thank
    you for opportunity to be of service and to express my views on
    restructuring the Internal Revenue Service. I am a practicing tax
    attorney in the City of Rolling Hills Estates, which is 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 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 taught IRS practice and procedure at USC's Graduate School
    of Accounting. I wish to emphasize, however, that I am not an ivory
    tower academic, but a full-time practicing tax lawyer. I come in daily
    contact with both the IRS' Audit and Collection Divisions.
                     oversight hearings of september, 1997
        Last September, this Committee heard three days of IRS horror
    stories ending with an apology by then Acting Commissioner Michael
    Dolan. We learned that an IRS District Director can take a taxpayer's
    home with a stroke of a pen; it's in the Internal Revenue Code. We
    learned of the complete absence of taxpayer due process when the IRS
    takes a taxpayer's home; and an absence of due process when the IRS
    takes a taxpayer's business. We learned that IRS collectors, with the
    blessings of management, can and do, commit perjury before federal
    judges when seizing taxpayer's assets. These people believe that they
    are above the law and that there is no day of atonement. We learned how
    the IRS forces productive taxpayers into bankruptcy because of
    unrealistic expense allowances. We learned that there is an ``us versus
    them'' mentality at the IRS. ``Just scratch any taxpayer hard enough
    and you will find a tax cheat.'' We learned that the collection and
    audit quota system is alive and well despite prohibitive legislation in
    the first Taxpayer Bill of Rights.
        Sadly, we learned that there is an absence of accountability within
    the system to the targeted taxpayer and to the American people--an
    institutional arrogance. Taxpayer abuse is so pervasive as to be
    perversive.
                               congress responds
        Last October the House passed H.R. 2676 entitled ``IRS
    Restructuring and Reform Bill of 1997.'' This Committee wisely waited
    until further hearings and investigations could be conducted before
    coming up with its own version of IRS reform. It is now clear that H.R.
    2676 was much less than meets the eye. When all is said and done, a lot
    was said, but very little was done.
        In my opinion, there isn't more than a handful of provisions in the
    Taxpayer Bill of Rights 3 (TBR3) that truly protect a taxpayer from IRS
    overzealousness or an attempt to provide a level playing field. In
    other words, if TBR3 passes, it will he business as usual at the IRS.
                       proposals for irs reform and tbr3
        After practicing law in the area of IRS tax controversies for over
    25 years, together with writing books, teaching at the university level
    and lecturing on IRS audit and collection procedures, I have made the
    following  observations:
              1. When a taxpayer has a problem within the IRS, about the
            only place to go to resolve the matter is within the IRS.
            History has shown that the Problem Resolution Program doesn't
            work most of the time and the Taxpayer Advocate is a ``weak
            sister.'' This leads to taxpayer frustration, anger and a loss
            of faith in the system.
              2. On many types of assessments and penalties, the IRS is the
            sole judge, jury and executioner. This generates a conflict of
            interest. You are guilty until proven innocent. The taxpayer
            doesn't get a fair shake.
              3. There is virtually a complete absence of basic due process
            when it comes to IRS liens, wage garnishments, and seizures of
            assets. Basic due process consists of giving the taxpayer
            notice and an opportunity to be heard prior to enforced
            collection, not afterwards in super expensive court
            proceedings. In other words, basic due process means basic
            fairness.
        You don't need a psychiatrist to tell you that you can't change the
    next guy--you must be the one to change. IRS taxpayer abuse is inborn,
    inbred, and systemic. It's not going to change with an apology from
    Michael Dolan or promises from new IRS Commissioner Rossotti--no matter
    how sincere or well-meaning. Within a few months after these hearings
    are over, it will be ``business as usual at the IRS.'' IRS
    representatives will tell this Committee, members of Congress, and the
    American people anything they want to hear to avoid stronger taxpayer
    rights.
        IRS monthly open houses are good ``PR'' and may represent a
    positive step in the right direction, but what is needed is the
    elimination of internal conflicts of interest, the establishment of
    real due process, and a realistic business-like approach to collecting
    the billions of outstanding, dollars known technically as the ``tax
    gap.''
                               specific proposals
        I submit to you four specific proposals for your consideration:
    1. Creation of an Outside Independent Forum to Hear Taxpayer's
            Complaints of IRS Field Level Audit and Collection Problems
        I recommend the creation of an outside independent forum to hear
    taxpayer complaints of IRS field-level audit and collection abuses
    without the taxpayer first having to first pay what the IRS alleges is
    owed.
        We currently have in place two judicial forums available to hear
    taxpayer complaints. These are the United States Tax Court and Federal
    District Court Magistrates. To increase the jurisdiction of either or
    both of these forums would be the most cost-effective with minor
    systemic changes.
        Tax Court Judges, for the most part, are headquartered in
    Washington, D.C. There are only one or two Special Trial Judges
    permanently stationed in major cities such as Los Angeles. Senior Trial
    Judges travel circuits around the country. This proposal would hire
    more Special Trial Judges to be permanently located in federal
    buildings in most major cities or in the capitals of the several
    states.
        Ideally however, it is my recommendation that a system of
    administrative law judges (ALJs) be created with a chief administrative
    law judge headquartered in Washington. DC. This will provide taxpayers
    a low cost and informal forum where lawyers and other highly paid
    professionals will not be necessary as they would be in the Tax Court
    and other federal courts.
    2. Guarantees of Due Process for the Following IRS Activities:
        (a) Liens, levies, wage garnishments and seizures.
        (b) Accusations of alter-ego and transferee liability.
        (c) Trust Fund Recovery Penalty. This is really not a penalty. It
    is a tax. Currently, the IRS uses a ``shot gun approach'' to assessing
    this penalty within an organization. It's something like the old Army
    joke. ``I need volunteers--you, you and you.'' Field cases are not
    properly and thoroughly developed. Many targeted taxpayers are
    innocent. Taxpayers wishing to contest this assessment have to plead
    their case before the IRS. The IRS is the sole judge, jury and
    executioner. The IRS knows that most targeted taxpayers cannot afford
    to go to court, so the IRS sticks them with the assessment, guilty or
    not. The botton line is an economic life sentence.
    3. Realistic Approaches to Accepting Offers in Compromise
        The offer in compromise process could be a highly effective vehicle
    for bringing taxpayers back into the system and collecting delinquent
    taxes. The IRS, however, changes the rules every few months making it
    more difficult for taxpayers to take advantage of a procedure that has
    been part of American taxation virtually since the War of 1812. It is
    my recommendation that specific legislation be introduced encouraging
    the IRS to adopt liberal acceptance procedures for offers in
    compromises.
        In 1996, the GAO estimated that approximately $200 billion was owed
    by  taxpayers having delinquent accounts. If the truth were known, it
    would be probably more like $400 billion. The Treasury is losing tens
    of thousands of dollars per second in uncollectible accounts, because
    of the expiration of the ten year statute of limitations for
    collection.
        The IRS is willing to force an otherwise productive taxpayer into
    bankruptcy rather than accepting a fair offer in compromise. This is
    the biggest scandal in American taxation today.
    4. Expansion of the Award of Civil Damages for Unauthorized Collection
            Activities
        Historically, taxpayers have been allowed to go to court to recover
    damages for violations of the tax law. This means violation of the
    Internal Revenue Code. This does not go far enough. The IRS doesn't
    pay. The IRS wears down the taxpayer. The IRS keeps appealing because
    it has the free use of the Department of Justice--the largest and best
    law firm in the country. I propose the following:
              (a) Award civil damages including attorney's fees and related
            costs for intentional, reckless, or negligent violations of the
            Internal Revenue Code, the Internal Revenue Manual (the Bible
            of the IRS), and IRS national policies (which are also set
            forth in the IRS Manual).
              (b) Once a judge awards a taxpayer damages, fees and costs,
            the IRS will not be allowed to appeal and the Treasury must pay
            the award in full within 90 days.
                                   conclusion
        In summary, what I am proposing is the legislation of basic
    fairness and taxpayer respect. Both are absent from today's IRS and
    Internal Revenue Code. You are not going to have basic fairness and
    respect by naively trusting promises from the IRS no matter how sincere
    and well-meaning. There are those in the IRS who right now are laughing
    at what this Committee stands for and its lofty aims. These IRS
    employees are not taking you seriously. Strong legislation is the
    necessary bottom line.
        Thank you for the opportunity to be of service.

                                   __________

                      Prepared Statement of G. Jerry Shaw

         Thank you for the opportunity to present the views of the career
    Senior Executive Service corps of the federal government.
         The Senior Executives Association (SEA) is a professional
    association representing the interests of career members of the Senior
    Executive Service and other career executives in equivalent positions
    in the federal government.
         SEA opposes the establishment of an Oversight Board at the
    Internal Revenue Service. We believe that the members of an Oversight
    Board, if composed of private citizens, would inherently be viewed by
    the tax paying public as having conflicts of interest, or as
    politicizing the operations of the Internal Revenue Service.
         Having said that, we recognize that there is overwhelming support
    in Congress for such a Board. We will, therefore, confine our comments
    to the manner in which an Oversight Board could be constituted and to
    some ways that the appearance of conflicts of interest could be
    ameliorated.
    IRS Oversight Board-Asset Disclosure
         First, we believe that any person appointed to the Oversight Board
    should be required to make public disclosure of his/her assets. The
    Board, as proposed in the House passed Bill, HR 2676, as well as in the
    Senate alternatives that we have seen (S.1096 and S.1174), would be
    authorized to require the Commissioner of IRS to provide staff to the
    Board and would be allowed to hire staff from outside government. This
    staff will be interacting with the Internal Revenue Service, getting
    information for the Board and the Board members. It is imperative that
    the IRS employees and the public, as well as the Board's staff, know
    that the request by a Board member or by the Board generally to its
    staff for information is not a request for information that might be
    used for the personal benefit of the Board member or of the Board
    member's employer. The only way this assurance can be made is if the
    Board member is required to make a public disclosure of all his/her
    assets owned by the Board member, and disclosure of all his/her
    business relationships. Some have suggested that disclosure to the
    Administration and to Congress is part of the confirmation process and
    would be sufficient. We respectfully, but strenuously disagree. It is
    the public that must have absolute faith that the tax laws are being
    administered in a non-partisan and unbiased manner. The integrity of
    the entire federal tax system (of whatever kind) is at stake.
    Composition of the Board
         The House and Senate bills would provide that a representative of
    the IRS employees union hold membership on the Oversight Board. The IRS
    career executives unanimously believe that this would place them in an
    untenable situation in dealing with the union in normal day-to-day
    labor/management, matters as well as in labor/management contract
    negotiations. In addition, they firmly believe that any union
    representative on the Oversight Board would have a very real conflict
    of interest.
         The union representative would sit on the Board for the sole
    purpose of representing the interests of his/her members. If he/she did
    not do so, he/she would not be a union representative for long. In
    addition, the Board has, under the various legislative provisions, the
    right to oversee the pay, bonuses, evaluations, promotions, and hiring
    and firing decisions regarding executives in the agency. This would
    give the union representative the opportunity to seek to take punitive
    action against a manager in the agency that he/she believes is not
    giving the union what it wants in negotiations or other labor/
    management issues. Finally, the union representative would be able to
    oppose the Commissioner on the Oversight Board and even seek to lead a
    movement to recommend to the President that a Commissioner that the
    union opposes be removed from his/her position.
         This kind of power for a union is unprecedented in the federal or
    the private sector. The only analogy is the Saturn Corporation, where
    the organization's labor/management partnership was built from the
    bottom up when the organization was first begun, not imposed from the
    top down. In addition, in the one instance when the President of the
    UAW was on the Chrysler Board (because Chrysler needed the union's
    support for government bail-out loans), the union president left the
    Board as soon as possible. He publicly remarked that it had been a
    mistake for him to be on the Board because of the conflicting issues he
    had to deal with on behalf of his membership and the company.
         We recommend that an Oversight Board subcommittee be established
    where the union representative, as well as representatives of the
    professional associations representing managers and executives, be
    given seats. The Oversight Board could then consult with this group as
    appropriate when input is needed on the impact of restructuring, and so
    on.
    Union Veto on Personnel Reform
         The House bill and the Senate Kerry/Grassley bill include
    provisions which grant the union absolute veto authority over any
    personnel reform initiated by the Oversight Board or the Commissioner.
    The provision stands the concept of labor/management relations on its
    head, granting the union veto authority over any proposal that could
    impact on bargaining unit employees. This could include proposals about
    performance, conduct, reassignments, promotions, pay banding systems,
    and anything else. This, too, is unprecedented in labor relations in
    both the federal government and the private sector. Under both the
    private sector Taft Hartley Act, and the public sector labor/management
    relations concept, management has certain rights which are not
    negotiable. In addition, if negotiations reach an impasse in the
    federal government, the matter is referred to the Impasses Panel, which
    makes a final decision. However, the provision in both the House and
    Senate bills would make the Impasses Panel provision not applicable to
    the IRS, and would thus give the union absolute veto authority, since
    the proposal states that nothing can be implemented which would affect
    bargaining unit employees without the union's written agreement.
         Literally, the union could veto the implementation of any
    Oversight Board proposal unanimously adopted by the Board and by the
    Commissioner that would have any impact on bargaining unit employees.
         This provision must be deleted from any final legislative
    enactment.
    The 120-Day Rule
         Section 9303(c) of HR 2676 makes inapplicable a provision of the
    Civil Service Reform Act requiring agencies to allow a ``120-day get
    acquainted period'' when a new political appointee takes over an
    agency. This means that a new political appointee cannot permanently
    reassign a career executive involuntarily during the first 120 days of
    his/her administration. This ``get-acquainted period'' was designed by
    Congress to ensure that new political leaders become familiar with the
    talents and experiences of incumbent career executives before making
    wholesale changes. We request that this provision making the 120-day
    rule inapplicable be dropped from the legislation. We have discussed
    this matter personally with Commissioner Rossotti, who stated that he
    has no problem with the 120-day rule being retained in effect at the
    IRS. We are unaware of any problems or complaints by other agencies or
    previous IRS Commissioners about this requirement.
         Please note that a Commissioner can, of course, detail career
    executives and can voluntarily reassign during this 120-day period.
    The Inspection Service in the IRS
         There have been numerous allegations that the Internal Security
    portion of the IRS Inspection Service has not functioned in a manner
    which Congress has wished. While we believe the allegations are
    overstated, we again recognize that something will likely be done to
    deal with the reality of the perception. Our experience at IRS is that
    the Internal Audit function of the Inspection Service must remain under
    the authority and control of the Commissioner. It should, however,
    report directly to the Commissioner, and not through the Deputy
    Commissioner, giving the Commissioner absolute authority over the
    ability to direct internal audits within the agency. We would also
    prefer that Internal Security remain within the IRS reporting directly
    to the Commissioner (not through the Deputy Commissioner, as has been
    the case for the past 12-15 years) in order that no cases could be
    buried, as allegedly has occurred. We believe this direct reporting to
    the Commissioner would resolve any real problems that have occurred.
         If, however, Congress decides that the Internal Security function
    must be moved, we strongly recommend that it not be placed in the
    Treasury IG's office, but that it be placed under the direction of the
    General Accounting Office. GAO is an arm of Congress, and serves the
    interests of the Congress and the people. GAO has routinely been
    involved in the audit of IRS operations and is extremely familiar with
    the functioning of this agency. It has personnel on site at IRS most of
    the time, doing audits of various kinds at the direction of Congress,
    and has a familiarity (even more so than the Treasury Department) with
    IRS operations. Thus, the Internal Security function of the IRS could
    maintain its present mission, but report to the GAO, as well as the
    Commissioner. Congress could then be assured by the leadership of the
    GAO that all cases are being adequately investigated and followed up on
    by the Internal Security function.
         One caveat is that the Internal Security apparatus in IRS must
    remain available to the District, Regional and National offices in
    order to provide physical protection to employees when their life or
    property is threatened by tax protestors or others. This function has
    become an absolute necessity in today's environment and must not be
    overlooked when making a determination as to where Internal Security
    functions should be performed. The physical security of federal
    employees and their families should not be put further at risk.
         In addition, the operations of the Inspection Service should not
    be subject to the authority of the Oversight Board, but report solely
    to the Commissioner, with the Internal Security function also reporting
    to GAO if Congress wishes. Obviously, the Commissioner is going to take
    the direction of the Oversight Board into consideration when assigning
    the Internal Audit or Internal Security functions to particular tasks,
    but there are limited resources within the Inspection Service.
    Inspection should not be subjected to the pulling and tugging of
    conflicting priorities that could take place between the Commissioner
    and the Oversight Board.
    Demonstration Project Authority
         Both the House and the Senate bills give the Commissioner the
    authority to establish demonstration projects without limitation in the
    IRS. In fact, the Commissioner could make the entire IRS a
    demonstration project under this authority. We support the
    Commissioner's ability to implement and test new and innovative
    approaches in IRS human resources management. However, we request that
    he not be granted authority to change (a) the current CSRS/FERS
    retirement systems, (b) the annual and sick leave regulations, or (c)
    deny employees the right to appeal adverse actions to the Merit Systems
    Protection Board.
         While bargaining unit members have the protection of the union's
    ability to negotiate over changes to any of these subjects,
    supervisors, managers and executives do not. We believe that giving the
    Commissioner a broad grant of discretion is appropriate, but we request
    that these specific provisions be retained as they currently are in the
    law.
    Taxpayer Advocate-Five-Year Moratorium
         HR 2676 would restrict any IRS employee appointed Taxpayer
    Advocate from returning to another position in the IRS for five years
    after the end of the appointment. We believe that this five-year
    restriction should apply to any individual appointed to the position of
    Taxpayer Advocate, not just to an IRS employee.
    Restrictions on Initiating or Terminating Audits, etc.
         Section 7212 of HR 2676 prohibits certain political appointees in
    the Administration from requesting the initiation or termination of
    audits or other actions against taxpayers. By naming the few, this
    legislative proposal empowers the many. Other than the President, the
    Vice President, their staffs and the Cabinet members, all other
    political appointees under this provision would be allowed to recommend
    the initiation or termination of tax audits. Obviously, this is not
    what Congress intended. We suggest that the language in this provision
    be changed to provide that only Executive Branch employees who are
    involved in the administration and enforcement of the Internal Revenue
    laws be allowed to request the initiation or termination of audits. All
    others would be precluded from doing so.
    Political Executives at the IRS
         HR 2428 and its companion bill S.1174 (the Rangel/Moynihan bill)
    propose to allow the Commissioner of IRS to hire up to 5% of the number
    of GS-15's through SESers (approximately 150) from outside the agency
    for term appointments of four years at salaries up to $200,000 per
    person. In addition, other similar alternatives have been discussed.
         Our primary concern about such proposals is the danger that these
    appointments would turn into ``political plums'' which would be filled
    by the White House personnel office of whatever Administration was
    currently in power. Because these positions would be discretionary with
    the Commissioner, and would serve for a term commensurate with the
    Commissioner, there would be heavy pressure to place political
    supporters of the Administration in such positions. This would destroy
    the perception of non-partisan fairness that the public must have
    concerning IRS operations.
         We do not, however, object to the Commissioner bringing people
    from outside Government into his administration, nor do we object to
    them being paid salaries exceeding those of current executives.
    However, we strongly recommend that they be required to meet the same
    test that any current applicant from outside government must meet in
    order to be hired as a ``career'' member of the Senior Executive
    Service. That is, their selection must not in any way be based on any
    political affiliation, but must be based strictly on ``merit'' and
    their ``qualifications'' for the stated requirements of the position,
    which are spelled out in a position description. In order for this to
    be enforced, we request that language be included in whatever bill is
    enacted requiring that the Commissioner's selection from outside
    government would have to be vetted through the Qualifications Review
    Board at the Office of Personnel Management. This vetting takes very
    little time and would not hamper the Commissioner's efforts. It would,
    however, ensure that unqualified, partisan political appointees were
    not being placed in these positions, thus politicizing the IRS and tax
    administration in general.
    Personnel Flexibilities Generally
    I. SEA believes that the personnel flexibilities granted to the
        Commissioner will be helpful in his efforts to restructure the
        agency. Career executives at IRS look forward to the possibility of
        being able to deal more expeditiously with poor performers and
        employees committing misconduct.
         Contrary to popular views, however, we do not believe that the
        current systems for dealing with problem employees are broken. In
        fact, they are not generally used. This is because managers have no
        incentives to deal with problem employees and many disincentives.
         If a manager even begins to take action against a problem
        employee, he/she can be assured of (a) an allegation against the
        manager by the employee to the IG's office of purported wrongdoing
        by the manager; (b) an EEO complaint alleging that the manager is
        really taking the action because of the employee's handicap, race,
        age, religion, national origin or gender; (c) if the employee is a
        female, the manager may well be accused of sexual harassment or
        creating a ``hostile work environment'' for the employee; (d) if
        the employee is in a bargaining unit, the union will file a
        grievance against the manager under the collective bargaining
        agreement and take it to an Arbitrator; (e) if the employee is a
        union official, the union will very likely file an ``Unfair Labor
        Practice'' charge against the manager at the Federal Labor
        Relations Authority, claiming the action is because the manager is
        anti-union; (f) the employee will also file an allegation at the
        Office of Special Counsel claiming that their allegation to the
        IG's office (see (a) above) makes them a ``Whistleblower,'' and the
        OSC should investigate and take punitive action against the
        manager; (g) finally, as a last resort, the union and/or the
        employee will write the employee's member of Congress, seeking
        intervention on the employee's behalf. They will also seek press
        coverage of the employee's plight if possible. Thankfully, members
        of Congress and the press shy away from these stories if they can.
         In the face of all these disincentives, the manager has only one
        positive incentive, and that is seeking to do his or her job by
        requiring the employee to work as necessary and appropriate and
        seeking to save the taxpayer's money by removing the employee if he
        or she doesn't. But, the manager must do this knowing that he or
        she will become the defendant, and the employee will not.
          This is a system totally out of balance. The only way managers
        can manage employees in such an environment is to ignore most
        problem employees and only deal with the most blatant and egregious
        cases. To deal with problem employees, two things are needed:
       1. A strong and cohesive exercise of management will and direction
            from the top of the agency to the bottom which makes employee
            ``responsibility'' as important as ``empowerment'' and a
            management process which provides support and assistance to
            managers, and;
       2. Absolute assurances by agency political leadership that it will
            back up its managers who seek to deal with problem employees,
            especially against the counter attacks which will surely come
            from all directions.
         Without ``management will'' and ``management support,'' managers
        cannot and will not effectively take action against problem
        employees.
    II. In addition to ``management will'' and ``management support,'' the
        federal government, in all agencies, needs a single system for
        dealing with problem employees. As previously shown, employees have
        a number of forums that they can go to to make allegations against
        managers who are trying to deal with poor performance or
        misconduct. There should only be one!

         We suggest that that one forum be the Merit Systems Protection
    Board for non-bargaining unit employees or an arbitrator for bargaining
    unit employees. However, in order for there to be consistency in the
    process, we recommend that arbitration decisions be subject to the
    review of the Merit Systems Protection Board on the basis that an
    arbitrator did not follow the law in his or her decision.
         If the employee only had an appeal to the Merit Systems Protection
    Board, the employee must be able to raise all the defenses that he/she
    would raise against the manager in other forums. In other words, he/she
    could make whatever EEO, ``whistleblowing,'' unfair labor practice or
    other allegations, or affirmative defenses that they wish to make in
    that single forum. The Administrative Judges at the Merit Systems
    Protection Board could rule on each and every issue in their decision,
    and the agency would only have to support the manager's decision before
    that single forum. The current multiplicity of forums costs the
    taxpayers millions of dollars for nothing except extreme confusion in
    federal agencies and undue protections to federal employees who seek to
    avoid their responsibilities. Under our proposal, the federal sector
    EEO program would be taken over by the Merit Systems Protection Board
    as would the unfair labor practice portion of the FLRA, if the ULP was
    raised in the context of a disciplinary or removal action.
         This consolidation in the MSPB would still leave one remaining
    problem in the federal sector employee management relations arena.
    Federal employees, as do private sector employees, currently have the
    right to take any decision involving an allegation of a violation of
    the EEO law to federal District Court for a trial de novo, if they lose
    their claim in the administrative agency. Thus, the MSPB cases would be
    reviewable in Federal District courts around the country for those who
    had alleged that the action was taken because of an unlawful
    discrimination. This would result, as it currently does, in a plethora
    of varying decisions across the country from Federal District Courts
    and the 10 Federal Circuit Courts of Appeal. An alternative that would
    end this dilemma, and still preserve the EEO community's access to the
    courts for review of EEO problems, would be to establish either a
    separate Article 3 Federal Court (like the U.S. Tax Court) which would
    have the combined jurisdiction of the current administrative agencies
    and would have melded into that court the apparatus of the Merit
    Systems Protection Board. The EEO community would have retained the
    ability for federal court review of their EEO claim, however, the
    review by that court could only be appealed to the Federal Circuit
    Court of Appeals as is now the case from MSPB actions. This would
    result in the development of a consistent body of law as it applies to
    all Federal civilian employees.
         Finally, a third alternative would be to meld the administrative
    agencies together and place all of them as part of the current U.S.
    Court of Federal Claims. This, too, would accomplish the same purpose
    and would result in an expansion of the U.S. Court of Federal Claims
    rather than an establishment of a new Court.
         In sum, the current incentives for managers to deal with problem
    employees do not exist, but the disincentives are numerous and real.
    The result is that nothing will happen in this arena except by an
    extraordinary effort of ``management will'' in the Internal Revenue
    Service as well as at each of the other federal agencies. The three
    alternatives cited above, i.e., a consolidated MSPB, a new Article 3
    Court, or the placement of the consolidated MSPB functions within the
    U.S. Court of Federal Claims would insure due process for the employee,
    but would protect the managers from having their judgments attacked in
    a plethora of administrative forums as presently happens. Any of the
    three options would be an improvement and would, for the first time in
    recent memory, allow managers to deal effectively with problem
    employees.
    Training
         We strongly believe that. in order for an agency such as IRS to be
    ``re-engineered,'' substantial training of all employees will be
    required, as well as clear, consistent direction from the agency head
    and the Congress. Employees need to be clearly told what the
    expectations are and how and why they are expected to change their
    workplace habits. Just telling them to do so won't accomplish the
    purpose. They must be trained, given the opportunity to ask questions
    and have those questions answered. All new employees must be given a
    similar orientation when they first come with the IRS.
         The culture of the IRS is that of a law enforcement agency which
    exists to ensure that tax payers pay their proper tax in a timely
    manner. ``Customer service'' within this context should mean that all
    citizens will be treated fairly and with respect. It should not mean
    that taxpayers who have not complied with the tax law, or have not
    timely paid their taxes should be cut ``slack'' or ``special deals''
    which are not authorized. The equal protection clause of the
    Constitution requires that the law be administered equally and fairly
    for all citizens. Common sense requires that the law be administered in
    a fair and respectful manner. The definitions that surround ``customer
    service,'' ``taxpayer rights'' and similar concepts must be taught to
    all employees so that they understand the difference between being
    ``nice'' and ``not enforcing the tax laws.'' Failure to do so will
    result in an agency not ``re-engineered,'' but either rendered
    ineffective or unchanged, since it will continue, as in the past, to
    merely ``ride out'' the changing political winds of the time.

    Attachment.

         Attached is a letter of January 21, 1998, which SEA sent to
    Chairman Roth with point-by-point recommendations concerning the
    various legislative proposals under consideration. We request that this
    letter be included in the record along with this statement.
         Thank you for the opportunity to testify. We will try to answer
    any questions you might have.
                                 Senior Executives Association,
                                                        Washington, DC.
    January 21, 1998

    Hon. William V. Roth, Jr.,
    Chairman, Senate Committee on Finance,
    Washington, DC.

        Dear Chairman Roth: Thank you for meeting with us recently. We
    appreciate your willingness to consider SEA's concerns regarding the
    provisions in H.R. 2676, The IRS Restructuring and Reform Act of 1998,
    and in S. 1096 the Kerrey/Grassley bill. We believe several provisions
    in these bills, as well as in S. 1174 would have a detrimental effect
    on federal management in general and on the operations of IRS in
    particular.

    I. The following points reflect the Senior Executives Association's
                position on H.R. 2676:
        A. Section 7802: We strongly recommend that all members of the IRS
                Oversight Board be required to publicly disclose their
                assets in order to prevent the appearance of conflicts of
                interest or actual conflicts of interest.
        B. Section 9303(c): The ``get acquainted period'' which allows
                career SES employees an opportunity to prove themselves to
                a new Commissioner before being reassigned is rescinded for
                the IRS in this provision. We request that this provision
                of the bill be deleted.
        C. Section 7802: We request that the activities of the Office of
                the Chief Inspector be included in this listing of law
                enforcement activities over which the IRS Oversight Board
                will have no authority. The Inspection Service is an arm of
                the Commissioner and carries out often sensitive
                investigations and audits at the direction of the
                Commissioner.
        D. Section 7803(c)(1)(B): The 5-year moratorium on the Tax Advocate
                being able to accept subsequent employment in the IRS
                should apply to anyone appointed to that position,
                irrespective of whether their prior employment was from
                within or outside of the IRS.
        E. Section 9304: We request that the IRS Commissioner's
                Demonstration Project authority be narrowed to prohibit the
                Commissioner from:
                    1. Altering the retirement systems (CSRS and FERS)
                    2. Changing the annual and sick leave regulations
                    3. Denying employees the right to appeal to the MSPB in
                    adverse action cases.
        F. Section 7802(b)(1)(D): Delete the provision making the NTEU
                President a member of the IRS Oversight Board because he
                would have a conflict of interest and such membership would
                prevent IRS management from effectively directing its
                workforce. Examples are:
                      1. Section 9301(b): The union president is given the
                    power to exercise an absolute veto over the IRS
                    Commissioner's or the Oversight Board's reform or
                    restructuring initiatives affecting bargaining unit
                    employees.
                      2. Under Section 7802(d)(3)(A): The union president
                    could lobby among the Board members for the appointment
                    or removal of a specific Commissioner if he is
                    dissatisfied with the IRS stance in labor-management
                    negotiations.
                      3. Under Section 7802(d)(3)(B): The union president
                    could misuse, or give the appearance of being able to
                    misuse his influence against IRS executives in labor
                    negotiations because, as an Oversight Board member, he
                    would be privy to reviewing their pay, bonuses,
                    evaluations and promotions, as well as decisions on
                    hiring or firing
                      4. As an Oversight Board member, the union president
                    would be privy to management information not generally
                    available to labor unions dealing with management
                    authority and rights as set out in 5 USC Section 7106.
                    He could use this information to benefit his union and
                    its members in dealing with the IRS leadership on
                    labor-management issues.
        G. Section 9301(b)(2): We request that this entire provision be
                deleted. It grants the union absolute veto power over the
                Oversight Board and the Commissioner's ability to
                administer, reform or reorganize the IRS. It grants to the
                union the ability to stop any change merely by refusing to
                sign off on the change proposal. It completely abolishes
                the concept of non-negotiable management rights as set
                forth at 5 USC Section 7106. This grant of veto power to
                the union is unprecedented in the history of U. S. labor
                law. The National Treasury Employees Union (NTEU) could
                effectively control the IRS workforce, without the
                Commissioner or the Secretary of the Treasury being able to
                prevent it.
        H. Section 7212: Expand the definition of ``Applicable Person'' in
                subsection (e) to include all political appointees in the
                Executive Branch, other than those directly responsible for
                administration and enforcement of the tax laws. This can be
                done by changing in (e)(2) the reference ``in section 5312
                of Title 5'' to ``in sections 5312 through 5317 of Title 5,
                and those positions designated Schedule C (political
                appointments) other than those directly involved in the
                administration and enforcement of the U.S. tax laws under
                Title 26 and related statutes.''
    II. The following points reflect the Senior Executives Association's
                position on S. 1096, the Kerrey/Grassley Bill:
        A. Section 7892(a)(1)(C): Recommend deletion. (See our comments in
                I.F. above.)
        B. Section 7803 (d)1(C): Recommend an amendment to apply to all
                appointees to this position. (See our comments in I.D.
                above.)
        C. Section 9301(b): Recommend deletion. (See our comments in I.G.
                above.)
        D. Section 9304(c): Recommend deletion. (See our comments in I.B.
                above.)
        E. Section 9305(a): Recommend amendment to provide that retirement
                systems, leave provisions and appeal right to the MSPB as
                set forth in Title 5 of US Code are retained. (See our
                comments in I.E. above.)
    III. H.R. 2428/S-1174 Rangel/Moynihan bill
        A. Section 9303: Authorizes the Commissioner to hire up to 5% of
                SES and GS-15 positions in IRS into essentially 4-year term
                political appointments with pay set at whatever rate the
                Commissioner pleases up to nearly $200,000.
            This would enable over 110 IRS positions to become political
                plums over time. If the Commissioner needs such authority,
                the positions should be restricted to career SES positions
                with expanded pay authority. The Commissioner can still
                hire the employees he or she needs from outside Government,
                but, to be hired as career SES employees, they would be
                required to be qualified for the positions, and partisan
                politics would be excluded from the hiring process.
        B. Section 9506: Amend to exclude the authorization to place
                ``limited emergency'' and ``limited term'' SES appointees
                in career-reserved IRS positions. This provision would
                further politicize the IRS, since in neither case does an
                employee actually have to be qualified for the position.
                Thus, unqualified political appointees could quickly be
                hired and could effectively alter the non-partisan
                administration and enforcement of the federal tax laws.
    Suggestions:
       Establish an annual budget within which the IRS Oversight
            Board will operate and/or limit the number of staff assigned to
            the Oversight Board in order to deter a burgeoning bureaucracy.
       Provide training to all employees of the IRS about what is
            expected of them to bring about the ``culture change'' sought
            by Congress in the IRS.

            Sincerely,
                                       G. Jerry Shaw,
                                       General Counsel.

                                   __________

                    Prepared Statement of Thomas H. Stanton

        Mr. Chairman and Members of the Committee:
        We appreciate your invitation to testify on H.R. 2676, the Internal
    Revenue Service Restructuring and Reform Act. My name is Thomas H.
    Stanton. I am Vice Chair of the National Academy of Public
    Administration's Standing Panel on Executive Organization and
    Management. Another panel member, Herbert N. Jasper, is accompanying me
    today.
        The Academy was chartered by Congress and has a special obligation
    to investigate and report on subjects when called upon by Congress or
    the Executive Branch. We carry out our work both through project panels
    and standing panels, such as the one on whose behalf I am testifying
    today. This statement does not necessarily represent the views of the
    National Academy as an institution.
        Standing panel members have extensive experience and knowledge
    about the relationship of organizational structure to the quality of
    federal management. The panel or its members have often testified on
    issues such as those presented by H.R. 2676, including those considered
    in connection with the governance structure for the Social Security
    Administration and the Resolution Trust Corporation.
        The Congress has a vital stake in assuring that the Internal
    Revenue Service (IRS) carries out the law in an accountable, effective
    and humane manner. The country will always need an IRS. Whether we have
    some form of today's tax system, a flat tax or a consumption tax,
    issues of implementation and good management will always be important
    to the American taxpayer.
        In our testimony today we would like to make four major points:
       We support the recommendations of the National Commission on
            Restructuring the Internal Revenue Service and the provisions
            of H.R. 2676 to strengthen congressional oversight. Greater
            involvement of the tax committees in oversight can help
            increase the accountability of the agency and offset some of
            the problems of an ingrown organizational culture.
        More intensive oversight also can help to sensitize policy makers
    to the difficulty that the IRS faces in trying to administer the many
    complexities and compromises that find their way, almost annually, into
    the tax code.
       The proposed Oversight Board will greatly limit the
            accountability of the IRS to the Congress, the President and
            the Treasury Secretary, and will damage the professional
            independence of the agency.
        H.R. 2676 gives the Oversight Board authority to approve strategic
    plans, reorganizations, and budgets of the IRS. The bill thus allows
    private parties to determine the deployment of the nation's tax
    collection apparatus and invites self-serving actions by the private
    board members, or invites a perception of such actions that could well
    lead to increased tax evasion. The Commissioner, individual board
    members, and the Secretary will all be able to point to others who hold
    partial responsibility for any actions that engender criticism.
       These problems can be overcome if this Committee would turn
            the Oversight Board into an advisory board that counsels the
            Secretary of the Treasury and the Commissioner, as the Senate
            wisely did with respect to the Social Security Administration
            and the Resolution Trust Corporation. An advisory board can
            help to infuse the IRS with fresh points of view on behalf of
            the private individuals and companies who must pay taxes, while
            trying to comply with an immense amount of instructions,
            paperwork, and arcane rules.
        The advisory board could add its voice to those of the Taxpayer
    Advocate, and perhaps the Chief Inspector, to help inform the process
    of congressional oversight and raise timely issues of importance to
    taxpayers and lawmakers. To the extent that an advisory board gives
    sound advice, and has the ear of the Congress and the Secretary as
    well, its recommendations will very likely be persuasive to the
    Commissioner.
       Management improvements must enhance rather than detract
            from the professionalism of the IRS. We support the ideas of a
            fixed term and a performance contract for the Commissioner.
            Provisions of H.R. 2676 to strengthen prohibitions on executive
            branch influence over taxpayer audits might be strengthened, we
            respectfully suggest, by applying similar prohibitions to the
            legislative branch.
        H.R. 2676 makes welcome additions to the flexibility of IRS
    personnel rules and provides that these shall be exercised in a manner
    consistent with merit system principles. We think it is not proper,
    however, to give veto power to the union representatives with respect
    to use of the personnel flexibilities.
        We urge that Congress strengthen the provisions to assure that
    merit principles are applied to the hiring of all IRS employees below
    the level of Commissioner. Otherwise, over time, the agency is likely
    to be offered a remarkable array of politically well-connected but
    marginally, qualified people for special positions that were intended
    to be filled by experts.
        At the end of the statement we summarize the nine principal changes
    that we believe need to be made in order to assure that the purposes of
    the legislation can be accomplished.
                     the dilemma of a tax collection agency
        People do not like to pay taxes. Oliver Wendell Holmes said that
    taxes are the price we pay for a civilized society. Americans want much
    of what taxes fund--such as national defense, aviation safety, clean
    air and water, and national parks. At the same time, most would prefer
    to pay no taxes or to pay less taxes. Former Senator Russell Long
    described that sentiment as, ``Don't tax me; don't tax thee; tax that
    fellow behind the tree.'' He went on to say, ``but there is only you
    and me behind the tree.''
        This view of taxes--as a necessary but disliked part of reality--
    means that the IRS operates with conflicting goals. We ask our tax
    collection agency to be sure that people pay what they owe. After all,
    the more taxes that are evaded, the greater the burden on everyone
    else. At the same time, we ask our tax collection agency to be polite
    and treat taxpayers and tax evaders as ``customers.'' Meeting both
    demands is hard; some people do cheat and there are estimated to be
    tens of billions of dollars in unreported income.
        Lack of enforcement does lead to an increase in tax evasion. There
    are already concerns that the reduced incidence of audits in recent
    years may have led to an increase in noncompliance. We must remember
    that fairness in tax collection has two dimensions. Everyone wants to
    be treated decently, but no one wants to see others evade their taxes
    with impunity.
        Treating taxpayers as customers has become an IRS objective, and
    the new Commissioner has strongly endorsed it. But calling taxpayers
    ``customers'' does raise some issues. The private sector customer model
    does not quite fit because taxpayers tend to be either reluctant or
    even unwilling customers. Unfortunately, some taxpayers may believe
    that their status as ``customers'' entitles them to lax enforcement.
    What both Congress and the Administration are searching for is a way to
    achieve effective collection of taxes owed while treating taxpayers
    fairly and decently.
        The tension between these goals makes it easy to understand how the
    IRS may go too far in one direction or the other, depending on
    transitory congressional and executive priorities. For example, if the
    IRS feels heat about ``uncollected taxes'' or ``the tax gap,'' it may
    pursue collection in a way that can be overzealous and unfair. If,
    however, ``friendly customer service'' becomes the primary performance
    goal, some citizens likely will be encouraged to believe that they can
    evade the taxes due to the government.
        A leading challenge for managing IRS effectively--and certainly for
    setting performance standards--must be to strike the right balance
    between the two goals. We believe that Congress has actually been a
    significant factor in setting IRS' priorities and, thus, promoting its
    recent emphasis on collection and enforcement. Care must be taken not
    to overreact by pushing IRS toward lax enforcement and consequent
    evasion by taxpayers. As you know well, the American system is the envy
    of the world because of its successful reliance on voluntary
    compliance. But we must remember that voluntary compliance depends in
    large measure on the expectation or fear of being caught if one cheats.
        The complexity of the tax code. Academy panels have many times
    noted situations in which the complexity or instability of the laws
    establishing federal programs has made it extremely difficult to assure
    their efficient or consistent administration.[1] For this reason, we
    suggest that many of the management shortcomings ascribed to the IRS in
    recent years are generated or, at a minimum, exacerbated by both the
    complexity of our tax laws and their frequent amendment.
        We urge that this Committee and the Congress as a whole give
    special and urgent attention to the excellent comments and suggestions
    with respect to simplifying tax administration contained in the report
    of the National Commission, co-chaired by Senator Bob Kerrey and
    Representative Rob Portman. It is encouraging that a group led by
    members of Congress observed that, ``While Congress often laments the
    complexity of tax forms and instructions, this complexity is a product
    of the laws written by the Congress.''[2]
                  undue emphasis on collection and enforcement
        In recent hearings, this Committee revealed several examples of
    overzealous and unfair tax collection by some IRS officials. Needed are
    (1) a means of reducing the incidence of such actions; and (2) an
    avenue of prompt redress for taxpayers who may find themselves caught
    in an unfair situation.
        The problem of IRS incentives relates to the need to set
    performance goals for the agency that relate to the quality of IRS
    taxpayer service, and not merely to the amount of tax revenue that the
    IRS collects. In enacting the Government Performance and Results Act of
    1993 (GPRA), the Congress warned agencies about the problem of
    distorted performance goals. The Senate Governmental Affairs Committee
    stated in its report on the act that, ``It is very important that
    annual performance plans include goals, not just for the quantity of
    effort, but also for the quality of that effort.''[3]
        In the face of congressional pressures to strengthen tax collection
    efforts, this warning was apparently disregarded. IRS provides a
    striking example of the importance of effectively balancing conflicting
    objectives. In congressional hearings, a report of the General
    Accounting Office, and appropriations for the 1995 compliance
    initiative, IRS was pushed to become more effective at raising
    significantly increased revenues, both from additional audits and
    through collections from delinquent taxpayers. This was seen to be an
    important part of the nation's efforts at deficit reduction.
        Lost in this emphasis upon the performance goal of revenue-raising
    was the need to assure fair treatment of taxpayers. We recommend,
    therefore, that Congress and this Committee in particular take an
    interest in the balanced implementation of GPRA by IRS and the
    application of an even-handed set of performance goals. IRS must still
    be directed to collect the maximum amount of taxes owed, but consistent
    with the development and use of safeguards to protect innocent
    taxpayers from abuse, and to deal reasonably and equitably with those
    who do owe money to the government. GPRA, properly applied, can help to
    set a balanced agenda for IRS.
        With a clear set of balanced goals from Congress, IRS should then
    carefully review its internal rules and procedures. It must assure that
    any guidance to staff, as well as performance standards, and evaluation
    and reward systems and practices are consistent with the desired
    combination of effective tax collection and fair treatment of
    taxpayers. Perhaps a new code of conduct should be developed to embody
    this balanced approach.
        Congress could also strengthen a number of possible taxpayer
    safeguards. For example:
              1. It is not clear that either taxpayers or IRS staff are
            sufficiently aware of the Problem Resolution process for
            removing cases subject to legitimate complaints from the
            ordinary flow of IRS action and providing for a prompt
            independent review of the case. Therefore, there ought to be
            more information and training about the process.
              2. A system of performance goals could be established for IRS
            units and for individual officials that reflect the balanced
            GPRA goals, i.e., that reward fair treatment of taxpayers and
            not just effective collection and enforcement.
              3. A system should be developed for identifying, retraining
            or otherwise dealing effectively with IRS officials whose
            actions result in unfair treatment of taxpayers.
        There are models for this kind of process and incentive structure.
    For example, the Department of Education, concerned about fair
    treatment of those delinquent in paying off student loans, has adopted
    such safeguards and applied them in its contracts with collection
    agencies.
        Provisions in the bill to strengthen the Taxpayer Advocate function
    might also be helpful in gaining fair treatment for taxpayers. The
    Taxpayer Advocate has already undertaken to inform IRS personnel more
    fully about the Problem Resolution process. Consideration might also be
    given to broadening the focus of the inspections division so that it is
    concerned with such issues as the way taxpayers are treated, along with
    looking for violations of rules and procedures.
        provisions that the panel supports, and suggested modifications
        Next, we will explain how many provisions of the bill would help
    set the tone for addressing current priorities. At the same time,
    however, we will point out how some of those provisions might be
    improved. Later, we will address some major features of the bill that
    we believe would be counter-productive.
        This bill is based largely on a lengthy and comprehensive study by
    the National Commission. We believe that the study and its report
    provide an excellent example of how Congress can bring public attention
    to significant problems and pave the way for constructive action with a
    comprehensive and bipartisan approach.
        We believe that the nine ``key recommendations'' summarized in the
    report constitute a well thought out and internally consistent set of
    objectives. However, as explained later, we strongly disagree with some
    of the implementing measures. We want to express our strong support for
    the following concepts in the House bill:
        Strengthened congressional oversight of IRS. Like many large
    agencies, the IRS receives oversight from a large number of committees
    and subcommittees. Most of these tend to focus on particular aspects of
    internal revenue policies, and the managerial implications are often
    neglected. The Joint Committee on Internal Revenue Taxation has played
    a useful and continuing role in coordinating tax policies, but it has
    not taken a similar role in considering tax system operations and IRS
    management.
        Title IV of the House bill requires that a twice-yearly joint
    hearing be conducted by representatives from three House and three
    Senate committees to review the strategic plans and budget of IRS.
    Further, the Joint Committee is directed to report annually to the six
    committees upon those matters, as well as on the state of our tax
    system, taxpayer service and compliance, and technology modernization,
    among other things. We believe those provisions would offer an
    opportunity for constructive oversight of IRS management, as well as
    for review of tax policies.
        Prohibiting political influence in tax enforcement. This Committee
    is well aware that the nation's tax system must be administered by an
    impartial, non-political, and competent workforce. This has not always
    been the case. In the early 1950s, the American public was shocked by
    numerous reports of IRS employee embezzlement and bribery. To halt this
    corruption, the Finance Committee played a major role in enacting the
    1952 congressional requirement that all of the IRS employees under the
    Commissioner be hired, trained, evaluated, and promoted under the merit
    system.
        Experience since 1952 has demonstrated the wisdom of that
    congressional decision. The subsequent change in IRS' image was
    striking. For decades, IRS was viewed as one of the better-managed and
    professional agencies. The recent hearings of your Committee and the
    yearlong investigation of IRS by the National Commission have not
    shown--or even alleged--the kinds of employee embezzlements and bribery
    that precipitated the 1952 reforms. The abuses that your hearings
    revealed were related to overzealous efforts to collect money for the
    Treasury, not to put money in the employees' own pockets. So we urge
    that this bill continue to stress the importance of a non-political,
    highly qualified workforce.
        We strongly support the prohibition in Section 104 of any attempt
    by some future President or other Executive Branch official to
    influence tax audits or investigations. Some of the recently released
    ``Nixon tapes'' reveal his anger and frustration over the fact that he
    had been unable to get the Internal Revenue Service career personnel to
    audit taxpayers whom he regarded as his political enemies, and that he
    wanted to get a new Commissioner who would bend the career people to
    his wishes. There have been reports suggesting that similar efforts
    were made by other presidents or White House staff as well.
        We believe that the prohibition on influencing tax audits is so
    significant that you ought to extend it to cover all political
    appointees in the Executive Branch. In addition, we suggest that it be
    applied to all Members of Congress.
        Merit principles and personnel flexibilities. H.R. 2676 provides an
    excellent opportunity to take further steps toward fulfilling the
    congressional intent of the Civil Service Reform Act of 1978, as we
    discuss below. As you know, the legislation was designed, on the one
    hand, to encourage development of a far simpler civil service system
    which provided agencies and managers with the flexibility to modernize
    federal human resource management so the federal workforce could be
    more responsive to contemporary challenges.
        On the other hand, the Congress also included among the 1978
    reforms a series of provisions designed to prevent the new
    flexibilities from being manipulated in ways that undermine the
    principles of a professional workforce chosen on merit and protected
    from politicization. Such protection is of the utmost importance in
    administering our tax laws and, as we have noted, this has been
    successful in IRS since the 1952 reforms.
        A set of merit principles was included in the 1978 law, together
    with a Merit Systems Protection Board (MSPB) and Special Counsel, to
    guard against violation of these safeguards as well as to prohibit
    discrimination. These provisions were included because of earlier
    experiences when the lack of safeguards permitted the positive steps of
    streamlining federal operations to be manipulated in ways that brought
    political intervention, resulting in scandal and lowered confidence of
    citizens in their government.
        We note that the effort to shield IRS from politically-motivated
    actions would be strengthened by assuring that its personnel are not
    hired because of their own political connections. Since it is clear
    that the 1952 requirement that all employees below the Commissioner be
    hired on merit has worked well, we recommend that it be retained in
    this bill. We, therefore, urge that Section 7804(a) of the bill be
    amended to require that all such employees: (1) be selected on a non-
    political and non-partisan basis; and (2) be selected strictly on the
    basis of merit and qualifications.
        In a number of panel reports, the Academy has urged that federal
    personnel rules be made more flexible, as contemplated in the civil
    service reform law.[4] Therefore, we were very glad to see that the
    House bill provides such flexibilities. And we strongly support the
    provision that these authorities must be exercised in a manner
    consistent with merit system principles.
        We recognize that IRS needs, from time to time, to hire experts
    from the private sector in such fields of expertise as information
    technology and customer service. But many federal agencies, including
    IRS, itself, as well as NASA, FAA and the Defense Department have
    already demonstrated that such experts can and should be selected and
    hired on a merit basis. Indeed, some agencies have found that political
    pressures to hire marginally qualified or even unqualified people
    sometimes can be avoided only by requiring merit hiring. Since tax
    policy responsibilities will remain with Treasury Department officials,
    we think such new hires should, like all other IRS employees, be
    selected on a merit basis.
        To be sure a proper balance is maintained between using the new
    flexibilities and observing merit principles, we urge that Section
    9301(a) be revised. It must make clear that the organizations with
    responsibility for dealing with violations of merit principles through
    appellate and oversight processes under the 1978 civil service reform
    and earlier legislation (MSPB and its Special Counsel, as well as the
    Office of Personnel Management (OPM)) still retain this responsibility
    with respect to IRS.
        Union veto. We were surprised to see that the House bill would give
    union officials veto power over the use of the personnel flexibilities
    in the organizational units that they represent. We believe that the
    unions should have full consultation rights, and perhaps bargaining
    rights, with respect to the use of these flexibilities. But veto power
    would make these union officials at least the equal of the Commissioner
    with regard to such matters. And it would give the union representative
    on the Oversight Board the ability to countermand decisions of the
    other ten members of the board.
        Inevitably, there will be cases in which the public interest
    requires that an agency take actions that its employees dislike.
    Examples are downsizing, office relocations, and use of labor-saving
    equipment or processes, any of which might be facilitated by the use of
    the personnel flexibilities authorized in the bill.
        The House bill would also prohibit the use in IRS of the Federal
    Impasses Panel to provide assistance in resolving labor-management
    disputes. We can see no reason to deprive the agency of this proven
    means for settling disputes. In order to equip IRS with the full range
    of methods for resolving disputes, while preserving the necessary
    prerogatives of management, we strongly urge two changes in Section
    9301: (1) remove the union veto and include provisions to assure
    consultation or bargaining rights; and (2) preserve the role of the
    impasses panel.
        A performance contract for the Commissioner. We were asked to
    comment on the utility of a performance contract for the Commissioner.
    Another Academy panel has reviewed the use of such contracts in
    connection with a study of the National Ocean Service in NOAA.[5] That
    panel concluded that a performance contract for the head of the new
    organizational unit that it recommended was both feasible and
    desirable. It appears to us that the IRS Commissioner, likewise, is a
    good candidate for a performance contract.
        Bringing In a New Team. When a new presidential appointee takes
    over a large agency, it is natural to want to put his or her own
    choices in some of the key jobs. In 1978, the designers of the Senior
    Executive Service were familiar with this tendency. Congress
    subsequently required that new appointees observe a 120-day get
    acquainted period before transferring career executives. The House bill
    would revoke this safeguard for IRS and revert to the older system in
    which new appointees unwittingly deprived themselves and the public of
    the value of many highly-experienced managers.
        We are concerned about the bill's weakening of the Senior Executive
    Service (SES) goal of providing an executive personnel system able to
    meet the government's need for career leaders and managers. It can be
    damaged by piecemeal changes without any conscious decision or intent.
    For example, if a career executive who has earned advancement to SES
    rank by years of effective service can be suddenly moved to another
    city, or to a position with few or no responsibilities, by a new
    appointee who knows nothing about the incumbent's ability, and merely
    wants to bring in ``his own team,'' that will damage morale and
    performance. Also, it could discourage many other outstanding people
    from accepting or remaining in SES jobs.
        The congressional decision to require a get acquainted period
    seemed to be a practical compromise and we think it has worked well.
    However, if Congress now concludes that the Commissioner needs a little
    more leeway, we think that the Deputy Commissioner position, alone,
    might be excepted from the 120-day rule. We do believe, however, that
    the outright elimination of the rule, as provided in the House bill,
    would be a serious mistake.
        Fixed term for the Commissioner. Historically, most executive
    officials have been appointed without fixed terms. A number of
    exceptions have existed for a sufficient time that we can assess the
    results. They include the Director of the National Science Foundation,
    the Director of the Office of Personnel Management, the Chairman of the
    Federal Reserve Board, the Administrator of the St. Lawrence Seaway
    Development Corporation, and the Comptroller General. The tenure of
    these officials was reviewed in connection with a 1991 study of the
    Federal Aviation Administration's (FAA) management problems.[6]
        Experience showed that such officials generally served most of
    their statutory terms. This contrasted sharply with the average tenure
    of presidential appointees, which has approximated only two years. The
    103rd Congress established a four-year term for the Commissioner of
    Social Security, and the last Congress established a five-year term for
    the head of the FAA. It should be noted that the Constitution generally
    assures that such appointees with fixed terms are removable by the
    President, as H.R. 2676 recognizes. In light of the favorable
    experience with fixed terms, we are pleased to endorse this provision
    in the House bill.
        Multi-year funding. Agencies such as IRS, the National Weather
    Service, and FAA, that require significant capital investments to carry
    out their missions, would be best served by the availability of stable
    and predictable funding. Other agencies, such as NOAA, have long
    enjoyed multiyear funding. The Defense Department and NASA have had the
    benefit of full funding for multiyear projects. We believe that
    multiyear funding would greatly improve planning and management in IRS.
        Updating the agency's technology. The need to modernize the
    agency's technology is closely related to the proposal for multi-year
    funding. While the agency's track record for managing its procurement
    of information technology may not have been exemplary, there is room
    for Congress, the Treasury Department, the Office of Management and
    Budget, and the General Services Administration to share the blame for
    a technology lag that resulted in part from inadequate and sporadic
    funding. We are hopeful that the consensus emerging on the agency's
    need for modern technology will make it possible for the new
    Commissioner, himself a management expert, to make rapid strides in
    effectively introducing such technology. A part of that should be the
    acceleration of plans and actions to facilitate paperless filing for
    most taxpayers, as recommended by the National Commission.
                              the oversight board
        The report of the National Commission strongly influenced the
    content of the bills now being considered by the Congress. Several
    Fellows of the Academy were consulted by commission members or staff
    because of their knowledge of either the IRS or the organization and
    management of large subcabinet agencies.[7] Since its release in June
    1997, the report and the ensuing legislation have been discussed at
    length by Academy members.
        To give independent advice on issues such as the role of an
    oversight board for IRS is precisely the reason that the National
    Academy was formed, and later chartered by Congress. The Executive
    Branch no longer has a staff of experts on such matters. The governance
    structure of agencies and the role of such boards are subjects upon
    which the advice of Academy Fellows has often been sought by Congress.
    For example, the proposed legislation to place a full-time board in
    charge of the Social Security Administration was revised in favor of a
    single administrator in 1994, as proposed in an Academy study. And the
    board was converted to an advisory board, as was stressed in the report
    on the bill by the Senate Finance Committee.[8] Similarly, the powers
    of the oversight board for the Resolution Trust Corporation were
    revised by the Senate in 1992 to make it strictly advisory, after
    testimony by two Academy Fellows, among others. We offer the following
    comments, recognizing that the National Commission proposed to vest
    IRS' functions in a Board of Directors with even stronger powers than
    those provided in H.R. 2676.
        We are pleased that the House substituted an oversight board for a
    board of directors. But we do not think that the House went far enough.
    Experience shows that, except for independent regulatory agencies with
    quasi-legislative and quasi-judicial functions, programs are most
    effectively managed when a single head is responsible and, of utmost
    significance, held accountable for performance. We believe that the
    provisions regarding the board would seriously jeopardize accomplishing
    of some of the principal objectives of the legislation. Most important,
    the Oversight Board's powers would make it impossible to hold anyone
    accountable for IRS' performance.
        There are, however, many potential benefits to establishing some
    sort of advisory board as a means to combat the natural insularity of a
    large government agency with a huge and recurrent workload, and
    difficult deadlines. As already noted, the frequent and extensive
    changes made by Congress in an already too complex tax code make it
    difficult for IRS to perform in a way that would engender widespread
    approval. There is a real danger that subjecting the IRS Commissioner
    to additional demands and disagreements generated by an oversight board
    may further compromise his ability to concentrate on effectively
    implementing the Taxpayer Relief Act of 1997 and to assure that the
    year 2000 problem will be resolved satisfactorily.
        Much has been said about the difficulty of changing the ``culture''
    of government agencies, especially that of a highly decentralized
    agency like IRS. But it should be noted that a well-established agency
    culture is a strength as well as a weakness. It conveys a sense of
    identity and professional pride in agency performance; it makes
    employees care about agency goals, about what they do and how well they
    do it; it orients and socializes new employees; and it helps present a
    coherent face to the customers.
        But a strong culture also has disadvantages. It discourages hiring
    from outside for positions above the entry level; it leads managers and
    workers, alike, to cling to outdated ways of doing business and to view
    skeptically proposals for change, even when they are needed. It narrows
    the range of options surfaced and restricts the kinds of innovations
    that might get even fair consideration. It discourages questions about
    existing policies, procedures and values.
        The challenge in changing an organization's culture is, first,
    especially with an inbred agency like IRS, to figure out how to change
    it at all. Second, one needs to preserve the benefits of a strong
    culture and commitment to the agency's mission, while opening the
    agency to new ideas.
        We do think the basic concept of having a group of very well
    qualified persons to review IRS strategic planning, management and
    operations, and to provide informed advice, is sound and helpful. A
    board of advisors to the Commissioner and the Secretary of the Treasury
    could:
       assist them to assess how the agency is perceived by its
            customers
       help them to think outside of the box, by assuring that
            genuine innovations receive full and fair evaluation and are
            not rejected out of hand by the bureaucracy
       suggest new management, organizational or administrative
            ideas or approaches
       provide a sounding board for innovations or changes that the
            Commissioner is considering
        All of these functions could be performed by an advisory board.
    Although the bill uses the term oversight to describe the board that it
    would establish, make no mistake about it: under H.R. 2676, the board
    would, in fact, be a governing board. Notwithstanding the
    Administration's endorsement of the House bill, the Commissioner has
    read it incisively. In his January 28, 1998 testimony before this
    committee (p. 15), he said `` . . . the Commissioner . . . will be able
    to be accountable to the Board . . . .'' We think it would be a serious
    mistake to make the Commissioner accountable to a part-time board
    dominated by eight private citizens.
        A number of the bill's provisions would assure that the board will
    keep very busy in carrying out its functions. Specifically:
       Members of the board would receive substantial compensation,
            and the board would meet monthly.
       The chair's compensation would be two-thirds greater than
            that of the other private sector members, thus implying that
            the chair will spend a lot more time overseeing the
            Commissioner.
       The board chair could demand the detail of IRS personnel to
            the board.
       The board chair could procure temporary and intermittent
            services, apparently limited only by appropriations to IRS.
       Presumably, all or most of the board's staff would be full-
            time, with the result that they would no doubt be interacting
            with the Commissioner and other senior personnel on a regular
            basis between meetings of the board.
        With those characteristics of the board in mind, we can now
    enumerate the provisions of the bill that would effectively give it
    power, rather than mere influence, over the Commissioner, as well as
    the Secretary of the Treasury:
       The board would not only review, but would approve, both
            strategic plans and the Commissioner's budget request. The
            Commissioner could well ascribe blame for failure to reach
            performance targets to the board because of its ill advised
            budget decisions.
       The board, and not the Commissioner, would submit the budget
            request to the Secretary, and both the Secretary and the
            President would be required to submit that budget to Congress.
       Any major reorganization of IRS would require the board's
            approval.
       The board could recommend removal of the Commissioner
            (although it could, of course, do so even without a statutory
            invitation).
        A number of other functions of the board also seem inappropriate,
    such as ensuring that the budget request supports the strategic plans;
    approving the Commissioner's appointment of the Taxpayer Advocate, and
    selecting its own chair from among the nongovernment employees. The
    President could not hold the board accountable because he would not
    appoint the chair, and his power to remove board members would be
    eroded because of the sharing of authority and responsibility by the
    whole board.
        The provisions stating that the Oversight Board shall have no
    responsibilities or authority with respect to tax policy and law
    enforcement activities would be compromised by the powers just
    described. That is because approving strategic plans, reorganizations
    and, especially, budgets for IRS is, in fact, setting tax policy and
    law enforcement policy.
        Suppose, for example, the board adopted a budget that drastically
    restricts resources for collection and enforcement of corporate taxes,
    individual taxes, or excise taxes. That would send a strong signal to
    the affected sector that obstruction or evasion would become less
    risky. Similarly, suppose the board disapproved a proposed
    reorganization because it would likely lead to more effective
    enforcement and collection affecting the interests of board members.
        To give a board with the preponderance of membership and the chair
    coming from the private sector such power over a federal agency is
    virtually unprecedented. To do so with respect to such a sensitive
    function as tax collection would be unfortunate. Among other things, we
    believe that new directions from the Congress could be frustrated by
    the board if it did not agree with those directions. We strongly
    believe that the bill's provisions relating to the Oversight Board
    would actually impede the attainment of the objectives of both the
    National Commission and Members of Congress for the following reasons:
       Neither the Congress nor the President could hold anyone
            accountable for IRS performance--not the Secretary of the
            Treasury, not the Oversight Board, and certainly not the
            Commissioner. All of them could pass the buck for whatever
            problems arise.
       Giving the board management functions would get it committed
            to agreed-upon courses of action with the result that it would
            lose its capacity to provide the fresh, outsider's perspective
            that we think you are seeking.
       The breadth of the board's powers would be an open
            invitation to employees and their union representatives,
            whether disgruntled or well-intentioned, to end-run the chain
            of command and take their problems or ideas directly to board
            members, or to their staff. The potentially large staff
            supporting the board would have a substantial incentive to
            develop and advance its own agenda.
       Members of the board from the private sector would have an
            extremely serious conflict of interest. Since they would be
            exempted from certain conflict of interest laws and from the
            Federal Advisory Committee Act, any actions promoting self
            interest could go undetected.
       The union representative would have an equally serious
            conflict of interest when the public's and employees' interests
            clash. Giving such a representative the power to vote for a
            recommendation to remove the Commissioner is fraught with
            possibilities for misguided actions. Unless the board is made
            advisory, as we strongly recommend, we believe that the
            provision for a union representative as a full-fledged, voting
            member must be deleted from the bill.
       Monthly meetings of a board supported by its own staff would
            likely intrude unduly on the time available to the Commissioner
            and his senior staff to manage the agency. There would also be
            preparations for the meetings, carrying out assignments from
            the meetings, and the need to meet many additional demands of
            the chair.
        We believe that other features of the board's functions indicate a
    need for further consideration by Congress. For example, the board
    would add a new layer of supervision when we have been seeking to
    flatten our hierarchies; its supervisory duties might generate an
    adversarial and debilitating relationship with the Commissioner; the
    board's responsibilities would overlap with those of the financial
    management advisory group that the Commissioner is directed to
    establish by Section 412; and actions of the board that are perceived
    to favor one class of taxpayers might seriously erode the confidence of
    taxpayers at large in the fairness of the tax system.
        We strongly believe that the board's powers should be revised so
    that it is clearly advisory, and not supervisory. Its reports to
    Congress could reflect any significant differences it might have with
    IRS or the Treasury Department.
        Even if the board is made advisory, we would support the objective
    of Section 7802 which states that board members must be well qualified,
    and appointed solely on the basis of their professional experience and
    expertise. Certainly, the nation would be better served if we could
    find ways of ensuring that appointees to important positions of this
    kind do have appropriate experience and expertise for their positions.
    But, we should note that the executive branch has not been fully
    responsive to similar provisions calling for appointments based on
    specific expertise.
        Based on experience with such bodies in the past, we can foresee
    that, sometime after the initial board has been appointed, a number of
    subsequent appointments will likely be based more on political
    expediency than expertise. This development could, of course, be
    overcome if the confirmation process focused more on enforcing
    provisions regarding qualifications.
        We note that the bill recognizes that the President's appointment
    power under the Constitution cannot be restricted. So we can fully
    endorse the provision of Section 7802 that the board shall recommend to
    the President candidates for appointment as Commissioner. We all know
    that it has been difficult for the President to find well-qualified
    people for several hundred key federal appointments. Several Academy
    studies have dealt with that problem.[9] In order to strengthen the
    board's capacity to find the best candidates, we suggest that language
    be added to make it clear that the board be allowed use of federal
    funds to hire an executive search firm to aid them with this task.
                                   evaluation
        The changes being contemplated by the Committee would fundamentally
    change the IRS, and--it is hoped--the agency's performance. Therefore,
    an organized independent evaluation of these changes and their
    effectiveness should be planned. The evaluation should be conducted
    once the changes are in place, and sufficient time has elapsed to
    measure their effects, for two reasons.
        First, it will be important to see whether the changes are
    achieving the objectives sought by the Congress--and if not, why not.
    The good intentions of the legislation may be thwarted by the
    unintended consequences that so often bedevil public administration. An
    evaluation would allow the Executive Branch and the Congress to take
    corrective action.
        Second, several of the changes may provide lessons for other
    agencies. A thoughtful evaluation will allow the Executive Branch and
    the Congress to determine which lessons are specific to IRS and which
    could be generalized.
        If a comprehensive evaluation is desired, it will be important to
    authorize it in the bill that you are considering. The evaluation needs
    to measure agency performance both now and after changes have been
    adopted, using a common set of metrics. Equally important, it must
    start with the objectives sought by the Congress, understood not in the
    imperfect mirror of hindsight but with the freshness and accuracy that
    only contemporary involvement can provide.
        Finally, we urge that the provisions respecting the oversight
    board, be made subject to a sunset provision. Perhaps a five-year trial
    period would be appropriate since that is the term proposed for the
    Commissioner. Such a provision would enable the results of any
    evaluations to be more seriously considered in decisions related to the
    continued use of an oversight board.
                                   conclusion
        We applaud the efforts of the National Commission, the House of
    Representatives and this Committee to reform the IRS. We note that the
    IRS is already undergoing substantial change, accelerated by this
    Committee's 1997 hearings. This Committee and the appropriations
    committee have recently heard testimony on what IRS has already
    changed, what changes it is working on, and the major reorganization
    that it is considering. We believe that you should give the agency and
    its new leader an opportunity to show what they can do. Creating a
    governing board at this time (regardless of what it is called) can only
    delay the pace of progress and confuse responsibility and
    accountability.
        As we have noted, the Senate decided wisely to create advisory
    boards for the Social Security Administration and the Resolution Trust
    Corporation, instead of governing boards. We strongly believe that your
    reform efforts will be seriously compromised unless you make the same
    arrangement for IRS.
        Following is a summary of the nine principal changes that we think
    need to be made in the bill in order to assure that the purposes of the
    legislation can be accomplished:
       Convert the Oversight Board to an advisory board by deleting
            each of the approval powers that we have noted, as well as the
            power to transmit IRS' budget.
       Eliminate the board's explicit power to recommend the
            Commissioner's removal.
       Vest in the President the power to name the board's chair.
       Require board meetings once a quarter rather than monthly.
       Make detailing personnel to the board subject to the
            Commissioner's discretion, and delete the board's authority to
            procure temporary and intermittent services.
       Restate the continued authority of today's oversight and
            appellate agencies to assure the preservation of merit
            principles for all personnel actions, not just those taken
            pursuant to the new flexibilities granted.
       Preserve the ``120-day'' rule for the Senior Executive
            Service, with an exception allowed for only the Deputy
            Commissioner.
       Provide that the board shall be terminated after five years
            unless extended by statute.
       Commission an independent evaluation of the functioning of
            the board and the other innovative features of the bill.
        Only with such changes do we believe that IRS, even under a strong
    Commissioner with life-long experience as a manager, will be able to
    measure up to your expectations. We will be pleased to work with your
    staff in any further consideration of revisions in the bill.
        This concludes our statement. We will be glad to answer any
    questions.
                                    endnotes
    [1]: E.g., see ``Renewing HUD,'' National Academy of Public
            Administration Panel Report, July 1994
    [2]: Report of the National Commission on Restructuring the Internal
            Revenue Service, June 25, 1977, p.39
    [3]: ``Government Performance and Results Act,'' report of the
            Committee on Governmental Affairs, United States Senate, to
            accompany S. 20, Report 102-429, September 29, 1992, p. 15.
    [4]: E.g., ``Revitalizing Federal Management: Managers and Their
            Overburdened Systems,'' Report of an Academy Panel, 1983, and
            ``The Role of the Office of Personnel Management,'' Academy
            Standing Panel on the Public Service, 1991.
    [5]: ``A Performance Based Organization for Nautical Charting and
            Geodesy,'' National Academy of Public Administration Panel
            Report, June 1996.
    [6]: ``Organizational Options for the Federal Aviation
            Administration,'' in Winds of Change: Domestic Air Transport
            Since Deregulation, Transportation Research Board of the
            National Research Council, by Herbert N. Jasper, 1991, see pp.
            322 and 367.
    [7]: E.g., Jonathan Breul, Sheldon Cohen, Alan Dean, Ronald Moe, and
            Edward Preston.
    [8]: S. Report 103-221, to accompany S. 1560, January 25, 1994, p. 7.
    [9]: E.g., ``Leadership in Jeopardy: The Fraying of the Presidential
            Appointments System,'' National Academy of Public
            Administration, 1985.

             National Academy of Public Administration,
                                                Washington, DC,
                                                        March 13, 1998.
    Hon. William V. Roth, Jr.,
    Chairman, Senate Committee on Finance,
    U.S. Senate,
     Washington, DC.

        Dear Mr. Chairman: We appreciated the opportunity to testify at
    your February 25 hearing on H.R. 2676, the Internal Revenue Service
    Restructuring and Reform Act. Time did not permit us fully to respond
    to some of the questions that were posed, and we would like to
    supplement our remarks.
    Why the Oversight Board Should Have Strong Oversight Authority But Not
            Decision-Making Authority
        The bill would divide authority and, therefore, accountability. In
    October 23, 1991 testimony before the Senate Subcommittee on Consumer
    and Regulatory Affairs on restructuring the Resolution Trust
    Corporation, Academy Fellow Harold Seidman noted that ``two heads are
    not necessarily better than one, particularly when they are on the same
    body.'' Congress, after hearing criticisms from a number of witnesses
    about the Administration's proposal for an Oversight Board with
    governing powers, changed the structure to have a single head of the
    RTC with a strong advisory board. By all accounts, the RTC went on to
    dispose of its business successfully and wind up its affairs.
         The structure in H.R. 2676 would actually lead to even more
    difficulty in holding anyone accountable for IRS performance than if
    the management authority and responsibility were shared with merely two
    heads. In fact, the board's eight private members would all be
    autonomous, the chair would have certain additional powers but could
    not dictate positions of the board, and the union member would, in all
    likelihood, ``march to his own drummer.''
        The kind of board that we are proposing would differ greatly from
    the current Commissioner's Advisory Group. We are recommending a board
    that would have substantially more status and authority than the
    existing advisory group. That group is appointed by the Commissioner
    and its members serve for a single, two-year term. It has no assured
    access to information, and it reports only to the Commissioner. By
    contrast, creating a board in statute would give its members more
    visibility and longer tenure and could guarantee them access to all
    pertinent documents and data. The provisions in H.R. 2676 could well be
    expanded and strengthened to assure the board's full access to
    information beyond the scope of strategic and operational plans,
    reorganizations and budgets, as now provided in H.R. 2676.
        A statutory charter would also provide the new board a formal
    reporting channel to the Secretary, the Congress and the President. The
    board could be charged by law with such an important and sensitive
    function as exposing abuses, a responsibility not assigned to the
    existing advisory group.
        The Congress would very likely pay as much attention to the views
    of a board with review and advisory functions as it would to a board
    that had decision-making authority. Indeed, the Congress could expect
    more candid views from such a board than from one that had already
    approved the decisions that the Congress might be inquiring about, or
    challenging.
        In short, we are not proposing a toothless board. As our full
    testimony statement emphasized, we see many benefits flowing from a
    board that can provide the fresh view of outsiders. Those benefits can
    best be achieved without the dilution of accountability and the
    additional ``layering'' that would occur if the board is part of the
    decision-making process.
        We think that the important issue to be resolved is whether the
    board retains the approval powers now included in H.R. 2676. If those
    few powers are deleted, as we strongly recommend, it could still be
    called an Oversight Board. However, other titles might be considered,
    such as Review Board or Advisory Board. The essential point is that the
    board must have full rights to receive all appropriate information and
    be able to provide meaningful review of IRS policies and actions.
    Why the Union Representative Should Be a Voting Member of an Advisory
            Board, But Not of a Board with Decision-Making Powers
        If the oversight board had all the review powers now proposed in
    H.R. 2676, but none of the approval powers that we have cited, we would
    strongly urge that the union representative be a full-fledged member.
    However, if the board continues to have authority in making the most
    significant management decisions of the agency, then we believe that
    the union representative must not be a voting member. Following are our
    reasons.
        Too many ``bites at the apple.'' The union representative already
    has at least three sources of leverage with respect to IRS management.
    He is a member of the partnership council, he represents employees on
    bargainable issues, and he sits on the IRS Executive Committee. Those
    functions, alone, would likely make him the most knowledgeable and
    influential member of the board, even without a vote. With a vote, he
    will have to be negotiated with by the other members, rather than
    merely listened to.
        Conflict of interest. Union representatives achieve and retain
    their positions by demonstrating that they put their members' interests
    first, and that they are effective in protecting those interests. That
    is an entirely constructive role, so long as the representatives are
    not placed in a position where they can usurp management's
    prerogatives.
        It is entirely unrealistic, however, either: (1) to assume that
    there will not arise conflicts between the public interest and the
    interests of union members, or (2) to expect the union representative
    to vote against his members' interests when such a conflict arises. A
    union member of the board would not be obliged to support any board
    decisions that might be inimical to his members' interests and he could
    continue to represent those interests through his other roles on the
    partnership council and the Executive Committee, and his right to veto
    (along with the representatives of other bargaining units) the exercise
    of personnel flexibilities. He could be in a position to vote within
    the board to accept the union's position on a matter upon which he had
    failed to persuade IRS management. This would compromise the integrity
    of the review function.
                                 *  *  *  *  *
         We are writing on behalf of the Academy's Standing Panel on
    Executive Organization and Management. The panel would be pleased to
    provide further information or assist the committee in any way that you
    might ask.

            Sincerely,

                                       Thomas H. Stanton, Vice Chair
                                       Herbert N. Jasper, Panel Member

                                     Personnel Provisions in IRS Restructuring Bills
             (March 16, 1998--Prepared by Several Fellows of the National Academy of Public Administration)
    ----------------------------------------------------------------------------------------------------------------
                                            S. 1174            H.R. 2676            S. 1096
                 Subject             ------------------------------------------------------------       Comment
                                           (Admin.)             (House)        (Kerrey/Grassley)
    ----------------------------------------------------------------------------------------------------------------
    1. Merit principles\1\ apply to   Yes (33)\2\.......  Yes (31)..........  Yes (11)..........  Should apply to
     flexibilities.                                                                                all personnel
                                                                                                   provisions
    2. Union veto of flexibilities w/ Yes (34)..........  Yes (31)..........  Yes (11)..........  Substitute
     o resort to Impasses Panel.                                                                   consultation for
                                                                                                   veto; preserve
                                                                                                   role of FSIP
    3. New critical pay authority,    Yes (34)..........  No................  No................  Existing authority
     n.t.e. Comptroller of Currency.                                                               appears adequate
    4. Streamlined critical pay       Yes (35-6)........  No................  No................  Unneeded;
     authority, w/new category of                                                                  undesirable; a
     term appointments, n.t.e. 5% of                                                               foot-in-the-door
     GS-15 and above positions, not                                                                for
     subject to merit principles.                                                                  politicization
    5. Recruitment, retention and     Yes (37)..........  No................  No................  Desirable
     relocation incentives for 10
     years.
    6. Performance bonuses..........  Yes (37-8) for 10   Yes (36) up to 50%  Yes (13) Pres. pay  Permanent
                                       yrs Compt'r of      V.P. pay as         as ceiling.         authority O.K.;
                                       Curr'y ceiling.     ceiling.                                50% of pay
                                                                                                   probably
                                                                                                   excessive;
                                                                                                   Compt'r of
                                                                                                   Currency ceiling
                                                                                                   preferable
    7. Career reserve SES             Yes (39)..........  No................  No................  Unneeded,
     appointments.                                                                                 undesirable, if
                                                                                                   it remains,
                                                                                                   however, this
                                                                                                   would be the
                                                                                                   place to give
                                                                                                   authority to
                                                                                                   terminate freely
                                                                                                   (see #16)
    8. Streamlined demonstration....  Yes (39-40)         Yes (43-7) New      Yes (16)..........  Reduced notice
                                       Permanent.          authy.                                  O.K., but 60 days
                                                                                                   authority
                                                                                                   preferred;
                                                                                                   termination
                                                                                                   waiver should
                                                                                                   have time limit
                                                                                                   and be fully
                                                                                                   justified
    9. New performance mgt,           Yes (41-4)          Yes (32-8)          Yes (11-13)         ``May'' is far
     retention, awards.                Authorized.         Required.           Required.           better than
                                                                                                   ``shall''
    10. Broad-banding...............  Yes (44-6)........  No................  Yes (13-14)+        Desirable; don't
                                                                               ``single band''.    understand case
                                                                                                   for single band
    11. Competitive promotions......  Yes (46-8)........  Yes (39)            No................  Should be fully
                                                           temporaries                             subject to merit
                                                           eligible.                               principles;
                                                                                                   making tempies
                                                                                                   eligible is
                                                                                                   another risk of
                                                                                                   politicization
    12. Categorical ratings for       Yes (48)..........  Yes (40)..........  Yes (15)..........  Make certain that
     candidates.                                                                                   there are two or
                                                                                                   more categories
                                                                                                   of qualified
                                                                                                   candidates
    13. Veterans preference           Yes (48)..........  Yes (41)..........  Yes (16)..........  Placing veterans
     incompetitive appointments.                                                                   at top of
                                                                                                   category affords
                                                                                                   preference in
                                                                                                   excess of that
                                                                                                   currently
                                                                                                   required by law
    14. Veterans eligibility in       No................  Yes (38)..........  No................  Allowing veterans
     ``inside'' competition.                                                                       not in IRS to
                                                                                                   compete for
                                                                                                   positions to be
                                                                                                   filled from
                                                                                                   within the agency
                                                                                                   would greatly
                                                                                                   expand preference
                                                                                                   and set an
                                                                                                   undesirable
                                                                                                   precedent
    15. Revoke 120 limit on details.  Yes (49)..........  No................  No................  Unneeded,
                                                                                                   undesirable
    16. Permit involuntary            No................  Yes (42)..........  Yes (16)..........  A major threat to
     reassignments, removals, w/o                                                                  the preservation
     current procedural protections.                                                               of ``merit
                                                                                                   principles;''
                                                                                                   simplifying
                                                                                                   appeals process
                                                                                                   is preferable;
                                                                                                   120 get-
                                                                                                   acquainted period
                                                                                                   for SES should be
                                                                                                   preserved, but
                                                                                                   could be
                                                                                                   shortened to,
                                                                                                   say, 90 days
    17. Allow three years' probation  Yes (49)..........  Yes (42)..........  Yes (16)..........  O.K.
    18. Alternative classification    No................  No................  Yes (14-15).......  Unneeded;
     system.                                                                                       undesirable;
                                                                                                   would further
                                                                                                   fractionate
                                                                                                   federal personnel
                                                                                                   system
    19. No right of appeal for        Yes (44)..........  Yes (38)..........  Yes (13)..........  O.K.
     denial of step increase.
    20. Change 30 days to 15 days     Yes (44)..........  Yes (38)..........  Yes (13)..........  O.K., but this
     for appeal of adverse action.                                                                 will not
                                                                                                   materially
                                                                                                   shorten the
                                                                                                   months and years
                                                                                                   spent in appeals;
                                                                                                   better to
                                                                                                   consolidate
                                                                                                   appeals venues
    ----------------------------------------------------------------------------------------------------------------
    \1\ Merit principles as used herein includes prohibited personnel practices.
    \2\ Nos. in (  )'s refer to page nos. in bill.

                                   __________

                         Statement of Bruce A. Strauss

         My name is Bruce A. Strauss and 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
    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. At the time of my retirement (April,
    1992), I was Senior Division Chief and had received nine consecutive
    performance awards from 1983 through 1991.
         I sincerely appreciate the opportunity to address this esteemed
    Committee. As you may recall, I had the privilege to testify before
    this Committee in September. 1997 regarding Internal Revenue Service
    practices, which generated ``abusive treatment of taxpayers'' and the
    ``resulting fear of the IRS'' by our citizens. This is of course, an
    unacceptable condition and must change. The reasons which are causing
    the current IRS push for statistics and the resulting disregard for
    taxpayers and their rights were addressed during the September
    Hearings.
         I would urge the members of this Committee to conduct a
    comprehensive and in-depth analysis of the issues which need to be
    addressed before writing proposed corrective legislation. It was less
    than two years ago, when the Taxpayer Bill of Rights 2 was passed.
    Obviously it did not address the core problem.
        THE CORE PROBLEM IS THAT THE IRS WRITES THE REGULATIONS (THE LAW),
    DETERMINES THE RULES ( THE INTERNAL REVENUE MANUAL) AND MAKES THE
    DECISIONS. CLEARLY, A PROBLEM  DISPUTE SYSTEM MUST BE ESTABLISHED,
    INDEPENDENT OF THE IRS, WHICH HAS THE AUTHORITY TO DECIDE THE
    APPROPRIATE RESOLUTION FOR TAXPAYERS. THIS SYSTEM MUST BE PROVIDED AT
    MINIMAL COST.
         The purpose of my testimony today is to recommend legislative and
    IRS organizational changes which should provide the citizens of this
    great nation:
              1. A system in which taxpayers can be readily compensated for
            economic damages and reimbursed for expenses when the IRS
            exceeds its authority.
              2. A system which guarantees an independent, timely, low
            cost, and highly skilled binding decision(s) when problems or
            disputes with the IRS require resolution.
              3. A system which should provide continuous oversight of the
            IRS. laws.
              4. A system which encourages taxpayers to voluntarily comply
            with the federal tax
         These systems should restore the IRS to a ``User Friendly,''
    ``Customer Service drive which seeks only the tax which is legally due.
    Major changes need to be accomplished in our current federal tax system
    in order to achieve these objectives.
        They are:
              1. An entirely new system must be established outside of the
            IRS organizational structure that any tax payer with a dispute
            or a problem with the IRS would utilize. This system would
            replace the current Taxpayer Advocate Program. This system
            should have the authority to resolve all IRS issues and should
            be provided at a minimal cost to the taxpayer. This system
            should also have the ability/authority to economically
            compensate the taxpayer when the IRS exceeds their authority.
            In addition, it would make these awards to the taxpayer from
            the IRS District budget. The staffing and administrative costs
            of this system would be offset by the reduction of the IRS
            budget currently used to fund the Taxpayer Advocate Program.
            This system's management must be outside the IRS.
              2. Congress must create a central ``Clearing House'' staff
            where all taxpayer complaints regarding the IRS are received
            and worked. This staff must be highly competent, having the
            ability to analyze the issues involved in any taxpayer
            complaint and to hold the IRS responsible to resolve these
            complaints fairly and objectively. This ``Clearing House''
            staff would also advise Congress of potential legislative
            changes based on their analysis of the complaints and the IRS's
            ability to appropriately resolve these complaints. In essence,
            it would provide, in part, continues oversight of the IRS.
              3. Congress must restrict the authority of the IRS to write
            tax regulations. It must also insist on Congressional approval
            prior to implementation of any new tax related regulations. The
            current ability of the IRS to write and implement regulations
            is one of the reasons for the complexity of the tax laws. The
            more immediate concern, is that federal law is being created by
            non-elected public employees.
              4. Congress should conduct a review of existing tax
            regulations and the Internal Revenue Code and eliminate all
            current regulations and sections of the IRC which have little
            or no impact on tax revenue production or citizen's rights.
              5. Congress should rethink the IRC, regulations, and Internal
            Revenue Manual concepts that control the IRS's approach to
            taxpayers who owe assessed unpaid taxes, taxpayers who have not
            filed legally due returns, and taxpayers who have filled
            incorrect returns. The objective should be, to have citizens,
            which fall in the above categories to become current with their
            legally due taxes; and ensure that they file and pay their
            future taxes in a timely manner. Currently, IRC Sections and
            many of the IRS policies create substantial financial barriers
            and are counterproductive in achieving this objective. For
            example, IRC Section 6222 assesses interest compounded daily,
            not only on the delinquent tax but also on the interest. For
            any other creditor, this is usury. The impact on the taxpayer,
            many times, is inability to become current with their taxes. As
            a result, for a period of 10 years or longer, the federal tax
            lien becomes a major problem in their ability to obtain credit,
            and live in a normal economic environment.
              6. Conduct an ``Amnesty Program'' for all taxpayers who have
            not filed or have stopped filing legally due federal tax
            returns. This program must be conducted outside of normal IRS
            operations and must be designed to make the taxpayer whole.
            There is a mentality that taxpayers who have not met their tax
            paying responsibilities should receive significant punishment.
            I concur with the need for these taxpayers to experience some
            economic realities, but these realities must be reasonable and
            consistently applied. To continue with the current policies
            will only motivate these citizens to live with the fear of
            ``getting caught'' or find new methods to avoid their present
            and future taxes. In either situation, all of us lose.
              7. Congress must legislate and the President must sign a law
            that specifically prohibits the IRS and all other federal
            agencies from establishing statistical operational goals and
            from including them in the IRS Executive annual evaluation
            process.
              8. The ``burden of proof'' for establishing ``INCOME,'' when
            the IRS disagrees with the taxpayer, must rest with the IRS.
            The current IRS practice of assigning income without a factual
            basis is a complete abuse of their power and of the taxpayer.
              9. Internal Revenue Code, Section 7430-33, was passed as part
            of the first ``Taxpayer Bill of Rights'' in 1988. The concept
            is to restore taxpayers, and to cover certain expenses for the
            taxpayer. This section needs to be expanded to include all IRS
            actions and to remove the two year statute. In addition, all
            economic awards given to taxpayers should be paid from the
            current IRS District budget and would be included in the
            responsible IRS Executives annual evaluation The adoption of
            this recommendation would place ``balance'' regarding a goal
            for fair and objective treatment of all taxpayers along with an
            objective to ensure that all taxpayers pay their legally due
            taxes. This same section should also be expanded: (A) To
            prohibit all coercion tactics by the IRS; (B) to include the
            failure of the IRS to apply sections of the IRC which benefits
            the taxpayer.
              10. The IRC must include provisions that all IRS decisions to
            prepare returns for taxpayers, recommendations to assess taxes
            on taxpayers; to file tax liens on third parties, to change
            taxpayer filing status, etc., must all be reviewed by an
            independent IRS quality review function prior to implementation
            of the decision. In addition, the IRS must provide the taxpayer
            a comprehensive written report, stated in layman's language,
            including an explanation of their rights to appeal the IRS
            decision.
              11. Congress must recognize that the IRS needs a consistent
            long-term funding approach. Congress should determine what
            ``Compliance Level'' is acceptable and be prepared to fund the
            IRS to achieve this level.
              12. Congress should return the collection statute to six
            years.
              13. Congress should encourage the public to share their
            problems which they are having with the IRS.
              14. Congress should require estimated income tax to be paid
            monthly, vs. the current requirement of four times a year.
              15. Congress and the IRS must work on how they communicate.
            An adversarial relationship has no benefits to Congress or the
            IRS and certainly the citizens of this nation are not well
            served.
        On December 9, 1997, I submitted 23 additional recommendations to
    the staffs of several members of this committee. I ask that these
    recommendations, along with my observations, also be given serious
    consideration and be included in the record. My primary objective is to
    create an environment within the IRS in that their only objective is to
    collect from the taxpayer what is legally due. This objective shall be
    achieved by treating all taxpayers in a respectful, courteous manner
    and by giving the taxpayer the benefit of the doubt.
        Thank you Mr. Chairman for the privilege of testifying before this
    Committee.

    Attachment--Dec. 9, 1997 Recommendations

                                       December 9, 1997

    Professional Tax Staff,
    Senate Finance Committee,
    Washington. DC.

        Please find attached my additional recommendations for legislative
    changes to the Internal Revenue Code. You have copies of my testimony
    and my initial recommendations which were attached to my testimony.
        A significant issue/problem identified during the Senate Finance
    Committee's Oversight Hearings of the Internal Revenue Service was the
    setting of statistical ``goals'' by the IRS. This is in direct
    violation of IRS Policy Statement P-1-20, dated 11-9-73, which, of
    course, is still in effect. As a result of the ``Hearings'', the IRS
    has stated that it will discontinue this practice.
        The ``bottom line'' is that: TAXPAYERS ARE BEING ASSESSED TAX WHICH
    THEY DO NOT OWE. THE RESULTING ABUSE OF TAXPAYERS IS TOTALLY
    UNACCEPTABLE.
        Now let's reexamine what has taken place: The IRS top executives
    violate a long standing IRS policy. This violation has major negative
    economic impact on the citizens of this country, and plays a major role
    in our citizens fear of the IRS. However, two months after the
    ``Hearings'' no one has accepted responsibility for this practice, nor
    has anyone been held accountable.
        Hopefully, the current efforts by Congress will result in an
    Internal Revenue Service which is fair and objective. An environment
    must be achieved in which any law abiding citizen will be assured that
    their IRS tax issues/problems will be resolved in a timely, objective,
    fair, understanding manner. There is absolutely no excuse for any law
    abiding citizen to ever FEAR any governmental agency.
        I look forward to discussing these issues with you.

    Attachment.

        1. IRC 6020[b] authority is being abused by the IRS. When, per IRS
    records, a tax return has not been filed by a taxpayer, the appropriate
    procedure is to issue a Summons for the books and records of the
    taxpayer to determine the proper tax liability. The practice that is
    currently in place by the IRS is to assess the tax using the authority
    of IRC 6020[b] in lieu of the summons procedure. The IRS Service
    Centers have been employing this tactic since the early 1980's. The IRS
    prepares the returns as a single taxpayer, with the standard deduction,
    even though the IRS records show that the taxpayer is married with
    legitimate dependents. Many times the income is overstated, but with
    certainty, the tax is almost always overstated. Then the collection
    pros is started with tax liens filed, etc. Many times, no tax is owed
    by the taxpayer.
        The impact on the taxpayer is severe economic hardship. The impact
    on the IRS Collection Division is considerable additional staff hours
    being spent on correcting these assessments, when these cases are
    actually worked. Many of these cases are assigned to the IRS Que
    inventory and are not worked, thereby leaving the taxpayer with a tax
    assessment which is not resolved. The benefit to the IRS is, of course,
    the statistical reporting of substantial tax being assessed.
            Solution: Except in ``Jeopardy Cases,'' require a summons be
            issued for the taxpayer books/records for the IRS to determine
            the correct tax liability. If tax is owed, apply a 10% Penalty
            in addition to the current 5% per month (Max 25%) Penalty for
            non filing.
        2. ``Nominee Liens''/``Alter Ego Liens.''
        This process/procedure is not in the IRC but needs to be codified.
    IRS, when it suspects that a taxpayer has moved cash/assets to a third
    party, administratively files Federal Tax Liens in the name of the
    third party and proceeds to collect the taxes with the sale of these
    assets. The third party receives no appeal rights or even notice of IRS
    proposing the action.
            Solution: Codify this process and give the parties effected
            normal appeal rights.
        3. IRC Section 3402(d) often is being ignored by the IRS.
            Solution: This can be rectified by giving it protection under
            IRC Section 7433.
        4. IRC Section 3509 is also being ignored by the IRS in many cases.
    The solution is the same as #3 above.
        5. Section IRC 7605(b) is being abused. I am repressing a case in
    which the taxpayer was changed from an independent contractor to an
    employer status. The IRS prepared the returns, after they looked at
    taxpayers records, and forced the taxpayer to sign. The taxpayer paid
    the tax, penalties and interest. Than she came try see me. We filed a
    claim to have the taxpayer refunded the money. The games that the IRS
    have played after the claim was filed are a classic example of abuse of
    power and of the IRS not admitting to their mistakes. The primary power
    play is their request to again examine the taxpayers records with the
    inherent threat of assessing more tax. Their are many additional issues
    in this case which even further weakens the IRS's position, but that
    doesn't stop the IRS from continuing to harass and abuse the taxpayer.
            Solution: Change IRC Section 7605(b) which specifically
            prohibits the IRS from such abuse and bring it under the
            protection of IRC Section 7433.
    NOTE: Recommendations 3, 4, 5 above are IRC Sections that were designed
                by congress to instill some fairness and to protect
                taxpayers. Why are they being ignored?
        6. IRS Examination has a long standing practice of accepting the
    reported income but disallowing all expenses. This is typical for a
    business return (Ex. Sch. C) when the IRS deems the taxpayer not to be
    fully cooperative. They assess the tax and than tell the taxpayer the
    only method available for resolution is to pay the tax (which the
    taxpayer doesn't owe) and than file a claim for refund.
            Solution: Codify: If the IRS is accepting the income than they
            must also accept reasonable business expenses which obviously
            were used to generate the income.
        7. The IRS many times will take more than two years to complete an
    examination. Meanwhile any tax which is assessed as a result of the
    audit, accumulates compounding interest, interest compounds on the
    interest and penalties.
            Solution: Codify maximum of one year to complete an examination
            and/or interest and penalties max out after one year.
        8. Examination Proposed Assessments (30 Day Letter) are not being
    reviewed for Quality by the Quality Review Staff. This results in many
    examination tax assessments which are improper and many times
    overstated. Also, sections of the IRC which benefit the taxpayer are
    not being applied.
            Solution: Require all proposed tax assessments by the IRS to be
            reviewed by an independent equality review staff.
    Note: SEE ATTACHMENT 1: Only 28.65% Of taxes proposed to he assessed
                (Tax, Penalty and interest) were upheld by the Appeals
                Function during the five year period of F.Y. 92 thru F.Y.
                96. Now consider the fact that less than 3% of proposed
                examination assessments were appealed in F.Y. 96. (The
                basis of this calculation is table 11-a from the FY1996 IRS
                Data Book)
        The question than arises (regarding the abuse of taxpayers by the
    Examination Function in order to achieve Statistical Operational
    Objectives) as to the total of the Examination additional tax
    assessments, what is the actual percentage that are not legally owed?
        9. The implementation of the Compliance 2000 initiative delegated
    the authority to approve a Compliance Project to the District Director
    Level, with ARC oversight. This authority must be moved back to
    National Office.
            Solution: Codify that all compliance projects must be approved
            by IRS National Office.
        10. The office of the Chief Inspector of the IRS, based on evidence
    at the Senate Finance Committee's Oversight Hearings and from my recent
    experience, appears to have abandoned least some of its
    responsibilities.
            Solution: Have it report/be responsible to the ``Independent
            Board of Directors.''
        11. The practice of establishing statistical operational goals and
    evaluating IRS personnel on achieving these goals is wholly
    unacceptable and is a (if not the) primary reason for the current
    environment within the IRS.
        The primary objective for any taxpayer case being worked by the IRS
    is that it is completed in a timely, quality manner and stays within
    the constraints of the IRC, IRS regulations and the Internal Revenue
    Manual (IRM).
            Solution: Codify Disciplinary/dismissal action(s) of IRS
            Personnel for utilizing.
        12. Many taxpayer claims for taxes paid but not owed, are not
    completed by the IRS within six(6) months of receipt.
            Solution: Codify: Failure to meet the six month date would
            result in automatic refunds of the amount claimed.
        13. Many times taxpayers are due refunds/overpay their tax/
    determine that IRS owes them money but can not legally have their money
    paid to them due to the two year claim statute. This was a major issue
    the ``Hearings.''
            Solution: Change IRC Section 6511 to Ten (10) years to allow
            for refunds due taxpayers when IRS actions play a role in
            creating the problem. Also, make it ``Retroactive.''
        14. The concept of tax return preparer penalties needs to be
    reexamined. The return preparer primary obligation is to the client. It
    is the IRS's responsibility to insure that the federal tax laws are
    adhered to/enforced. The current preparer penalties, in effect,
    intimidate many preparers.
            Solution: Study the effect impact of modifying/removing the tax
            return preparer penalties.
        15. The ``burden of proof'' for determining unreported income must
    rest with the IRS.
            Solution: Codify.
        16. The IRC must identify/state the ``Mission'' of the IRS. The
    current IRS Mission Statement is contained in IRS Policy Statement P-1-
    1 dated 1-29-90. To authorize the Executives of the IRS to determine
    what their mission should be, is illogical and wholly inappropriate.
    This is a responsibility of Congress.
            Solution: Codify the mission of the IRS. Certainly ``to collect
            the proper amount of tax revenue'' is inadequate. What does
            ``proper'' mean used in this context?
        17. All IRS actions which impact a taxpayer should be subject to an
    ``appeal'' outside the IRS. The current ``IRS Appeal Function'' is part
    of the IRS. Also the Problem Resolution Function is part of the IRS.
            Solution: Codify an ``Appeal Process'' independent of the IRS.
            I suggest that it be responsible to the Department of Justice
            or to the ``Independent Board of Directors.''
        18. In recent years, the IRS has implemented a policy of charging
    ``fees'' (Ex. $1 for Pub. 17; $43 for an installment agreement). In my
    view this practice is highly questionable and is viewed as a tax.
            Solution: Codify prohibition of such fees by the IRS.
        19. In certain tax issues, the IRS has multiple authorities to
    resolve the same issue. An example is the Gift tax where the assets
    gifted can be pursued by the IRS (this is the IRS position) thru the
    Gift tax lien and/or a transferee assessment and/or a suit in Federal
    District Court. I represent a taxpayer where this process has been on
    going for more than twelve (12) years. A classic example of abuse.
            Solution: Codify that a taxpayer can be perused for resolution
            of a IRS tax issue for no longer than six (6) years after the
            appropriate tax return has been filed and/or the tax has been
            assessed.
        20. A favorite issue of the Examination Function is questioning the
    value of an asset, particularly real estate/land. Their approach is to
    place a value much higher than the taxpayer's and than place the burden
    on the taxpayer to prove the IRS position to be incorrect. Many times
    the IRS will not accept the valuation placed on the property by the
    county/city for their own taxation purposes although these values are
    kept current. The result, of course, is additional taxes being assessed
    by the IRS.
            Solution: Codify that real estate/land values determined by the
            respective local taxing authorities will be the controlling
            value for IRS purposes.
        21. The IRS, many times, will bypass a Power of Attorney and they
    will not follow their own IRM procedures in the bypass. It would appear
    their motivation is an attempt to intimidate the taxpayer.
            Solution: Codify automatic disciplinary action.
        22. The ``Report of the National Commission on Restructuring the
    Internal Revenue Service'' dated June 25, 1997, Appendix I ``Taxpayer
    Rights Proposals'' are on ``target'' and I support all of them. I would
    suggest that the proposal on ``Offers in Compromise'' be enlarged to
    include all payment agreements on delinquent taxes and IRS ``Wage
    Levies''/attachments. The IRS unilaterally determined what living
    expenses and the amount of these living expenses they would allow a
    taxpayer(s) while repaying their delinquent taxes. I suggest these type
    of issues/decisions are legislative matters.
        23. I have examples of FOIA requests for IRS records which are
    critical to challenging an IRS action/position. The IRS response is
    that the records are not available/or they cannot locate the records.
    The result is that the taxpayer is severely handicapped to resolve the
    issue.
            Solution: Codify relief for the taxpayer.
                                    summary
        The fundamental issue is that there is not a level playing field
    when a taxpayer has a dispute with the IRS. In tact, a more accurate
    analogy is that when an ordinary citizen has a dispute with the IRS
    there is no playing field. The IRS makes significant portion of the law
    (Regulations, etc.), all of the rules (ex. IRM), and all of the
    decisions, unless someone has the financial recourses to eventually
    have the case heard before a court.
            THE IRS DISPUTE/PROBLEM RESOLUTION SYSTEM MUST BE CHANGED AND
            IT MUST BE MOVED OUTSIDE THE IRS
        Many current IRS staff years (Approximately 200) are committed to
    resolving taxpayer problems/disputes with the IRS (ex.; Problem
    Resolution and Appeals). Take these staff years and establish a
    legitimate, viable system outside the IRS with appropriate authority to
    resolve the problems and disputes and to restore the taxpayer where
    appropriate.
        This system should include removal of at least some of the required
    administrative procedures currently included in IRC Section 7433.
        Again, all IRS actions, must be brought under the protection of IRC
    Section 7433.

                                          TABLE I-1. RECOVERY RATES IN APPEALS
    ----------------------------------------------------------------------------------------------------------------
                                                                                                          Five Year
                                          FY 1996      FY 1995      FY 1994      FY 1993      FY 1992       Total
    ----------------------------------------------------------------------------------------------------------------
    Nondockted:
        Number of work units closed...       43,731       42,281       41,576       43,281       44,347      215,216
    Additional tax and penalties:
        Proposed ($1,000).............   11,623,092    9,893,945    8,629,987    8,507,266    8,891,067   47,545,357
        Revised ($1,000)..............    3,880,121    2,877,568    2,384,268    2,519,875    2,588,071   14,249,903
    Percent recovered docketed........       33.38%       29.08%       27.63%       29.62%       29.11%       29.97%
    Number of work units closed.......       20,136       19,059       22,148       23,378       25,140      109,861
    Additional tax and penalties:
        Proposed ($1,000).............    2,043,079    2,341,895    2,939,049    2,492,774    3,194,118   13,010,915
        Revised ($1,000)..............      435,602      615,915      768,859      447,616      832,348    3,100,340
    Percent recovered total...........       21.32%       26.30%       26.16%       17.96%       26.06%       23.83%
    Number of work units closed.......       63,867       61,340       63,724       66,659       69,487      325,077
    Additional tax and penalties:
        Proposed ($1,000).............   13,666,171   12,235,840   11,569,036   11,000,040   12,085,185   60,556,272
        Revised ($1,000)..............    4,315,723    3,493,483    3,153,127    2,967,491    3,420,419   17,350,243
        Percent recovered.............       31.58%       28.55%       27.25%       26.98%       28.30%      28.65%
    ----------------------------------------------------------------------------------------------------------------
    TERMS:

    Work units--Historically Appeals has tracked its inventory in ``works units''. A work unit generally involves
      one or more related taxpayers for one or more periods, for which the protests contain substantially the same
      primary issue. A work unit can, and often does, involve more than one tax return.
    Additional Tax and Penalties--All of the docketed amounts and the bulk of the nondocketed amounts represent
      District proposed deficiencies (as defined in IRC Sec. 6211). However, the nondocketed figures also contain
      adjustments which are not subject to Tax Court jurisdiction. This includes cases referred to Appeals by
      Collection such as Trust Fund Recovery cases and Offer in Compromise cases.

     SOURCE: Office of the National Director of Appeals, IRS.

                Responses to Questions Submitted by Senator Roth

        Question 1. Do you believe that taxpayers are afforded proper due
    process in the collection process as implemented by the IRS? If not,
    what are your suggestions that would protect the taxpayer while not
    harming, our tax system?
        Answer. I do not believe that taxpayers are afforded proper due
    process in either the IRS Collection or Examination process. My written
    testimony recommends several solutions to this problem which are
    recommendations #1, 7, 9, 10 and 11.
        Question 2. I am also concerned that the IRS targets low income and
    disadvantaged taxpayers for audits. What can be done to ensure that
    these taxpayers who are attempting to comply with the complex tax laws
    are afforded adequate protection from being targeted by the IRS?
        Answer. I am representing a number of taxpayers who are low income
    and/or disadvantaged citizens who have had additional taxes assessed.
    These cases are true ``Horror Stories.'' The personal and economic
    price these citizens pay, due to IRS being driven by statistical goals
    and its incompetence, is unacceptable, and must change. The
    implementation of recommendations #1, 2, 3, 5, 7, 8, 9, 10, and 13
    should eliminate this problem.
        Question 3. Are the Taxpayer Advocate and Problem Resolution
    Officers effective in quickly solving taxpayer problems?
        Answer. My recent experience with the IRS Taxpayer Advocate/Problem
    Resolution process demands that a new system be implemented to resolve
    taxpayer disputes. The incompetence is overwhelming. Implementation of
    recommendations #1, 2, 9 and 13 should eliminate this issue.
        Question 4. The current offer in compromise program does not seem
    to work. In too many instances, people go into the program, nothing
    gets resolved, and by the time they get out they are socked with
    horrendous interest and penalties. Is this program broken? How would
    you improve it?
        Answer. The reason the current IRS Offer in Compromise program does
    not work is the attitude by the IRS that they must ``Protect the
    governments interest.'' As a result, the investigating IRS employee
    does to give proper consideration to the taxpayer needs, and the
    benefit to the government of making this taxpayer ``whole.''  A
    taxpayer who does not have a federal tax lien on his credit report
    certainly has the potential to increase their earning capacity and
    thereby pay more federal taxes in future years. My recommendations to
    improve this program are:
              Remove the automatic extension of the collection statute when
            an Offer in Compromise is submitted by a taxpayer. Also
            recommendations #1 and 12 attached.
        Question 5. Last September, one of our witnesses, Father Ballweg,
    indicated to all of us the importance of a system that is customer
    friendly. Shouldn't most correspondence be signed so that agency
    personnel are accountable? At some stage in the process, where a
    problem arises, should the taxpayer be given an employee to whom the
    taxpayer may turn to resolve the case?
        Answer. I concur with this recommendation. This recommendation
    should also include IRS executives.
        Question 6. I have a constituent who owns a small business in
    Delaware. After settling his issue at the IRS appeals level, he asked
    whether he was entitled to his attorney's fees because he substantially
    prevailed on the merits. The IRS and it would get back to him. After
    nearly two years the IRS finally responded to this basic question. He
    was not entitled to his attorney fees. Because he did not pay the IRS
    at the time of settlement, he was responsible for interest during the
    IRS's two year delay. If the IRS audits or attempts to collect from a
    taxpayer and the taxpayer prevails either in court in appeals, should
    the IRS pay the taxpayer's costs and attorney fees?
        Answer. My recommendation #9 addresses this problem along with
    recommendation #1.
    Changing the Culture
        Question 7. During the September hearings employee witnesses
    testified that many IRS employees ignore the Internal Revenue Manual
    and other official procedures with impunity. Should IRS employees be
    required to follow the Internal Revenue Manual and other official
    procedures? If IRS personnel do not follow IRS policies and procedures,
    what should happen to the taxpayer's case?
        Answer. IRS employees are currently required to follow the Internal
    Revenue Manual. The reasons this problem exists is:
              (A) The lack of concern/incompetence of IRS managers. When
            the ``drive'' is to achieve statistical goals, manual
            procedures and taxpayer rights (due process) tend to be
            ignored.
              (B) The IRS has substantially reduced/eliminated the
            requirement for the ``Quality Review'' of cases in process and
            closed cases. Therefore, the built-in management ``feedback''
            system as to the quality of the case work by the IRS employees
            has substantially been removed.
        The implementation of recommendation(s) #1, 2, 7, should resolve
    this issue.

                                   __________

                     Prepared Statement of Robert M. Tobias

        Chairman Roth, Members of the Finance Committee, I am very pleased
    to be here today to discuss the IRS Restructuring and Reform Act of
    1997. I have served as President of the National Treasury Employees
    Union (NTEU) since 1983 and have been associated with NTEU since 1968.
    NTEU represents approximately 150,000 federal employees, roughly 95,000
    of whom work for the IRS.
        I recently had the opportunity to serve with two very able Members
    of this Committee, Senator Kerrey and Senator Grassley, on the
    Commission to Restructure the IRS. The Commission's final report, which
    I supported, formed the basis of the legislation the Committee is
    considering today. I strongly support that legislation (H.R. 2676) and
    urge this Committee, the Senate and any Conference Committee that may
    be appointed, to move quickly to make it law.
        The IRS has had many problems in recent years, including serious
    difficulties in acquiring and utilizing technology needed to allow
    employees to perform their jobs at levels that taxpayers rightly
    expect. Funding and training cutbacks have also created problems.
    Between 1992 and 1998 the agency has cut nearly 15,000 employees,
    leaving many functions, such as customer service, understaffed and
    woefully undertrained.
        The IRS Restructuring Commission looked carefully into the many
    problems facing the IRS and the taxpayers who must interact with it.
    The Commission's thoughtful analysis of the problems and solutions
    provide a solid guide to getting the IRS back on track. But, the
    Commission's recommendations might have languished on a shelf without
    the impetus for action created by your hearings last September. Those
    hearings were very painful for the IRS employees I represent.
        They were painful because the vast majority of IRS employees try
    very hard, despite antiquated computers, sometimes misguided managers
    and public disdain to do the best job possible for the taxpayers, yet
    the message of the hearings that filtered through the media all across
    the country was that most IRS employees were incompetent at best and
    evil at worst. I note and appreciate, Senator Roth, your repeated
    statements that most IRS employees do a good job and that your interest
    is in correcting systemic problems and in protecting employees from
    management abuses.
        The hearings were painful for IRS employees for other reasons as
    well. They were painful because many of the problems that were
    highlighted were problems that IRS employees knew could have been
    avoided. The most glaring of these problems, that of overly aggressive
    tax collection efforts, could have been avoided if the Field Office
    Performance Index, which has been suspended since the hearings, had
    never been adopted. NTEU had strenuously opposed the use of this system
    that measured and rated each IRS Field Office by the amount of
    collection revenue brought in. We knew that even though individual
    employee quotas had been outlawed, this system would have the same
    result by pushing district managers to push employees to emphasize
    collection statistics rather than fair treatment. And, in fact, your
    hearings and subsequent IRS internal investigations have found a number
    of managers who have done just that.
        I believe that lack of training, outdated technology, low pay and
    the ``stovepipe,'' compartmentalized structure of the IRS contributed
    to the inability of taxpayers to get their problems solved. I believe
    that Commissioner Rossotti's proposals to change the IRS structure to
    make it more responsive to taxpayers will make it easier for IRS
    employees to provide better customer service. I also believe that the
    institution of ``problem solving days'' has been helpful in providing
    IRS employees the means to solve taxpayers' problems and should serve
    as a model for how all of IRS's departments should work together to
    solve taxpayers' problems all the time. But much more needs to be done
    and the most important step to addressing the problems raised at your
    September hearings is enactment of H.R. 2676.
        One of the provisions in H.R. 2676 that has received a great deal
    of attention is the establishment of an oversight board for the IRS.
    The board would be made up of private individuals, the Secretary of the
    Treasury, the IRS Commissioner and a representative of employees of the
    IRS. I believe that the board is necessary to restore credibility to
    the IRS and to ensure that the IRS becomes more responsive to taxpayers
    and does not fall into another disaster similar to its problems with
    Tax Systems Modernization.
        There has been much consideration given to the powers and makeup of
    the board. With regard to the board's powers, I think H.R. 2676 strikes
    an appropriate balance that will allow the IRS Commissioner to manage
    the agency without undue interference, while ensuring that long term,
    broad based decisions are carefully reviewed. While some have proposed
    giving the board more powers, it should be noted that the IRS Oversight
    Board in H.R. 2676 has significant authority, especially as compared to
    other similar boards. The Social Security Advisory Board, for example,
    which was created by this Committee as part of the Social Security
    Independent Agency legislation, is charged with advising, analyzing,
    making recommendations and reviewing systems and policies at the Social
    Security Administration. Whereas, the IRS Oversight Board, in addition
    to similar duties, also approves strategic plans, major reorganizations
    and agency budget requests.
        I know the issue of granting 6103 authority to the board is under
    consideration. My view is that such authority is not necessary to
    fulfill the board's role as broad policy advisor on tax administration
    matters.
        The issue of the makeup of the board has also generated much
    interest. As you are aware, H.R. 2676 provides that one of the eleven
    members of the board be ``an individual who is a representative of an
    organization that represents a substantial number of Internal Revenue
    Service employees.'' I am aware that representatives of IRS managers
    have raised objections to having an employee representative on the IRS
    Oversight Board. I believe that it is crucial for the board to have the
    input of the employees. I also believe that the concerns raised are
    unfounded.
        First, the employee representative, would be nominated by the
    President, subject to Senate confirmation and removable at will by the
    President. If the representative were to wield the awesome power that
    some have suggested, interfering with the sound management and
    administration of the IRS, the President could remove the
    representative without the need to even provide a reason. Senate
    confirmation and Presidential removal at will provide adequate
    protection against inappropriate action by an employee representative.
        Second, I currently serve as the employee representative on the IRS
    Executive Committee, which has performed many of the functions to be
    assigned to the board. I have served on this and predecessors of this
    committee for 6 years and I believe that while there have been times of
    disagreement, the IRS believes that it has not been a detriment to the
    accomplishment of agency objectives, but rather, an asset to have a
    representative of employees on these policy making bodies.
        Third, an employee representative was put on the board because of,
    not in spite of, his or her role on behalf of IRS employees. Therefore,
    suggestions of a conflict of interest due to the representative's role
    with regard to employees has no merit. In addition, the employee
    representative is prohibited from chairing the board and is in the
    minority even compared to the Secretary of the Treasury and the IRS
    Commissioner, who, I believe, are fully capable of and responsible for
    representing management concerns at the IRS.
        Also, while the board has authority to review issues associated
    with senior managers' selection, evaluation and compensation, it has no
    approval authority in this area. I believe it is very appropriate for
    the board generally and the employee representative specifically, to be
    involved in such a review. Employees will have information that other
    board members will not. After all, it was employees who revealed to
    this Committee that some managers were employing abusive tactics
    against taxpayers and subordinates in order to beef up their collection
    statistics. The board should have regular access to any similar
    information.
        Unlike the attention generated by the IRS Oversight Board, the
    Personnel Flexibilities provisions (Sec. 111) of H.R. 2676 have
    received little public attention, but I believe they are critically
    important to reforming the IRS. This section of the bill will allow the
    IRS to experiment with hiring, pay, classification, performance
    management and other personnel matters outside the restrictions of
    government wide civil service laws in order to find more effective ways
    of accomplishing its mission. The bill uses current law on
    ``demonstration projects'' as a model.
        The purpose of demonstration projects is to allow agencies to waive
    statutory and regulatory personnel policies in order to test new and
    innovative approaches. Current law on demonstration projects, in effect
    since 1978, provides that:
              (f) Employees within a unit with respect to which a labor
            organization is accorded exclusive recognition under chapter 71
            of this title shall not be included within any project under
            subsection (a) of this section--
              (1) if the project would violate a collective bargaining
            agreement (as defined in section 7103(8) of this title) between
            the agency and the labor organization, unless there is another
            written agreement with respect to the project between the
            agency and the organization permitting the inclusion; or
              (2) if the project is not covered by such a collective
            bargaining agreement, until there has been consultation or
            negotiation, as appropriate, by the agency with the labor
            organization.

    (5 USC 4703)

        While some have characterized the written agreement language of
    section 9301(b) in H.R. 2676 as an unprecedented approach, in fact, it
    is based on the above language, which has been used often and
    successfully in demonstration projects that have produced exactly the
    kind of enhanced effectiveness that is needed at the IRS.
        The large majority of the demonstration projects that have been
    completed, made permanent, or are currently underway have involved
    employees represented by a labor organization and have involved a
    written agreement between the union and the agency before
    implementation, exactly as envisioned by the above referenced section
    of H.R. 2676. According to the Office of Personnel Management, these
    projects have increased effectiveness, produced cost savings and
    boosted productivity.
        Nonrepresented employees have also participated in successful
    demonstration projects. Under current law on demonstration projects
    such nonrepresented employees have the same consultation rights as they
    have in other matters. H.R. 2676 could be clarified to ensure that
    those rights would continue upon enactment.
        The idea behind both current law on demonstration projects and
    section 9301(b) of H.R. 2676 is that the employee representative and
    the agency will work collaboratively, in a consensus or partnership
    mode, to try new approaches. It provides a method for lifting many of
    the statutory protections afforded employees by the civil service laws,
    while providing a check against agency abuse by requiring agreement
    from recognized labor organizations before imposing new systems. While
    NTEU agrees that experimentation is a necessary part of positive
    change, allowing agencies to operate outside the civil service laws
    without such a check, could, I fear, lead to widespread abuses with no
    available recourse for employees. I believe that your September
    hearings provided ample evidence to support that fear.
        Some have characterized the written agreement language in H.R. 2676
    as providing the employee representative with a veto over agency
    proposals because it does not provide for appeal to the Federal Service
    Impasses Panel, which can impose a decision when an impasse is reached
    in other instances. While NTEU believes that this lack of appeal was
    intended and does, mirror current practice under demonstration project
    law, we would support a change that would allow appeals to the Federal
    Service Impasses Panel.
        I would also like to correct an inaccuracy that I have seen in
    material discussing H.R. 2676 with regard to what laws can and can't be
    waived under the bill. I have seen statements indicating that basic
    benefits such as retirement and health insurance could be waived. That
    is not true. Section 9304(e)(2) of the bill states that subpart G of
    part III of Title 5 cannot be waived. Subpart G of part III of Title 5
    covers workers compensation, retirement, unemployment compensation,
    life insurance and health insurance for federal employees.
        Another inaccuracy I have seen states that prohibited personnel
    practices could be waived under H.R. 2676. That is also not true. H.R.
    2676 states that, ``any flexibilities under this chapter shall be
    exercised in a manner consistent with chapter 23, relating to merit
    system principles and prohibited personnel practices.'' (Section
    9301(a)(1)). In addition, current law on demonstration projects
    prohibits waiving merit system and prohibited personnel practices law
    and is not amended by H.R. 2676. (See 5 USC 4703(c)(5) and section 9304
    (b) and (c) of H.R. 2676.)
        One change that we would like to see in the personnel flexibilities
    section of the bill would be to drop section 9304(e)(4), which prevents
    demonstration projects under the bill from permitting collective
    bargaining over pay or benefits, or requiring collective bargaining
    over any matter which would not be required under section 7106.
    Collective bargaining over pay is not prohibited under the current law
    on demonstration projects and Executive Order 12871, in effect since
    1993, requires collective bargaining over certain subjects that are
    merely permissible under section 7106. I am unaware of any problems
    with these current law provisions and would recommend that these
    changes made by H.R. 2676 be dropped.
        I would also like to address the issue of whether the flexibilities
    set out in H.R. 2676 will have the effect of bringing about needed
    change at the IRS and what kind of innovations might be pursued. I have
    spent a good amount of time with the new IRS Commissioner, Mr.
    Rossotti. I support his reorganization proposals and have joined with
    him to urge all IRS employees to do the same. In my role on the IRS
    Commission, I advocated the position that IRS needed to make customer
    service its number one priority. I believe Commissioner Rossotti agrees
    with that view.
        Right now, customer service representatives at the IRS make on
    average around $28,000 a year, with an absolute maximum salary in the
    highest cost city in the country (San Francisco) of $36,027. The
    customer service representative is the person who is charged with
    answering every question that any taxpayer across the country may have
    when they call the IRS for help. This is the person charged with having
    intricate knowledge of the entire U.S. Tax Code, including the 9,000
    pages just added last year. A law school graduate working as a first
    year associate at a tax law firm would laugh at that salary. Even
    customer service representatives at other federal agencies, like the
    Social Security Administration make more money. That must change and I
    believe it can by using flexibilities in the bill that will allow
    experimentation in the area of job classification with the goal of
    attracting, retaining and promoting individuals who will provide world
    class customer service.
        I would note that Senator Gramm of Texas stated at the Committee's
    January 28th hearing that IRS employees needed to be paid more. I would
    like to second that sentiment and emphasize that not only the top
    technology people need to be paid more, but to ensure quality service
    to taxpayers front line employees need to be paid more as well.
        Despite the monumental amount of knowledge required to perform the
    customer service jobs well, little and in some cases no training is
    provided. I have heard of many cases in which IRS employees who
    ordinarily perform other functions have been told to answer taxpayer
    calls and man walk in sites with no training at all. One IRS employee
    temporarily assigned to cover a taxpayer service window with no
    training recently told me that she felt terrible having to tell a
    taxpayer that all she could do was take her information and ask someone
    else to get back to her. She said she understood and sympathized with
    the taxpayer's anger over not being able to get an answer to her
    question, but that she was more afraid of giving the taxpayer the wrong
    answer. This also must change and I believe ensuring the availability
    of appropriate training can be addressed in the context of a new
    performance management system as required by section 9302 of the bill.
        The personnel flexibilities section of H.R. 2676 also provides for
    rewarding groups of employees who work as a team and allows
    gainsharing, or the ability to reward employees by passing on savings
    that come about due to their successful efforts to improve work
    processes. The bill also specifically prohibits the use of cash awards
    based solely on tax enforcement results. I believe that all of these
    provisions will aid the IRS in achieving the culture change that is
    necessary to become a customer service oriented organization.
        One issue critical to success for IRS reform that is not directly
    addressed in H.R. 2676 is adequate funding. Employees cannot provide
    quality service to taxpayers without adequate pay, training, technology
    and facilities. I hope this Congress will provide the funding necessary
    to achieve the level of service taxpayers expect and deserve. I believe
    that the provisions of H.R. 2676 that call for more coordination
    between Congressional Committees with jurisdiction over IRS can help
    that process by limiting conflicting directives. I also believe that
    the tax complexity analysis provisions will at best lead to a simpler
    tax code and at a minimum raise the awareness of legislators as to any
    tax administration cost increases associated with new tax legislation.
        Another issue that is not addressed in the bill, but that you have
    raised, Mr. Chairman, deals with the use of pseudonyms by IRS
    employees. Pseudonyms are rare, but sometimes extremely important to
    protect IRS employees from violent taxpayers. As you know, IRS
    employees are physically assaulted more than any other federal agency
    employees, including the FBI and DEA. In the past five years,
    approximately 3,200 threats and assaults against IRS employees have
    been reported. The main reason an IRS employee uses a pseudonym is to
    prevent a potentially violent taxpayer from finding out where they and
    their family live. In a small number of cases, I believe that is
    necessary.
        I also believe, however, that taxpayers have a right to be able to
    know who they dealt with, in order to keep records or report
    inappropriate behavior, inaccurate information, nonresponsiveness, or
    yes, Mr. Chairman, even a problem solved, a helpful attitude or a job
    well done. (It does happen.) I believe that there should be a way to
    provide the protection that is sometimes necessary as well as the
    information that taxpayers require by instituting an employee
    identification number system. I would be pleased to work with you and
    the Committee staff to try to design such a workable system.
        Mr. Chairman, thank you for this opportunity to present the views
    of the National Treasury Employees Union on the IRS Restructuring and
    Reform Act of 1997. And, again, thank you for continuing to point out
    throughout your hearings that most IRS employees do a good job. I
    certainly agree with that and would like to add that most IRS employees
    would like to be able to do a better job and that quick enactment of
    H.R. 2676 will further that goal. I would be pleased to answer any
    questions you may have.

                                   __________

                     Prepared Statement of Stefan F. Tucker

        Mr. Chairman and Member of the Committee:
         My name is Stefan F. Tucker. I appear before you today in my
    capacity as Chair-elect of the American Bar Association Section of
    Taxation. This testimony is presented on behalf of the Section of
    Taxation. It has not been approved by the House of Delegates or the
    Board of Governors of the American Bar Association and, accordingly,
    should not be construed as representing the position of the
    Association.
         The Section appreciates the opportunity to appear before the
    Committee today to discuss various proposals to restructure the
    Internal Revenue Service. Because of the limited scope of today's
    hearing, our testimony focuses principally on issues of Executive
    Branch governance, Congressional oversight of the Internal Revenue
    Service (``Service'' or ``IRS'') and certain other proposals contained
    in the House bill. When appropriate, we would be pleased to present our
    views on other issues to the Committee.
         We have been privileged to consult with the Commission, members
    and staff of the tax writing committees, and representatives of the IRS
    and Treasury as they developed first the Commission's report and then
    the House bill. We particularly appreciate the courtesy that Senator
    Kerrey extended to us during this process and his willingness to
    consult with us.
         In general, we support the House bill's approach to addressing
    crucial issues arising out of the Commission's report. While the
    Section does not agree with some important details of the solutions
    proposed by the Commission and the House, we believe the thoughtful way
    in which the issues have been presented will permit the Congress to
    fashion a workable framework for restructuring the IRS. We hope the
    testimony we present contributes to that goal.
                          i. governance and oversight
    1. Governance
        The House bill would create an IRS Oversight Board (the ``Board)
    within the Treasury Department. The Board would be charged with
    oversight of IRS ``administration, management, conduct, direction, and
    supervision of the execution and application of'' the tax laws.
    Specifically, the Board would have the authority to: review and approve
    IRS strategic plans, review operational functions of the IRS, provide
    for review of the Commissioner's selection, evaluation and compensation
    of senior managers, and review and approve the Commissioner's plans for
    major reorganizations.
                a. Oversight Board
         The Tax Section is concerned with the House proposal to vest in
    the management board direct approval authority over certain functions
    of the IRS. We believe the President is, and should remain, the
    ultimate authority over the IRS. Management of the agency charged with
    collection of virtually all of the revenues of the Federal Government
    is, fundamentally, an Executive Branch function. We believe this is
    consistent with the Constitutional notion of separation of powers and
    the management notion of accountability.
         Moreover, we believe it is impossible, as well as unwise, to split
    the fiscal management of the Service from other issues involving tax
    administration, enforcement and policy. These functions should be
    retained by the only branch of government capable of carrying out both
    simultaneously--the Executive Branch--and should continue to be lodged
    in the Treasury Department, the Cabinet department charged with
    administering the Government's fiscal affairs.
         We are concerned that a Board with substantive authority over IRS
    operations could be an impediment, rather than an aid, to better
    management. Much of the criticism directed at the Service in recent
    months has, at its core, been about lack of control and accountability.
    The Service is a huge organization which, like most bureaucracies,
    tends to function with or without top-down leadership. Any
    restructuring proposal should seek, as its principal goal, to enable
    those in charge to control the agency more effectively.
         An independent oversight board with management authority will, we
    believe, hinder, rather than enhance, management accountability.
    Instead of a single head, operating within the Treasury chain of
    command, there would be separate power centers, each competing for its
    share of authority and each with different reporting relations. We see
    a Board with management authority as both a potential distraction to
    the Commissioner and, even worse, a rival. As a separate power center,
    the Board offers a potential for intrigue on the part of those seeking
    to undermine or circumvent the Commissioner. While this result is by no
    means a certainty, creating even the potential for such confusion is
    problematic. The Tax Section believes this development would run
    counter to the desired goal of enhancing the management of the Service.
         The Section urges that day-to-day management functions remain
    within the Treasury Department Consequently, we do not support the
    House proposal to shift approval of certain management decisions to the
    Board. By retaining all such authority within the Executive Branch,
    clear management accountability will be maintained.
         Having said this, we believe the creation of a Board without
    management authority could serve a useful purpose. Consistent with our
    view that private sector expertise should be made available to the
    Service's senior management and that such individuals should be
    involved in the oversight process, we recommend that Congress create an
    IRS Board of Review, made up exclusively of private sector members. No
    government officials would serve on the Board, either directly or ex
    officio. We suggest that the size of the Board be kept relatively
    small--five or six members would seem optimal. Their appointment,
    compensation, etc. would be as proposed by the House.
         The role of the Board would be specified by Congress in the
    implementing legislation and would be somewhat similar to the role
    recommended by the Commission. For example, the Board would be expected
    to review and provide input to the Service's proposed budget, short-
    term and long-range strategic and operational plans, and major proposed
    management initiatives. In addition, the Commissioner would be expected
    to consult with the Board regarding the appointment, evaluation and
    compensation of the Commissioner's senior management team. The Board
    also would be expected to recommend to the President qualified
    candidates for the positions of Commissioner and Chief Counsel.
         A Board constituted in this way would have the duty to make
    periodic (preferably semi-annual) independent reports directly to the
    President and the Congress concerning its assigned tasks.
         Such reports would be expected to deal in a candid and uncensored
    fashion with the successes and problems of the Service, as well as any
    management initiatives which Congress must approve. Members of the
    Board would be available to consult directly with, and testify before,
    the Congress on the successes and problems of the agency. Rather than
    being involved in direct management of the Service, we conceive of the
    Board's role as an extension of Congressional oversight. It would serve
    as the eyes and ears of Congress with respect to the Service, directly
    involved in reviewing the major management decisions affecting the
    Service without disrupting the normal Executive Branch authority.
         Some might contend that a Board constituted in this manner would
    lack any authority. We clearly disagree. The authority that the Board
    would have would come not from direct management responsibility but,
    rather, from its reporting responsibility to Congress. The Board would
    have a direct link to the Congress that could not be circumvented by
    IRS or Treasury management. As a result, such management would, in all
    likelihood, seek to work with the Board.
         As importantly, the Board would contribute the relevant expertise
    of private sector professionals as a consultative resource for the IRS
    and the Treasury on major management matters. This role should be
    specified in implementing legislation. A properly recruited Board could
    make considerable resources available to the IRS and could complement
    the management skills of the Commissioner and senior IRS officials by
    making available expertise in areas with which they may be less
    familiar.
         We are convinced that a Board of Review, operating as we propose,
    would attract very high caliber members from the private sector. We are
    confident that ultimately these individuals would add substantial value
    to the analysis and review of management issues, and Congress would
    view the Board's role as an integral part of its oversight
    responsibility. Because of the important impact the Board of Review
    will have on improved management and oversight of the Service, we think
    there will be no shortage of top quality private sector individuals
    willing to serve.
                 b. Congress should establish the position of
                        Undersecretary of Taxation
         We concur in the assessment that Treasury oversight of the Service
    has been ``limited and uncoordinated.'' We are concerned, however, that
    the House bill would not improve that Treasury oversight function.
    Therefore, we propose that this problem be addressed directly by
    creating within the Treasury Department a new Undersecretary of
    Taxation. The Undersecretary would be charged specifically with that
    responsibility, together with the task of coordinating the entire tax
    system, both tax administration and tax policy. The scope and
    importance of this new position dictate that it should be filled only
    with an individual having significant experience with the tax system.
         The Undersecretary would report directly to the Secretary. In
    addition, the Undersecretary would be required to assure Treasury's
    participation with the Commissioner and other IRS management in the
    development of long-range planning for the Service. The Commissioner
    and the Assistant Secretary of the Treasury for Tax Policy would report
    directly to the Undersecretary. The Chief Counsel of the Internal
    Revenue Service, who currently reports directly to the Treasury
    Department General Counsel and has dotted-line reporting responsibility
    to the Commissioner, also would have dotted-line reporting
    responsibility to the Undersecretary [1] as would the Assistant
    Secretary for Management and others as deemed appropriate.
         We believe that creation of such a position addresses more
    directly than does an outside Board the concerns expressed by the
    Commission concerning Treasury accountability. Such a position provides
    a person at the highest levels of Treasury whose sole responsibility
    would be to manage and coordinate the tax functions of the
    Administration. This is, in fact, what has been lacking in past
    Administrations, a point emphasized by the Commission. The
    Undersecretary would serve as the point of intersection between tax
    administration and tax policy, with the clear mandate to coordinate
    these functions.[2] In turn, the Undersecretary would report directly
    to the Secretary, the individual charged by the President with overall
    responsibility for the Treasury's tax function.
         The Undersecretary would be required to make periodic reports to
    the Secretary, who in turn would be required to report regularly to the
    Congress. The Undersecretary and the Commissioner would be required to
    attend meetings of the Board at such reasonable times as the members of
    the Board determine, and would be responsible for reporting to and
    advising the Board about impending management proposals. The
    Undersecretary also would be available to the relevant Congressional
    committees to report and consult on matters relating to the Service.
         The statutorily-mandated job description of the new Undersecretary
    that we have in mind differs from those of prior Treasury
    undersecretaries. For example, early in President Reagan's
    administration, an Undersecretary for Economic Policy had supervisory
    authority over the Assistant Secretary for Economic Policy and the
    Assistant Secretary for Tax Policy. We do not envision, and would not
    support, the proposed position as involving economic policy. Rather,
    the tasks assigned to the new Undersecretary should be limited to those
    relating to the management of the Service and tax policy.
         Creation of the position of Undersecretary of Taxation would
    assure clear, continuing and coordinated accountability within the
    Treasury Department that, to date, has been absent or sporadic. This
    would not only avoid the prospect of management by committee, but also
    assure the greater coordination of fiscal management of the Service,
    tax administration and tax policy that we believe is essential.
    Together with a Board of Review reporting directly to Congress, the
    Undersecretary will provide a clear focus of responsibility, authority
    and accountability.
     2. Personnel Policies
         The Tax Section strongly endorses the recommendations of the
    Commission and the proposals in the House bill that give the
    Commissioner more flexibility with respect to IRS personnel.
    Historically, civil service rules have tied the Commissioner's hands,
    making it extremely difficult, if not impossible, for the Commissioner
    to hire the best people from the private sector and pay them at
    appropriate levels. The Service and, indeed, the Nation, can no longer
    afford such inflexibility. As an agency at a crossroads, it is
    imperative that the IRS, through the Commissioner, be able to bring
    into government the best and the brightest. That cannot and will not
    happen unless flexibility in hiring is increased and unless the
    Commissioner is given the ability to pay such individuals at levels
    that will attract them away from high-paying private sector jobs.
     3. Independent Inspector General
         The Tax Section also supports the creation of an independent
    Inspector General within the Internal Revenue Service. At present, the
    Treasury IG serves as the IG for the Service as well. This relationship
    suffers in many ways from the same problems as that of the Service to
    the Treasury generally. The Treasury IG is responsible for an entire
    Cabinet department, which makes it exceptionally difficult for that
    person to devote as much attention as necessary to the Service. This
    would be rectified by the creation of an IG position at the Service.
         In addition, we believe an independent IG at the IRS would go far
    to address public perceptions about an agency out of control. While we
    do not share the view that the IRS is a rogue agency, recent
    revelations make it clear that abuses are not random or isolated and
    should be dealt with accordingly.
     4. Congressional Oversight
         We endorse the Commission's proposal to establish a single
    Congressional entity to coordinate IRS oversight. A joint panel,
    composed of members from the various committees of jurisdiction, would
    provide a focal point for examining the full scope of IRS management
    and budget issues. In addition, it would coordinate the sharing of
    information on IRS operations among the committees of jurisdiction.
    Finally, a joint entity could play a constructive role as a forum for
    enhanced communication among the various committees of jurisdiction and
    among the Congress, the IRS and Treasury.
     5. Streamlining of Penalty and Interest Provisions
         We note with interest Chairman's Roth's stated desire to
    streamline current law penalty and interest provisions. We are pleased
    that the Chairman has taken an interest in these provisions and wish to
    offer our technical assistance to him and the staff of the Finance
    Committee. There are many cases in which the application of penalty and
    interest provisions take on greater significance to taxpayers than the
    original tax liability itself. The Tax Section is concerned that
    individuals are often caught unaware by these provisions, and that the
    system lacks adequate flexibility to achieve equitable results. For
    example, there presently is little ability on the part of the Service
    to adjust penalties and interest after a statutory notice of deficiency
    has been issued. We would, therefore, support creation of such a review
    procedure as well as other changes to the penalty and interest
    provisions.
                             ii. tax simplification
        The Commission focused on tax simplification as a major step in
    improving the administration of the tax law. We strongly agree, and
    emphatically endorse its conclusions on the relationship between
    complexity of the tax law and administration. Unless there are
    meaningful legislative and administrative efforts to simplify the tax
    law, any changes in IRS governance will lose their effectiveness.
         More specifically, tax law complexity and frequent changes in the
    Code mean more tax forms and instructions, more computer programming,
    more regulations and rulings, more training of IRS personnel, more
    taxpayers requiring assistance, and more disputes with taxpayers. They
    also mean greater compliance burdens for taxpayers and an increased
    likelihood of taxpayer filing errors. Increased taxpayer errors, in
    turn, require the tax administrator to deal with correcting those
    errors.
         Moreover, many of the amendments to the Code enacted since 1986
    have particularly complicated tax administration and compliance. A
    significant reason for this is revenue considerations. The need for
    revenue has resulted in enactment of provisions that scale back the
    availability of tax benefits for taxpayers with incomes above certain
    levels. At the same time, revenue available for tax cuts has been
    limited, thus constraining the enactment of tax benefits with general
    applicability. Consequently, the tax benefits enacted have been
    carefully targeted to minimize the revenue impact. While the targeting
    of tax benefits may, in many cases, assist in carrying out laudable
    goals, the result is significantly increased complexity. The Taxpayer
    Relief Act of 1997 is replete with examples.
         The Tax Section has long been a supporter of simplification.
    However, because change--even simplification--can be complicating, we
    recommend that simplification proposals only be adopted if they
    represent significant simplification, after they have received careful
    consideration, and then only if the changes are expected to remain in
    place for the long term.
         With that background, we offer two proposals to the Committee.
     1. Earned Income Tax Credit
         The EITC affects approximately 15 million individual taxpayers
    and, according to the IRS, is the source of the most common errors made
    by taxpayers. Its purpose is to deal with a problem--regressive payroll
    taxes--by an indirect rather than a direct solution.
         The EITC is incredibly complex. Eligibility alone is based on
    earned income, both taxable and non-taxable, adjusted gross income,
    modified adjusted gross income, and a number of other factors. The
    amount of the credit requires further difficult computations because it
    is dependent on different factors, including the number of qualifying
    children. This in turn depends upon whether the child lives with the
    taxpayer, the relationship of the child to the taxpayer, and the
    child's age. The test is more complicated than the test for dependency,
    and typically applies to a group of taxpayers who are generally unable
    to afford tax preparation assistance.
         We have previously recommended that consideration be given to
    substituting the dependent child definition for the qualifying child
    definition. Although further improvements should be studied, this
    change alone would simplify application of the EITC and eliminate the
    need to twice determine whether a child can be claimed on a taxpayer's
    return.
     2. Phaseouts
         As noted above, many provisions of the Code are phased out over an
    income range. Phaseouts create a variety of computational difficulties
    that complicate forms and confuse taxpayers. This is magnified by the
    number of provisions subject to phaseouts, the different phaseout
    ranges, and the methods for computing the phaseouts. These phaseouts
    also create uncertainty for taxpayers as to whether they are eligible
    for certain tax benefits (and thus their ultimate tax liability). This
    uncertainty creates taxpayer frustration. For example, taxpayers cannot
    factor the Hope Scholarship Credit into their financial plans if they
    cannot determine whether they will be eligible for the credit.
         The simple solution for this complexity would be to eliminate
    these phaseouts and adjust the tax rates to compensate. Short of this,
    we recommend a study of whether phaseouts could be standardized and
    simplified to minimize computational complexity and uncertainty.
     3. Complexity Analysis
         The House bill, based on the Commission's recommendation, proposed
    that a Tax Complexity Analysis be required as a formal part of the
    legislative process. The Section endorses the Commission's objective of
    providing relevant information with respect to the complexity of tax
    legislative proposals to those responsible for their enactment. Indeed,
    we suggested a similar process in our testimony before the Commission.
         We are concerned, however, that the provision included in the
    House bill would have little effect on the legislative process. The
    House bill requires that such an analysis be provided as part of a
    committee's report on a bill, after the committee markup has already
    occurred. Thus, as presently envisioned, the complexity analysis would
    not be available at the very time when it would be most useful: the
    markup.
         We believe a complexity analysis can have a meaningful effect on
    reducing complexity. In order for this to occur, however, the analysis
    must be available before members of tax writing committees consider
    proposals rather than afterward. Therefore, we strongly encourage this
    committee to require a complexity analysis before a committee markup in
    order that it be available to members.
                    iii. disclosure of field service advice
         The Court of Appeals for the D.C. Circuit recently held that field
    service advice memoranda issued by the IRS National Office are not
    exempt from disclosure under the Freedom of Information Act. Currently,
    there are no statutory procedures or administrative rules governing the
    disclosure of field service advice memoranda. The Section believes that
    legislation is necessary not only to provide clear guidelines to the
    IRS in determining the extent and timing of public disclosure but also
    to ensure that the process is fair to both taxpayers and the government
    and does not jeopardize taxpayers' privacy interests. We encourage the
    Congress to make clear, however, that the legislation is not intended
    to restrict the court's opinion.
    1. Public Disclosure
         The Section suggests that such legislation amend section 6110 of
    the Code to include written field service advice memoranda within the
    definition of a written determination, thus making such memoranda open
    to public inspection as provided in regulations. We do not believe it
    is advisable to constrain the ability of the field personnel to
    communicate orally with the National Office; however, we believe it is
    appropriate to adopt a rule that requires that any advice adverse to
    the taxpayer be rendered only in writing.
         The legislation should clearly define the types information in
    field service advice memoranda that are subject to disclosure. For
    example, information providing guidance as to the interpretation of the
    internal revenue laws, including alternative legal theories, and the
    application of such laws to the facts of a particular case, should be
    subject to disclosure, while information that reveals the scope,
    direction, or emphasis of audit activity should not.
     2. Taxpayer-Specific Provisions
         The Section appreciates the usefulness of field service advice as
    a tool that permits field personnel to seek advice regarding the
    development of a case from the National Office at an early stage and in
    a relatively quick and efficient manner. We encourage the Congress to
    make clear that the legislation is not intended to jeopardize the
    efficiency of this process; however, we believe that certain safeguards
    are necessary to protect the interests of taxpayers and the government.
    We believe that an appropriate rule would provide that the taxpayer be
    notified that field service advice is being sought and provide the
    taxpayer the opportunity to request that such advice be obtained using
    the more formal technical advice process (if the facts are sufficiently
    developed and the issue is appropriate for such advice) or, if both the
    taxpayer and field personnel agree, through a joint informal
    consultation with the National Office. If the taxpayer does not wish to
    request technical advice (or technical advice is not appropriate), and
    a joint request for informal consultation is not acceptable by both
    parties, then the field personnel may proceed with the field service
    advice. Conversion to the technical advice process should be automatic,
    however, when a legal issue arises at a time when the facts and
    strategies of the case have been fully developed (e.g., at the appeals
    level). We encourage the Congress to direct, through Committee Report
    language, that these rules not be interpreted to preclude a request for
    both field service advice and technical advice in the same case, if
    both are appropriate. In addition, we recommend that the legislation
    require that a copy of the field service advice be promptly provided to
    the taxpayer.
     3. Non-Substantive Tax Matters
         We believe that one final point merits discussion. Neither the
    D.C. Circuit nor the legislative proposal that appeared in the Ways and
    Means Committee Chairman's mark explicitly addressed the disclosure of
    advice concerning non-substantive tax issues, such as collection,
    bankruptcy, and summons matters. We suggest that the legislation
    provide that the disclosure rules apply equally to information in field
    service advice memoranda regarding these general litigation matters.
                 iv. shift in the burden of proof in tax cases
         The House bill provides that the IRS shall have the burden of
    proof in any court proceeding with respect to a factual issue if the
    taxpayer asserts a reasonable dispute with respect to any such issue
    relevant to ascertaining the taxpayer's income tax liability. The
    provision includes a number of ``safeguards'' that limit the scope of
    the shift in the burden of proof in order to create a ``better
    balance'' between the IRS and taxpayers, without encouraging tax
    avoidance. Taxpayers other than individuals must establish that their
    net worth does not exceed $7 million in order to be eligible for the
    benefits of this provision.
         The provision specifically states that it should not be construed
    as overriding any requirement to substantiate an item under the Code or
    regulations. Accordingly, taxpayers must meet all applicable
    substantiation requirements, whether imposed generally or with respect
    to specific items. Taxpayers who fail to substantiate any item in
    accordance with the legal requirements of substantiation will not have
    satisfied all of the legal conditions that are prerequisite to claiming
    the item on the taxpayer's tax return, so will not be able to avail
    themselves of the provision's shift in the burden of proof.
         The Tax Section continues to oppose any blanket shift in the
    burden of proof that would apply to all tax disputes. We have expressed
    concern that such a radical shift would provide a disincentive to
    adequate taxpayer recordkeeping; would result in some taxpayers being
    less forthright in preparing and filing their returns; would increase
    the incidence of taxpayers taking overly aggressive positions on their
    returns; and would encourage the IRS to be more aggressive in
    collecting information from taxpayers and third parties in the
    administrative audit stage. In our view, enactment of a proposal to
    shift the burden in all cases would have a significant adverse impact
    on tax administration and compliance.
         In contrast, the proposal contained in the House bill is narrower
    and more reasonable in scope. We commend the House for recognizing that
    any changes to the burden of proof should be carefully crafted to
    ensure sound administration of the tax laws without compromising
    compliance. In particular, the requirement that the taxpayer cooperate
    fully during the audit process and exhaust administrative remedies
    within the IRS should eliminate most of the potential for abuse.
    Further, the House bill makes it abundantly clear that a taxpayer will
    not be relieved of either the general or specific substantiation
    requirements imposed by the Code and regulations. Thus, it appears that
    the government would not be placed in the fundamentally disadvantageous
    position inherent in earlier proposals.
         It is hard to gauge what behavioral changes would occur as a
    result of the House bill's proposed burden shift. We strongly encourage
    this Committee to be guided by the counsel provided by the judges of
    the Tax Court by means of a letter to Chairmen Roth and Archer from
    Chief Judge Mary Ann Cohen. We share the concern of Chief Judge Cohen
    that controversies will, undoubtedly, increase as a consequence of this
    provision.
         Thus, while we believe the House bill provision represents a
    substantial improvement over earlier legislative proposals, we strongly
    recommend that technical modifications be made to ensure that the
    safeguards provided in fact are effective to limit the problems about
    which we have previously expressed concern. For example, the meaning of
    the provision's requirement that the taxpayer assert a ``reasonable''
    dispute is not clear. Does this mean that the taxpayer can simply
    assert an issue in his or her pleadings or that the taxpayer must
    present some evidence in support of the position? Does ``reasonable''
    mean ``not frivolous'' or something more? We recommend that the
    Congress provide additional guidance as to the meaning of the foregoing
    provisions to narrow the disputes which likely will arise between
    taxpayers and the IRS on these matters.
                v. extension of privilege to other tax advisors
         The House bill includes a proposal to extend the common law
    attorney-client privilege of confidentiality to tax advice that is
    furnished to a taxpayer by any individual who is authorized to practice
    before the Internal Revenue Service.
         As a preliminary matter, the Tax Section acknowledges the
    sensitivity of this issue. We recognize that anything that we say that
    raises concerns about the proposal may be dismissed by supporters as
    self-serving parochialism. We have attempted to put aside any self-
    interest and carry out our analysis from policy and technical points of
    view. In doing so, we have explicitly assumed that the House provision,
    or something similar to it, will be enacted.
         First, we believe it is critical to examine the historical
    underpinnings of the privilege and the different roles that attorneys
    and accountants play in our society. The privilege developed directly
    out of the role of attorneys as zealous advocates for their clients.
    Without such a privilege, a client would never be willing to confide in
    the attorney. Since free and open communication between an attorney and
    his client is essential to zealous representation, privilege was an
    crucial element of that relationship. The attorney must remain free and
    independent of government coercion.
         The privilege protects from disclosure communications to and from
    a client and his attorney. Where the privilege applies, it is absolute.
    It applies in all contexts: civil litigation, criminal litigation,
    administrative proceedings, and day-to-day advisory functions. It
    applies in both state and Federal proceedings. The privilege belongs to
    the client, not the attorney. It may be waived by the client, in which
    case the attorney may not assert it on his own. The privilege does not
    extend to communications between an attorney and his client, where the
    attorney is acting in a capacity other than as an attorney, such as a
    tax-return preparer or a business advisor.
         The client's privilege is generally available with respect to
    cases pending before the United States district courts and the United
    States Court of Federal Claims and with respect to tax-deficiency and
    other non-refund cases pending before the United States Tax Court.
         In contrast, accountants have served an entirely different
    function in our society, one that is inconsistent with the concept of
    privilege. Indeed, accountants that serve as independent attestors of
    financial statements are required to maintain their independence from
    their clients, in order to act as protectors of the marketplace. In
    rejecting the creation of an accountant-client privilege, Chief Justice
    Burger, on behalf of a unanimous Court in United States v. Arthur Young
    & Co., 465 U.S. 305 (1981), stated:
            [T]he independent auditor assumes a public responsibility
            transcending any employment relationship with the client. The
            independent public accountant performing this special function
            owes ultimate allegiance to the corporation's creditors and
            stockholders, as well as to the investing public. This ``public
            watchdog'' function demands that the accountant maintain total
            independence from the client at all times and requires complete
            fidelity to the public trust. To insulate from disclosure a
            certified public accountant's interpretations of the client's
            financial statements would be to ignore the significance of the
            accountant's role as a disinterested analyst charged with
            public obligations.
         We are concerned that extension of privilege calls this basic role
    of accountants into question. An accountant acting as both attestor and
    tax advisor faces a potential and fundamental conflict between those
    roles if, on the one hand, the accountant must maintain confidentiality
    while, on the other hand, the accountant's role as independent auditor
    compels or may compel disclosure of such information. We encourage this
    Committee to examine this conflict to determine if it may result in a
    weakening of the privilege and, thereby, harm to the public generally.
         The Tax Section applauds Congress's attempt to broaden the number
    of tax professionals available to assist taxpayers in controversies
    before the IRS. We are concerned, however, that taxpayers who are
    unaware of the limited privilege being granted may be harmed. Taking a
    privilege that is absolute and that applies in all different
    situations, and engrafting on to it a new class of professional for
    whom the privilege will not be absolute and to whom it will apply in
    only limited circumstances, will, we believe, cause significant
    confusion.
         Under the House bill, the privilege only applies to representation
    in civil tax cases, and then only during the administrative phase of
    such cases. Once any tax case reaches litigation, the privilege would
    disappear. That, alone, could subject the non-attorney tax advisor to
    being subpoenaed and the information, once confidential, being
    discovered. The common law attorney-client privilege, pervasive
    throughout the judicial system, far exceeds the breadth of any
    legislative privilege being granted.
         Moreover, the privilege of confidentiality that extended in tax
    controversies would disappear once the information was sought for
    another purpose. Several examples will illustrate this point. By its
    own terms, the provision would not extend the privilege to criminal
    matters. Criminal tax controversies do not always begin as criminal
    cases. An individual may be surprised to learn that information given
    to his non-attorney advisor in the course of a civil tax case was not
    confidential once the case became a criminal one. While this would not
    be a common occurrence, the potential for mischief is apparent. A
    similar dilemma would arise in state tax cases, where the proposed
    privilege would not apply.
         An even more likely situation is one involving domestic relations
    controversies. It has become increasingly common in today's world to
    find divorcing spouses using financial information in litigation over
    property settlements and alimony. We can easily envision that
    information disclosed to a non-attorney advisor for purposes of a tax
    controversy would be discoverable by one spouse or the other in divorce
    proceedings. No privilege would extend in that situation.
         Finally, difficulties may arise in situations where an accountant
    is furnishing both tax advice and certified financial statements. For
    example, consider the situation where a small business seeks to obtain
    a loan or other financing. A non-attorney advisor to whom was given
    confidential tax information in the course of a tax controversy could
    not exercise the privilege to prevent disclosure of that information to
    potential lenders requiring certified financial statements. The
    advisor's duty as an independent auditor appears to conflict with any
    claim of privilege.
         Again, mindful of our self-interest, we have attempted in good
    faith to bring to the attention of this Committee issues that may
    create problems. We do not hold ourselves out as experts on the rules
    governing accountants and other non-attorney advisors. We encourage the
    Committee to examine these issues carefully.
                                 vi. conclusion
         Mr. Chairman, thank you for the opportunity to appear before the
    Committee today. I will be pleased to respond to any questions.
                                    endnotes
    [1]: The Chief Counsel would report to the Undersecretary on matters
            involving tax and compliance policy and legal interpretation of
            the tax laws. The Chief Counsel would continue to report to the
            General Counsel on litigation and personnel matters.
    [2]: By this proposal, we do not advocate that the position of
            Assistant Secretary for Tax Policy be diminished in any way.
            The new Undersecretary position would, instead, focus on IRS
            management and coordination between that management function
            and tax policy.

                              American Bar Association,
                                           Section of Taxation,
                                                        April 23, 1998.
    Hon. William V. Roth, Jr.,
    Chairman, Committee on Finance,
    U.S. Senate,
    Washington, DC.

        Dear Mr. Chairman: On behalf of the American Bar Association's
    Section of Taxation, I am responding to your letter of March 5, 1998,
    requesting additional views concerning restructuring the Internal
    Revenue Service. In light of the Senate Finance Committee's subsequent
    markup of IRS restructuring legislation, this letter will address
    various aspects of the Senate Finance Committee bill as well.
         We wish to compliment you and your committee for your work on IRS
    restructuring. While our views about certain aspects of the proposed
    legislation may differ, we are optimistic that, on balance, the
    ultimate product will strengthen the IRS.
         As a general matter, the Section views with some concern the
    extent to which the Finance Committee bill seeks to impose statutory
    prescriptions for IRS organization and conduct of affairs. (In this
    regard, we note that our concern is not limited to the Finance
    Committee bill. More generally, the question of how far a legislative
    body should go in imposing management rules on an agency applies to all
    tax legislation and particularly taxpayer rights legislation.) We
    recognize that part of the motivation behind IRS restructuring has been
    the identification of past IRS abuses and the perceived need to ensure
    those abuses do not recur. While we agree with that goal, we are
    concerned that many provisions of the bill go too far. When Congress
    micromanages too many decisions for an agency as complex as the IRS,
    there will be unintended consequences, and the overall result may be to
    eliminate the flexibility the Commissioner needs to create an agency
    that performs in a fair and expeditious manner.
         Discretion on the part of an agency is, without question, a two-
    edged sword. Discretion without appropriate management guidance and
    supervision often leads to the types of behavior Congress rightly seeks
    to curb. On the other hand, the complete elimination of discretion
    leads to rigidity in agency action, often to the detriment of
    taxpayers. In our view, it would be more advisable in such instances
    for Congress to identify problems that may exist, and then instruct the
    Commissioner to develop solutions to those problems. The Commissioner
    is the individual charged with management of the agency and, in most
    circumstances, the person best able to design solutions that address
    such problems without overly restricting the agency. Throughout this
    letter, we will identify particular provisions where this approach
    should work well.
                                   governance
    1. Board of Oversight
         As we pointed out in our testimony before the Finance Committee in
    January, the Section believes that the creation of an IRS oversight
    board could serve a useful purpose by providing independent, real world
    expertise and experience to an agency that has, in the past, suffered
    from excessive insularity. At the time, however, we also expressed
    concern about the possible risks that a board charged with actual
    management authority could pose.
         As proposed by the Finance Committee, the new board of oversight
    would possess such direct management authority, particularly as it
    relates to the approval of strategic plans and budgets. While this
    authority is limited, we are nevertheless concerned that it may pose an
    impediment to improved management rather than any actual improvement in
    the same. A board so constituted could develop into a separate power
    center, actually competing with the Commissioner and the Secretary for
    authority. In short, it could become a rival to the Commissioner rather
    than an aid to better management.
         A principal goal stated in the report of the Commission on
    Restructuring the Internal Revenue Service was to increase the
    accountability of those charged with managing the IRS. We believe
    strongly that any restructuring plan must be very explicit about where
    lines of authority and accountability run. New structures will only
    compound existing problems unless those structures simplify agency
    management. We remain unconvinced that an independent board with
    management responsibilities accomplishes that goal.
         We compliment the Committee on the inclusion of a ``sunset'' for
    the new board of oversight. As Stefan Tucker indicated in his oral
    testimony before your Committee, such a sunset provides Congress with
    the ability to ``go back'' and adjust mechanisms that may not be
    working as well as planned. This is particularly useful in situations
    such as this where entirely new structures are being implemented.
    2. Section 6103 Authority
         The Finance Committee bill grants the new board limited access to
    confidential taxpayer information under section 6103. As we stated in
    January, the Section opposes any such authority on the part of the
    board. While the bill seeks to provide safeguards against abuses, we
    see no point in providing such access in the first place. We are not
    aware of any situation in which the new board should have access to
    confidential taxpayer information, and we think that a grant of
    access--no matter how limited in scope--can only create future
    problems.
    3. Chief Counsel
         We are concerned about the decision to remove the IRS Chief
    Counsel's reporting responsibility from Treasury. In view of the very
    substantial organizational changes proposed by the Commissioner, we
    think it is inadvisable to change the Chief Counsel's reporting
    responsibility without further consideration.
         The most important benefit that we think derives from the current
    structure is that the Office of the Chief Counsel has some independence
    from its client and, therefore, is in a position to give the
    Commissioner and his vast compliance organization objective advice,
    even if that advice is not popular with the client. It has been
    suggested that the proposed change in reporting is more consistent with
    a corporate model and will assure accountability of the Office of Chief
    Counsel within the Service. We think it is very important to underscore
    the difference between the Internal Revenue Service and a private
    corporation. In a private corporation, a lawyer is charged with the
    responsibility of aggressively representing the position of his or her
    client as long as such representation is in accordance with the law and
    the rules of professional responsibility that govern a lawyer's
    behavior.
         Unlike a private enterprise, the Internal Revenue Service is a law
    enforcement agency. Because of its extremely broad and significant
    powers, we should want the agency's lawyers to perform a different
    role. As we seek to further protect individual taxpayer's rights--a
    laudable goal of the Finance Committee -we should seek a structure in
    which the Office of Chief Counsel will be able to stand up to a revenue
    agent or collection officer, should the lawyer determine that the
    actions of the revenue agent or collection officer are improper. We are
    convinced that lawyers within the Office of Chief Counsel are better
    able to take positions that may be unpopular with others within the
    agency in a structure in which they ultimately report to an official
    outside the agency. If the same lawyer ultimately reported through the
    Chief Counsel to his or her client, we fear that the lawyer's
    effectiveness as a protector of taxpayer rights might be seriously
    undermined.
    4. Treasury Inspector General
         The Section is also concerned about the proposal to eliminate the
    IRS Office of Chief Inspector and transfer such functions to the
    Treasury Department in the form of a Treasury IG for Tax
    Administration. Our experience with the Treasury Department and IRS
    lead us to conclude that such a shift may actually result in less,
    rather than more, attention being paid to problems within the IRS.
    Removal of the IG position from the agency does not, in and of itself,
    ensure greater success. Indeed, to move the function outside of the
    agency may result in a diversion of resources to other inspection
    functions. In addition, the fact the inspection function is removed
    from the agency may actually limit the inspector's ability to know the
    culture and weed out problems. To this end, we cite the successful
    tenure of Frederic Hitt, Inspector General of the CIA, as evidence that
    an independent IG within an agency is a workable model.
    5. Ex Parte Contacts
         The IRS offers one of the most highly developed systems of
    alternative dispute resolution (ADR) that exists today for resolving
    controversy without litigation. The various forms of ADR utilized by
    the IRS have been extraordinarily successful in minimizing the number
    of disputes that must be resolved by the courts through litigation.
    Forms of ADR function best when the ADR process is left flexible so
    that it can be adapted to fit the particular needs of the participants.
    For that reason, we urge caution in enactment of any proposals that
    would limit flexibility in the ADR process. Overlegalization of ADR is
    likely to harm, not help, the dispute resolution process. On the other
    hand, we encourage the Committee to make it clear to the Internal
    Revenue Service and the Treasury Department that it wishes to maximize
    the use of ADR as much as reasonably possible, including in disputes
    with foreign governments under our bilateral tax treaty network.
         We would like to refer specifically to two proposals in the
    Finance Committee bill, the proposal to bar the participation of
    Examination personnel in the Appeals process and the proposal to bar
    field personnel from the taxpayer's conference of right in connection
    with a technical advice request.
         We are aware that some taxpayers have found the participation of
    Examination personnel to have an adverse effect on the dispute
    resolution processes. Of course, this is not universally the case. In
    some instances, the participation of Examination personnel may speed
    the resolution of issues, and excluding them from the process may have
    an adverse effect on taxpayers.
         In this regard, we are particularly concerned with the proposal
    that would prevent an Appeals Officer from communicating ex parte with
    Examination personnel. The Appeals process is heavily reliant on
    Examination personnel for the production of factual material and for
    mathematical calculations necessary to the disposition of the case. We
    think it would be a mistake to remove effectively the support of
    Examination personnel from Appeals Officers on an absolute basis.
         On the other hand, we can understand how some taxpayers may be
    concerned when issues of disputed fact or law are discussed by an
    Appeals Officer ex parte with a revenue agent. In general, it is poor
    management strategy to permit examinations to remain uncompleted.
    Otherwise, the Appeals function will not be viewed as an independent
    review of the examination. We believe the Service should establish as
    its goal that examinations be carried through to completion. If the
    Committee is concerned with substantive ex parte discussions with
    Examination personnel on disputed issues of law or fact, then we
    suggest that the legislation direct the Commissioner to establish
    procedures for assuring that taxpayers have an opportunity to
    participate in such discussions.
         With respect to the participation of field personnel in so-called
    adverse conferences in the technical advice process, we understand that
    the proposal does not automatically exclude field personnel, but only
    affords the taxpayer the right to exclude them. We also note that the
    proposal does not preclude the National Office from communicating with
    the field during its consideration of the technical advice request. We
    support preservation of this ability to communicate. However, we are
    concerned with trends in the technical advice process that have the
    perception of making the process less objective in resolving legal
    issues in dispute. Other examples include instances where the National
    Office has refused to advise the taxpayer of the status of the
    technical advice request, referring the taxpayer instead to the field,
    and the direction in the Internal Revenue Manual to refuse to supply
    the taxpayer with the written technical advice memorandum issued by the
    National Office if the field chooses to challenge a taxpayer-favorable
    decision.
         We think it may be an appropriate time to reconsider the technical
    advice process and, in particular, the taxpayer's right to assure an
    even handed, objective determination of issues submitted to the
    National Office for resolution. Frankly, we would prefer for changes in
    the rules to be made by the Commissioner without the need for
    legislation, and if the Congress were able to obtain the Commissioner's
    commitment to do so, we would support that route.
         Finally, we suspect that the proposals restricting field
    participation in the Appeals and technical advice processes may have
    been prompted, at least in part, by the behavior of particular
    Examination personnel who may become so vested in an issue that they
    lose their perspective. For example, we understand that there have been
    referrals to IRS Inspection of cases where issues have been resolved
    favorably to taxpayers. Obviously, such a practice could have a
    severely chilling effect on the ADR processes that the IRS has employed
    so successfully. Accordingly, we recommend that the Committee make it
    clear to the Commissioner that it expects the Service to undertake
    efforts to further train employees in their responsibilities and supply
    appropriate disciplinary measures, if necessary.
    6. Personnel Proposals
         While many of the proposals with respect to IRS personnel purport
    to provide greater flexibility, others seemingly limit the
    Commissioner's discretion. In particular, we are concerned about the
    proposals that mandate dismissals of IRS employees for certain
    behavior. While it may often be the case that an employee should be
    dismissed for such behavior, there may also be situations in which
    dismissal would not be appropriate. It is simply too hard to know in
    advance of an actual case, or to adequately articulate which behavior
    is inappropriate so as to take account of changing mores and legal
    boundaries. Lack of flexibility on the part of the Commissioner to deal
    with such behavior in ways other than dismissal may become a deterrent
    to IRS employees who fear that proper, but aggressive pursuit of cases
    may place their jobs in jeopardy. Again, we believe it is the
    Commissioner who should be held responsible for balancing the competing
    interests of the agency.
                          taxpayer bill of rights iii
    1. Burden of Proof
         We restate our opposition to a blanket shift in the burden of
    proof from taxpayers to the IRS. We recognize that the Senate Finance
    Committee's proposal is more limited, and should eliminate most of the
    potential for abuse inherent in a complete shift of the burden. On the
    whole, however, we are concerned that such a shift introduces
    tremendous uncertainty into a system that presently functions
    relatively well, though not perfectly. For example, the Finance
    Committee proposal requires, as a prerequisite to shifting the burden,
    that the taxpayer produce ``credible'' evidence with respect to a
    factual issue. Disputes as to what constitutes ``credible'' evidence
    will likely proliferate. Similarly, disputes as to whether the
    taxpayers have met their burden of moving forward generally will arise
    in many cases. We view these disputes as adding more complexity in
    cases, adding to the burdens on our courts, without any corresponding
    gain to taxpayers. For these reasons, we believe the burden of proof
    should remain where it is presently.
    2. Innocent Spouse Relief
         The Finance Committee proposes to allow spouses to elect to limit
    their liability for unpaid taxes on a joint return to the amount they
    would otherwise owe if they filed separately, unless the spouse had
    actual knowledge of the understatement of tax. This proportionate
    liability proposal would eliminate fairly severe restrictions that
    exist under present law, and represents a policy endorsed by the ABA.
         The Section is pleased that the Finance Committee has seen fit to
    address the innocent spouse issue. The Section has, for some time,
    viewed the current limits on relief as overly restrictive and has
    attempted to develop alternatives that address concerns about fairness
    without allowing others to escape responsibility. While proportionate
    liability determinations can be difficult, we strongly encourage the
    Finance Committee to provide appropriate additional relief for the
    truly innocent spouse.
    3. Interest Netting
         We compliment the Finance Committee for addressing the vexing
    problem of interest netting. The Finance Committee bill goes far toward
    fixing this problem, particularly for individuals. Unfortunately,
    however, it does little to address the problem faced by corporate
    taxpayers. We urge that the Finance Committee eliminate any
    differential between interest rates for the underpayment and
    overpayment of taxes, irrespective of the type of taxpayer involved.
    Only by doing so can the problem be eliminated completely.
    4. Suspension of Interest and Penalties After One Year
         The Finance Committee bill includes a provision that would suspend
    the accrual of interest and penalties if the Service has not sent to
    the taxpayer a notice of deficiency within one year of the time the
    taxpayer filed their return. Interest and penalties would resume 21
    days after receipt by the taxpayer of such notice.
         We believe the rule being proposed is a goal toward which the
    Service should strive. We are concerned, however, that such a goal may
    be unattainable at present, given the cutbacks in IRS budgets and the
    diversion of resources to address the Year 2000 problem.
         Until and unless the Commissioner can bring new computer systems
    on-line, it will be virtually impossible, except in the simplest of
    cases, to issue notices of deficiency within a year of the return
    filing. The response could even result in the Service issuing far more
    notices than are issued at present, in order to protect the fisc in
    cases where it is suspected that a deficiency could arise. This would
    be a perverse result in view of the purpose of the provision.
         We would prefer to see the Committee defer action on this proposal
    and, instead, direct the Commissioner to streamline procedures for the
    issuance of deficiency notices, with the goal that taxpayers receive
    notices within one year of return filing.
    5. Due Process in IRS Collections Actions
         The bill provides procedures by which taxpayers could challenge
    any levy and seizure actions by the Service. The proposal would allow
    administrative appeals to the IRS Appeals Office, followed by the right
    to challenge such actions in U.S. Tax Court.
         The Section is concerned that this provision may unduly tie the
    hands of the Collection Division. During fiscal 1996, the IRS served
    3.1 million notices of levy, filed 750,000 liens and conducted 10,000
    seizures. If even a small portion of taxpayers challenged such actions
    with Appeals or in U. S. Tax Court, the system would stall. The
    granting of Tax Court jurisdiction would allow taxpayers to engage in
    long periods of delay during the collection process.
         We believe a better approach would be to adopt statutorily the
    current administrative collection appeals system. The statute could
    provide specific standards for overruling overzealous collectors
    without resultant litigation. We would be pleased to work with the
    Committee staff to design such a proposal.
    6. Low Income Taxpayer Clinics
         We congratulate the Committee on its decision to authorize
    matching grants to fund clinics for low income taxpayers. The Section
    of Taxation has consistently supported the work of such clinics, both
    as an aid to taxpayers and as a means to allow the tax system to work
    more fairly and expeditiously. We look forward to continuing to work
    with these clinics to provide them with additional resources.
    7. Pseudonyms
         While the use of pseudonyms apparently has been abused in the
    past, it is clear that such use is appropriate in certain instances,
    such as the threats made by militants in certain IRS districts. We
    think the Commissioner is the individual best able to determine the
    appropriateness of their use.
                             technical corrections
         The Section is pleased that the Finance Committee has acted
    expeditiously with respect to technical corrections. It is essential to
    the functioning of the tax system that mistakes be highlighted and
    corrected quickly, lest the system contain traps for the unwary. We
    hope that the speed with which Congress has adopted technical
    corrections this year becomes a model for the future.
         In summary, Mr. Chairman, we appreciate the Committee's thoughtful
    approach to restructuring and hope we have provided useful suggestions.
    We would be pleased to assist you, your Committee and your staff as the
    process moves forward.

            Sincerely,
                                       Phillip L. Mann,
                                               Chair.

                                   __________

                     Prepared Statement of Lynda D. Willis

        Chairman Roth, Senator Moynihan, and Members of the Committee:
        We are pleased to be here today to assist the Committee in its
    ongoing oversight of the Internal Revenue Service (IRS). As you
    requested, my statement today addresses four issues related to
    allegations of taxpayer abuse and employee misconduct. They are
      --the adequacy of IRS controls over the treatment of taxpayers,
      --the responsibilities of the Offices of the Chief Inspector (IRS
            Inspection) and the Treasury Office of Inspector General
            (Treasury OIG) in investigating allegations of taxpayer abuse
            and employee misconduct,
      --the organizational placement of IRS Inspection, and
      --the role of the Taxpayer Advocate in handling taxpayer complaints.
        The statement is based on our past report on IRS' efforts to
    improve controls for ensuring that taxpayers are treated properly and
    preliminary information from work we have just started to assess the
    effectiveness of the Taxpayer Advocate.
        In summary, my statement makes the following points:
      --In spite of IRS management's heightened awareness of the importance
            of treating taxpayers properly, we remain unable to reach a
            conclusion as to the adequacy of IRS' controls to ensure fair
            treatment. This is because IRS and other federal information
            systems that collect information related to taxpayer cases do
            not capture the necessary management information to identify
            instances of abuse that have been reported and actions taken to
            address them and to prevent recurrence of those problems.
      --Treasury OIG and IRS Inspection have separate and shared
            responsibilities for investigating allegations of employee
            misconduct and taxpayer abuse. IRS Inspection has primary
            responsibility for investigating and auditing IRS employees,
            programs, and internal controls. Treasury OIG is responsible
            for the oversight of IRS Inspection investigations and audits
            and may perform selective investigations and audits at IRS.
      The two offices share some responsibilities as reflected in a 1994
            IRS Commissioner-Treasury OIG Memorandum of Understanding. This
            involves investigating allegations of waste, fraud, and abuse
            by IRS employees. The investigations covered under this
            Memorandum encompass a wide range of misconduct allegations
            including taxpayer abuse. IRS Inspection is responsible for
            investigating allegations against IRS employees who are GS-14s
            and below and who do not work in Inspection. Treasury OIG
            Officials advised us that employees at this level are the ones
            most likely to have direct interaction with taxpayers and are
            most likely to be subject to allegations involving taxpayer
            abuse. Treasury OIG is responsible for investigating
            allegations against senior level IRS officials and IRS
            Inspection employees.
      In the 1996 report on controls to ensure the proper treatment of
            taxpayers that we prepared at your request, Mr. Chairman, we
            noted that officials from both organizations thought that the
            arrangement was working well. However, more recent information
            indicates there may now be some concerns among those officials,
            particularly regarding timely referrals of allegations by both
            offices.
      --In the Committee's September 1997 hearings, questions were raised
            about the independence of IRS Inspection. Subsequently,
            suggestions have been made to remove IRS Inspection from IRS
            and place it in Treasury OIG. We have historically supported a
            strong statutory Treasury OIG. We also believe that the IRS
            Commissioner needs an internal capability to review the
            effectiveness of IRS programs. Regardless of where IRS
            Inspection is placed organizationally, within IRS or Treasury
            OIG, mechanisms need to be in place to ensure its
            accountability and its ability to focus on its mission
            independent from undue pressures or influence. The Inspectors
            General Act as amended in 1988, provides guidance on the
            authorities, qualifications, safeguards, resources, and
            reporting requirements needed to ensure independent
            investigation and audit capabilities.
      --In 1979, the Taxpayer Ombudsman was established administratively
            within IRS to advocate for taxpayers and assume authority for
            IRS' Problem Resolution Program. In 1988, this position was
            codified in the Taxpayer Bill of Rights 1. In 1996, the
            Taxpayer Bill of Rights 2 replaced the Ombudsman with the
            Taxpayer Advocate and expanded the responsibilities of the new
            Office of the Taxpayer Advocate. The Advocate was charged under
            the legislation with helping taxpayers resolve their problems
            with IRS and with identifying and resolving systemic problems.
            It is now nearly 20 years after the creation of the first
            executive-level position in IRS to advocate for taxpayers, and
            questions about the effectiveness of the advocacy continue to
            be asked. These questions involve the Advocate's (1)
            organizational independence within IRS; (2) adequacy of
            resource commitments to achieve its mission; and (3) ability to
            identify and correct problems with IRS processes and systems
            that adversely affect taxpayers.
    adequacy of irs' controls to ensure fair treatment of taxpayers cannot
                                 be determined
        The new IRS Commissioner and IRS management have expressed a
    commitment to ensure that taxpayers are treated properly. Even so,
    problems with current management information systems make it impossible
    to determine the extent to which allegations of taxpayer abuse and
    other taxpayer complaints have been reported, or the extent to which
    actions have been taken to address the complaints and prevent
    recurrence of systemic problems. That is because, as we reported to you
    in 1996, information systems currently maintained by IRS, Treasury OIG,
    and the Department of Justice do not capture the necessary management
    information. These systems were designed as case tracking and resource
    management systems intended to serve the management information needs
    of particular functions, such as IRS Inspection's Internal Security
    Division. None of these systems include specific data elements for
    ``taxpayer abuse;'' instead, they contain data elements that encompass
    broad categories of misconduct, taxpayer problems, and legal and
    administrative actions.
        Information contained in these systems relating to allegations and
    investigations of taxpayer abuse and other taxpayer complaints is not
    easily distinguishable from information on allegations and
    investigations that do not involve taxpayers. Consequently, as
    currently designed, the information systems cannot be used individually
    or collectively to account for IRS' handling of instances of alleged
    taxpayer abuse.
    Information Systems Related to Taxpayer Abuse Allegations
        Officials of several organizations indicated to us that several
    information systems might include information related to taxpayer abuse
    allegations--five maintained by IRS, one by Treasury OIG, and two by
    Justice. (See attachment for a description of these systems.)
        The officials familiar with these systems stated that the systems
    do not include a specific data element for taxpayer abuse that could be
    used to easily distinguish abuse allegations from others not involving
    taxpayers. For example, officials from the Executive Office for the
    U.S. Attorneys stated that the public corruption and tort categories of
    their Case Management System may include instances of taxpayer abuse.
    But, they also said the system could not be used to identify such
    instances without a review of specific case files.
    Systems Do Not Have Common Data Elements or Unique Identifiers
        From our review of data from these systems for our 1996 report, we
    concluded that none of them, either individually or collectively, have
    common or comparable data elements that can be used to identify the
    number or outcomes of taxpayer abuse allegations or related
    investigations and actions. Rather, each system was developed to
    provide information for a particular organizational function, usually
    for case tracking, inventory, or other managerial purposes relative to
    the mission of that particular function. While each system has data
    elements that could reflect how some taxpayers have been treated, the
    data elements vary and in certain cases may relate to the same
    allegation and same IRS employee. Without common or comparable data
    elements and unique allegation and employee identifiers, these systems
    do not collect information in a consistent manner that could be used to
    accurately account for all allegations of taxpayer abuse.
    IRS Has Adopted a Definition for ``Taxpayer Complaints''
        As we also reported in our 1996 report, IRS has not historically
    had a definition of taxpayer abuse. In response to the report, IRS
    adopted a definition for taxpayer complaints that included the
    following elements: (1) allegations of IRS employees' violating laws,
    regulations, or the IRS Code of Conduct; (2) overzealous, overly
    aggressive, or otherwise improper behavior of IRS employees in
    discharging their official duties; and (3) breakdowns in IRS systems or
    processes that frustrate taxpayers' ability to resolve issues through
    normal channels.
        Also in response to the report, IRS established a Customer Feedback
    System in October 1997, which IRS managers are to use to report
    allegations of improper employee behavior toward taxpayers. IRS used
    this system to support its first required annual reporting to Congress
    on taxpayers' complaints through December 31, 1997. IRS officials
    acknowledged, however, that there were changes needed to ensure the
    accuracy and consistency of the reported data.
    treasury oig and irs inspection roles for investigating taxpayer abuse
                                  allegations
        The 1988 amendments to the Inspectors General Act, which created
    the Treasury OIG, did not consolidate IRS Inspection into the Treasury
    OIG, but authorized the Treasury OIG to perform oversight of IRS
    Inspection and conduct audits and investigations of the IRS as
    appropriate. The act also provided the Treasury OIG with access to
    taxpayer data under the provisions of Section 6103 of the Internal
    Revenue Code as needed to conduct its work, with some recording and
    reporting requirements for such access.
    Treasury OIG's Responsibilities
        Currently, Treasury OIG is responsible for investigating
    allegations of misconduct, waste, fraud, and abuse involving senior IRS
    officials, GS-15s and above, as well as IRS Inspection employees.
    Treasury OIG also has oversight responsibility for the overall
    operations of IRS Inspection. Since November 1994, Treasury OIG has had
    increased flexibility for referring allegations involving GS-15s to IRS
    for investigation or administrative action. The need to make more
    referrals of GS-15 level cases was due to resource constraints and an
    increased emphasis by Treasury OIG on investigations involving criminal
    misconduct and procurement fraud across all Treasury bureaus.
        In fiscal year 1996, Treasury OIG conducted 43 investigations--14
    percent of the 306 allegations it received--many of which implicated
    senior IRS officials. Treasury OIG officials said that these
    investigations rarely involved allegations of taxpayer abuse because
    senior IRS officials and IRS Inspection employees usually do not
    interact directly with taxpayers.
    IRS Inspection's Responsibilities
        The IRS Chief Inspector, who reports directly to the IRS
    Commissioner, is responsible for conducting IRS investigations and
    internal audits done by IRS Inspection, as well as for coordinating IRS
    Inspection activities with Treasury OIG. IRS Inspection is to work
    closely with Treasury OIG in planning and performing its duties. IRS
    Inspection is also to provide information on its activities and
    results, as well as constraints or limitations placed on its
    activities, to Treasury OIG for incorporation into Treasury OIG's
    Semiannual Report to Congress. Disputes that the IRS Chief Inspector
    may have with the IRS Commissioner are to be resolved through Treasury
    OIG and the Secretary of the Treasury, to whom the Treasury OIG
    reports.
    Reporting Responsibilities for Treasury Law Enforcement Bureaus
        In September 1992, Treasury OIG issued Treasury Directive 40-01,
    which summarizes the authority vested in Treasury OIG and the reporting
    responsibilities of various Treasury bureaus. Treasury law enforcement
    bureaus, including IRS, are to (1) provide a monthly report to Treasury
    OIG concerning significant internal investigative and audit activities;
    (2) notify Treasury OIG immediately upon receiving allegations
    involving senior IRS officials, internal affairs employees, or IRS
    Inspection employees; and (3) submit written responses to Treasury OIG
    detailing actions taken or planned in response to Treasury OIG
    investigative reports and Treasury OIG referrals for agency management
    action.
        Under procedures established in a Memorandum of Understanding
    between Treasury OIG and IRS Commissioner in November 1994, the
    requirement for immediate referrals to Treasury OIG of all misconduct
    allegations covered in the Directive was reiterated and supplemented.
    Treasury OIG has the discretion to refer any allegation to IRS for
    appropriate action, that is, either investigation by IRS Inspection or
    administrative action by IRS management. If IRS officials believe that
    an allegation referred by Treasury OIG warrants Treasury OIG attention,
    they may refer the case back to Treasury OIG, requesting that Treasury
    OIG conduct an investigation.
    How Treasury OIG Handles Allegations Against IRS Employees
        During our review for the 1996 report, Treasury OIG officials
    advised us that under the original 1992 Directive, they generally
    handled most allegations implicating Senior Executive Service (SES) and
    IRS Inspection employees, while reserving the right of first refusal on
    GS-15 employees. Under the procedures adopted in 1994, which were
    driven in part by resource constraints and Treasury OIG's need to do
    more criminal misconduct and procurement fraud investigations across
    all Treasury bureaus, Treasury OIG officials stated they have generally
    referred allegations involving GS-15s and below to IRS for
    investigation or management action. The same is true for allegations
    against any employees, including those in the SES, involving
    administrative matters and allegations dealing primarily with disputes
    of tax law interpretation.
        Treasury OIG officials said that a determination is made by
    Treasury OIG after a preliminary review of the merits of the allegation
    as to whether it should investigate, refer to IRS to either investigate
    or take administrative action, or take no action at all. In fiscal year
    1996, Treasury OIG received 306 allegations, many of which involved
    senior IRS officials. After a preliminary review, Treasury OIG decided
    no action was warranted on 40 of the allegations; referred 214 to IRS--
    either for investigation or administrative action; investigated 43; and
    closed 9 others for various administrative reasons.
        Treasury OIG officials stated that, based on their investigative
    experience, most allegations of wrongdoing by IRS staff that involve
    taxpayers do not involve senior-level IRS officials or IRS Inspection
    employees. Rather, these allegations typically involve IRS Examination
    and Collection employees who most often interact directly with
    taxpayers.
    How Treasury OIG Assesses IRS' Action in Response to Investigations or
            Referrals
        Treasury OIG officials are to assess the adequacy of IRS' actions
    in response to Treasury OIG investigations and referrals as follows:
    (1) IRS is required to make written responses on actions taken within
    90 days and 120 days, respectively, on Treasury OIG investigative
    reports of completed investigations and Treasury OIG referrals for
    investigations or management action; (2) Treasury OIG investigators are
    to assess the adequacy of IRS' responses before closing the Treasury
    OIG case; and (3) Treasury OIG's Office of Oversight is to assess the
    overall effectiveness of IRS Inspection capabilities and systems
    through periodic operational reviews.
        In addition to assessing IRS' responses to Treasury OIG
    investigations and referrals, each quarter, the Treasury Inspector
    General, Deputy Inspector General, and Assistant Inspector General for
    Investigations are to brief the IRS Commissioner, IRS Deputy
    Commissioner, and Chief Inspector on the status of allegations
    involving senior IRS officials, including those being investigated by
    Treasury OIG and those awaiting IRS action.
        In our 1996 report, we noted that officials from both agencies
    agreed that the arrangement was working well to ensure that allegations
    involving senior IRS officials and IRS Inspection employees were being
    handled properly. Even so, Treasury OIG officials expressed some
    concern with the amount of time IRS typically took to respond to
    Treasury OIG investigations and referrals. IRS officials acknowledged
    that responses were not always made within Treasury OIG time frames
    because, among other reasons, determinations about taking disciplinary
    actions and imposing such actions may have taken a considerable amount
    of time. Also, the IRS officials said some cases had to be returned for
    additional development by Treasury OIG, which may have prolonged the
    time for completion. The IRS officials, however, also suggested that
    actions on Treasury OIG referrals were closely monitored, as evidenced
    by the referrals inclusion in discussions during quarterly Inspector
    General briefings with the IRS Commissioner.
        Since 1996, there has been some indication of problems between the
    two offices. Specifically, in its most recent Semiannual Report to
    Congress, Treasury OIG concluded, after reviewing IRS' compliance with
    Treasury Directive 40-01, that ``both IRS and Treasury OIG need to make
    improvements, particularly in the area of timely, prompt referrals.''
    It is not clear what steps Treasury OIG officials plan to take to
    resolve the problems.
      organizational placement of irs inspection remains subject of debate
        At the Committee's September 1997 IRS oversight hearings, some IRS
    employees raised concerns about the effectiveness of IRS Inspection and
    its independence from undue pressures and influence from IRS
    management. Since that time, debate has continued on the issue of where
    IRS Inspection would be optimally placed organizationally to provide
    assurance that taxpayers are treated properly. This is not a new issue.
    During the debate preceding the passage of the 1988 amendments to the
    Inspectors General Act that established the Treasury OIG and left IRS
    Inspection intact, as well as on several other occasions since,
    concerns have been raised about the desirability of having a separate
    IRS Inspection Service.
        Historically, we have supported a strong statutory Treasury OIG,
    believing that such an office could provide independent oversight of
    the Department, including IRS. That is, reviews of IRS addressed to the
    Secretary of the Treasury, rather than the IRS Commissioner, should
    improve executive branch oversight of tax administration in general and
    provide greater assurance that taxpayers are treated properly, fairly,
    and courteously. We have also noted that under the statute, Treasury
    OIG is authorized to enhance the protection of taxpayer rights by
    conducting periodic independent reviews of IRS dealings with taxpayers
    and IRS procedures affecting taxpayers.
        We have also recognized that, to meet his managerial
    responsibilities, the IRS Commissioner needs an internal capability to
    review the effectiveness of IRS programs. IRS Inspection has provided
    Commissioners with investigative and audit capabilities to evaluate IRS
    programs since 1952. IRS Inspection currently has roughly 1,200
    authorized staff in its budget who are split about equally between its
    two divisions, Internal Security and Internal Audit.
        The Treasury OIG, on the other hand, has fewer than 300 authorized
    staff to provide oversight of IRS Inspection activities as well as to
    carry out similar investigations and audits for Treasury and its 10
    other very diverse bureaus. IRS officials have been concerned that if
    IRS Inspection is transferred to the Treasury OIG, the transferred
    resources will be used to investigate or audit other Treasury bureaus
    to the detriment of critical IRS oversight.
        The Inspectors General Act provides guidance on the authorities,
    qualifications, safeguards, resources, and reporting requirements
    needed to ensure independent investigative and audit capabilities. No
    matter where IRS Inspection is placed organizationally, certain
    mechanisms need to be in place to ensure that it is held accountable
    and can achieve its mission without undue pressures or influence. For
    example, a key component of accountability and protection against undue
    pressures or influence is reporting of investigative and audit
    activities and findings to both those responsible for agency management
    and oversight.
       taxpayer advocate's ability to bring about change remains an open
                                    question
        Another IRS organization responsible for protecting the rights of
    taxpayers is the Taxpayer Advocate. The position was originally
    codified in the Taxpayer Bill of Rights 1 as the Taxpayer Ombudsman,
    although IRS has had the underlying Problem Resolution Program (PRP) in
    place since 1979.
        In the Taxpayer Bill of Rights 2, the Taxpayer Advocate and the
    Office of the Taxpayer Advocate replaced the Taxpayer Ombudsman
    position and the headquarters PRP staff. The authorities and
    responsibilities of this new office were expanded, for example, to
    address taxpayer cases involving IRS enforcement actions and refunds.
    The most significant change may have been to emphasize that the
    Advocate and those assigned to the Advocate's Office are expected to
    view issues from the taxpayers' perspective and find ways to alleviate
    individual taxpayer concerns as well as systemic problems.
        The Advocate reported that it resolved 237,103 cases in fiscal year
    1997. Its reported activities included establishing cases to resolve
    taxpayer concerns, providing relief to taxpayers with hardships,
    resolving cases in a proper and timely manner, and analyzing and
    addressing factors contributing to systemic problems. The report also
    discussed activities and initiatives and proposed solutions for
    systemic problems.
        Even with the enhanced legislative authorities and numerous
    activities and initiatives, questions about the effectiveness of the
    Taxpayer Advocate persist. The questions relate to the Advocate's (1)
    organizational independence within IRS; (2) resource commitments to
    achieve its mission; and (3) ability to identify and correct systemic
    problems adversely affecting taxpayers. We have recently initiated a
    study of the Advocate's Office to address these questions about the
    Advocate's effectiveness.
        The first question centers on the Advocate's organizational
    placement at headquarters and field offices. The Taxpayer Advocate
    reports to the IRS Commissioner. Taxpayer Advocates in the field report
    to the IRS Regional Commissioner, District Director, or Service Center
    Director in their particular geographic area. Thus, these field
    advocate officials report to the IRS executives who are responsible for
    the operations that may have frustrated taxpayers and created the
    Advocate's caseloads.
        The second question involves the manner in which the Advocate's
    Office is staffed and funded. For fiscal year 1998, the Advocate's
    Office was authorized 442 positions to handle problem resolution
    duties. These authorized Advocate Office staff must rely on assistance
    from more than 1,000 other field employees, on a full-time or part-time
    basis, to carry-out these duties. These 1,000 employees are funded by
    their functional office, such as Collection or Customer Service. While
    working PRP cases, these employees receive program direction and
    guidance from the Advocate's Office. They are administratively
    responsible to their Regional Commissioners, District Directors, or
    Service Center Directors--again, the same managers responsible for the
    operations that may have frustrated taxpayers.
        The third question was debated during oversight hearings last year
    regarding the Advocate's ability to identify and correct IRS systems or
    processes that have frustrated taxpayers. The question historically has
    been the amount of attention afforded the analysis of problem
    resolution cases to identify systemic issues in light of the Advocate's
    workload and available staff. The more recent question, however, has
    been the ability of the Advocate's Office to bring about needed
    administrative or legislative changes to address systemic problems.
        Questions about organizational placement, dedicated staffing, and
    ability to change IRS processes and systems all must be answered in
    assessing whether the Advocate's environment is free of undue pressures
    that may detract from its ability to focus on its overall mission. Our
    recently initiated study is designed to provide such an assessment of
    the Advocate's effectiveness.
                                    summary
        In summary, Mr. Chairman, we are unable to determine whether
    existing IRS controls are adequate to ensure that allegations of
    employee misconduct and taxpayer abuse are identified, investigated,
    and prevented from recurring, because existing systems do not capture
    this information. Both Treasury OIG and IRS Inspection have
    responsibility for investigating allegations of misconduct. We
    supported the 1988 amendments to the Inspectors General Act that
    established an independent Treasury OIG, and recognized the IRS
    Commissioner's need for an internal capability to evaluate IRS
    programs. The Inspectors General Act provides guidance on the
    authorities, qualifications, safeguards, resources, and reporting
    requirements needed to ensure independent investigative and audit
    capabilities.
        Questions also remain unanswered about the effectiveness of the
    Taxpayer Advocate in representing taxpayers. Regardless of where IRS
    Inspection and the Advocate sit organizationally, to protect taxpayers
    they must be able to discharge their responsibilities free of undue
    pressures or influence and be held accountable for achieving their
    respective missions.
        Thank you, Mr. Chairman. This concludes my prepared statement. I
    will be happy to respond to any questions you or other Members of the
    Committee may have.

    Attachment.
            information systems related to taxpayer abuse allegations
        Two of the IRS systems--Inspection's Internal Security Management
    Information System (ISMIS) and Human Resources' Automated Labor and
    Employee Relations Tracking System (ALERTS)--are designed to capture
    information on cases involving employee misconduct, which may also
    involve taxpayer abuse. ISMIS is designed to determine the status and
    outcome of Internal Security investigations of alleged employee
    misconduct; ALERTS is designed to track disciplinary actions taken
    against employees. While ISMIS and ALERTS both track aspects of alleged
    employee misconduct, these systems do not share common data elements or
    otherwise capture information in a consistent manner.
        IRS also has three systems that include information on concerns
    raised by taxpayers. These systems include two maintained by the Office
    of Legislative Affairs--the Congressional Correspondence Tracking
    System and the IRS Commissioner's Mail Tracking System--as well as the
    Taxpayer Advocate's system known as the Problem Resolution Office
    Management Information System (PROMIS). The two Legislative Affairs
    systems are designed to track taxpayer inquiries, including those made
    through congressional offices, to ensure that responses are provided by
    appropriate IRS officials. PROMIS is to track similar inquiries to
    ensure that taxpayers' problems are resolved and to determine whether
    the problems are recurring in nature.
        Treasury OIG has an information system known as the Treasury OIG
    Office of Investigations Management Information System. It is designed
    to track the status and outcomes of Treasury OIG investigations as well
    as the status and outcomes of actions taken by IRS in response to
    Treasury OIG investigations and referrals.
        Justice has two information systems that include data that may be
    related to taxpayer abuse allegations and investigations. The Executive
    Office for the U.S. Attorneys maintains a Centralized Caseload System
    that is designed to consolidate the status and results of civil and
    criminal prosecutions conducted by U.S. Attorneys throughout the
    country. Cases involving criminal misconduct by IRS employees are to be
    referred to and may be prosecuted by the U.S. Attorney in the
    particular jurisdiction in which the alleged misconduct occurred.
        The Tax Division of Justice also maintains a Case Management System
    that is designed for case tracking, time reporting, and statistical
    analysis of litigation cases the Division conducts. Lawsuits against
    either IRS or IRS employees are litigated by the Tax Division, with
    representation provided to IRS employees if the Tax Division determines
    that the actions taken by the employees were within the scope of
    employment.

                                   __________

                       Prepared Statement of Ray Woolner

        The Professional Managers Association (PMA) is a national
    membership association representing the interests of more than 200,000
    professional managers and management officials in the federal
    government. PMA's core belief is that federal managers and management
    officials have thoughtful and essential input on management issues that
    should be brought to the attention of the Administration, Congress and
    the public. We appreciate the opportunity you have provided to present
    our members' concerns and suggestions on HR 2676, The Internal Revenue
    Service Restructuring and Reform Act of 1997 to the Committee.
        The managers and management officials of the Internal Revenue
    Service (IRS) are dedicated to the fair and efficient administration of
    the tax law. These dedicated men and women have spent their working
    careers in the public service and pursue the goal of fair and efficient
    tax administration on a daily basis. PMA members believe that improving
    government operations is at the core of their role as federal managers.
    In that context, we offer the following concerning the reform of the
    Internal Revenue Service.
        The ultimate standard to which any reform legislation must be held
    is the best interests of the American people. Whether the bill
    currently before your Committee will best serve the American taxpayer
    is still an open question. PMA supports IRS Commissioner Charles O.
    Rossotti's restructuring plan as outlined before your Committee on
    January 28, 1998 and we look forward to participating in the process
    that will ultimately lead to those reforms. We are concerned, however,
    that the bill now before your committee has serious structural and
    procedural flaws that will significantly diminish the effort to improve
    IRS operations and will hinder Commissioner Rossotti's ability to
    implement his plan.
        Specifically, PMA has serious concerns about the viability of the
    Oversight Board concept set out in the bill. Although we do not oppose
    an Oversight Board, we urge that the powers vested in the Board be
    closely reviewed and that any and all opportunities for real or
    apparent conflicts or potential conflicts of interest be immediately
    uncovered and resolved at the outset. This Board and its role in the
    operations of IRS have the potential to negatively affect tax
    administration. The mere appearance of a conflict of interest weakens
    the public confidence in the fairness of the tax system. Without that
    confidence, the foundation of voluntary compliance is compromised. All
    steps must be taken in the legislation to limit the opportunity for the
    Board to directly affect ongoing tax administration operations. The
    focus of the Board should be long-term planning and resource
    identification or allocation and not the daily operation of the tax
    administration system. In that regard, PMA does not believe that the
    Oversight Board should be granted the authority under Sec. 6103 of the
    Internal Revenue Code to allow access to taxpayer account information.
    Such access would further exacerbate conflict of interest concerns and
    erode taxpayer confidence in the fairness and impartiality of the
    system.
        Our second concern with the bill is the placement of the head of
    the employee union on the Board. We believe that placement is both
    unnecessary and ill advised. Taking this action, the purpose of which
    is unclear, compromises the balance intended by the Labor-Management
    Relations Title of the Civil Service Reform Act and creates serious
    conflicts of interest for the Union and its leadership. The balance of
    power has been carefully established in statute to allow labor and
    management, in the spirit of cooperation and collaboration, to work
    through their differences and ultimately, with the help of third
    parties, to do what is best for the efficient operation of the
    government. Powers granted by the seat on the Board, along with powers
    assigned in other parts of the legislation, would give the
    representative of one segment of the employees of the agency an
    inordinate amount of influence over agency operations.
        The Union is in a clear conflict of interest on the Board by virtue
    of its role as the exclusive representative of bargaining unit
    employees. Decisions and direction assigned by the Board must
    ultimately be bargained with the Union. At the same time, the Union, as
    part of the Board, will oversee the activities, evaluations and
    selection of managers and leaders of the agency, including the
    Commissioner. These two roles clearly present conflicts and barriers to
    the operation of labor-management relations under the statute and to
    the goal of this legislation--IRS reform.
        We strongly endorse the previous testimony of former IRS
    Commissioners Donald Alexander and Sheldon Cohen that the Union not be
    given a seat on the Oversight Board. However, if the role of the Board
    is such that employee views are necessary for it to function, we
    recommend that a representative of IRS managers have a seat on the
    Oversight Board to ensure the benefit of the widest range of IRS
    management and employee views.
        Section 9301b. of the bill gives the Union far too much control
    over the personnel flexibilities through which the Commissioner is
    charged with reforming the agency. The present language restricts the
    Commissioner's actions with respect to bargaining unit employees by
    giving the Union the right to refuse to agree to any change in working
    conditions suggested by the agency leadership both nationally and
    locally. In addition, the bill does not require the Union to engage in
    any third-party intervention to resolve differences. The balance of
    powers set out in 5 U.S.C. Chapter 71, Labor-Management Relations, is
    completely set aside in favor of a Union veto of management actions.
    This section of the legislation should be stricken.
        PMA would like to offer these additional specific suggestions on
    the legislation for your consideration:
       Readjust the labor-management relationship to adopt a
            standard of the best interests of government operations. For
            some time now the emphasis on collaboration and cooperation has
            resulted in energies being directed toward ``partnership'' and
            not into the more important and relevant question of government
            operations. A standard should be adopted to govern labor
            management relations in IRS requiring the parties to pursue
            solutions that promote customer service, mission
            accomplishment, quality, productivity and efficiency. This
            standard will put the interest of good government before all
            others in resolving disputes between the parties. With wider
            authority to reform the IRS, the employee union and the
            Commissioner should be held to this higher standard of
            performance that promotes the interests of the American people
            and the efficient and effective operation of their government.
       Create an alternative system of pay and benefits for
            managers, supervisors and management officials. The present
            system treats leaders in the same manner it does rank and file
            employees with respect to reductions-in-force, pay and other
            personnel matters. While the legislation recognizes a need for
            greater rewards and motivators for top levels, it does not make
            the same provision for leadership at the lower levels. Managers
            are not given incentives to think and act in innovative ways
            about their organizational goals and mission, structure,
            processes or systems. A system that rewards managers and
            supervisors and motivates them to reinvent and reform their
            operations is needed.
       Reform the system for dealing with poor performers to
            promote speed of decision-making and appeals. Requirements
            beyond 30-60 days for any step in the process (improvement
            period, notice, appeals, etc.) should be reduced to 30 days or
            less and the appeal process limited to three months. Poor
            performance, for whatever reason, should not be tolerated for
            more than six months.
       Grant the IRS the authority to offer voluntary separation
            incentives in the form of buyouts to employees throughout the
            period of transition as suggested by Commissioner Rossotti.
       Allow pay banding to permit managers to properly compensate
            those employees whose work is deserving and withhold pay
            increases from those whose work is lacking. Managers have
            little or no control over increases given to individual
            employees. Real authority to grant increases or withhold them
            will significantly change the employer/employee relationship
            and empower managers to create better performers at the
            workplace by connecting compensation with performance.
       Lastly, the wide grant of authority given to the
            Commissioner of IRS under this legislation to create
            demonstration projects and develop other personnel
            flexibilities should be accompanied by a requirement to consult
            with representatives of managers and management officials over
            how those changes affect them. Reformation of the culture of
            the organization will require that all employees be aligned
            with the change. Most critically, the managers who are leading
            the change must participate in the development of that change.
            Given the sweeping new view of the organization laid out before
            you by Commissioner Rossotti on January 28, 1998, we believe
            that managers should be brought on board first, through
            consultation with their representatives, before changes
            affecting them are implemented. Bargaining unit employees are
            afforded the opportunity to participate in decisions affecting
            them through their exclusive representative; the managers and
            management officials of IRS are not included in such
            deliberations. Participation in decisions over matters
            affecting the working conditions, personnel practices and
            policies for managers and management officials should be
            mandated by this legislation.
                                 Communications

                                  ----------

                   Statement of Paula A. Adams, Telluride, CO

    November 10, 1997

    Editorial Section,
    Committee on Finance,
    U.S. Senate,
    Washington DC.

    Dear Sirs:

        HOW THE IRS DELIBERATELY MADE MY CHILDREN, AND MYSELF HAVE TO GO
    INTO HIDING, HAD OUR ANIMALS SHOT, WE SHOT AT, THROWN IN JAIL, LOST
    HOME, SECURITY, CREDIT, SEPARATED MY CHILDREN FROM ME, AND LOST
    EVERYTHING IN LIFE. WE NEED HELP!
        IRS, audited my employer and in the process, my former employer had
    so many connections within all government agencies. He got off.
        The Special Agents involved said if this were true about my
    employer having so many contacts, that if I would help they would clean
    house from local law enforcement all the way to the top. This began in
    the state of Arizona.
        My children and I were guaranteed safety and new identy and
    relocation.
        Corruption from local law enforcement, state level U.S. District
    Attorney Janet Napolteano, Grant Woods, Arizona U.S. Attorney General,
    Arizona State Tax Revenue agent, Arizona State Judges, all the up to
    Janet Reno, and U.S. District Attorney Douglas Metcalf, prosecuting
    Attorney for the IRS.
        Mr. Metcalf deliberately put our lives in danger and was paid off
    and admitted it when I was on the phone with him during the
    investigation.
        I am taking a very big risk trying to get help as I am homeless,
    can't get a job, I have gone from excellent health to poor, as my
    children are in poor health mental and physical do to running for our
    lives. We are separated from each other as my children are afraid it
    would be more dangerous for me to be near them.
        I do have supporting evidence of the above mentioned facts! If you
    question my integrity please contact the agent now for DEA in Phoenix,
    Arizona.
        I need help in finding out how to get protection for myself and my
    children do to my testifying against my former employer. It was in
    regards to an IRS audit, Drugs, INS. The US District Attorney, Doug
    Metcalf, was the prosecuting attorney, only he was on the side of the
    man he was suppose to prosecute and wanted me to be quite and not cause
    him any problems. Mr. Metcalf received compensation from the man he
    prosecuted, as well as making the fines light, along with the judge.
        FACTS: The IRS Special Agent Jim McCormick, Internal Security IRS,
    Tom Hickson were the two people I first spoke with in regards to
    information. They were told from the start as was the main office in
    Texas, if I were guaranteed safety for my family and I, I would help.
    It was promised that we would have protection. ``not to worry.'' I
    informed them there were several people within different departments of
    the government that were corrupt and the employer knew them. They were
    informed of the relationship with Janet Reno, U.S. Attorney General,
    Grant Woods, Arizona U.S. Attorney, the newly to be elected Janet
    Napolitano Attorney General.
        I worked closely with Mr. McCormick and as we progressed, he
    brought in a man, Gary Mengel, Arizona IRS special investigations.
        Mr. Mengel was ``shacking up'' with my employers ex-wife's best
    friend. My employer is still very close to his ex-wives. My employer
    had a call from his ex-wife letting him know everything that was going
    on through Mr. Mengel's girl friend. Most of what had been said was
    confidential.
        Mr. Metcalf made the statement, ``the people who live on the
    western part of the United States are ``hicks.'' He doesn't think there
    is any need for my protection as it could cause him a lot of
    embarrassment and his job if I speak up.
        After Mr. Metcalf prosecuted this case he quit his position with
    the government and moved on elsewhere. Mr. McCormick supervisors said
    that Mr. Metcalf would or was suppose to give recommendation to our
    safety and without it they didn't know what else to do. They would like
    to help.
        I have lost my home, my family, everything. I am homeless, can't
    get financial help, can't hold a job due to my mental state. My
    children are running for their lives as I am. All we had asked for were
    to be safe and have new identities so we could start over. It was told
    and guaranteed to me we would have this if I would testify.
        Here are some of the facts: I was employed by Donald Hopkins, of
    Sedona, AZ. as a secretary/bookkeeper. I watched over the years how Mr.
    Hopkins treated his employees, including me. When Mr. Hopkins wanted to
    let someone go, he would accuse them of stealing, or anything he could
    think of to discredit them. Most of the employees didn't steal.
        Mr. Hopkins was indicted. He is known for his harassment,
    connections to and with government officials, and the power he has.
        This man is not stupid. He is very intelligent in the business
    world and always tries to manipulate everyone. His philosophy is if he
    can black mail people they will do what he wants when he wants. He must
    be in total control at all times. He has always stated, ``that if I
    steal everyone does.'' He would brag about how he got his money and
    stole everything and black mailed people to get what ever he wanted
    since he was young. He had bragged about having people killed for
    little money exploited women, and non-American, (blacks, Jews, Mexicans
    etc.).
        When I first spoke with Mr. McCormick and Tom Hickson, they were
    informed that this was a serious case do to people getting killed,
    families being torn apart etc. This was stressed over and over again. I
    was assured that all precautions would be taken in this matter, along
    with all the other problems that may arise as we go along before Mr.
    Hopkins was indicted.
        I was assured that my children and I would be protected at all
    times and would go into witness protection.
        Mr. Hopkins has attorney friends who are ``special friends'' with
    U.S. Attorney General Janet Reno, and very close friends with Arizona
    Attorney General Grant Woods and Janet Napolitano. Mr. Hopkins attorney
    friends informed us that Ms. Reno and Mr. Woods, would make sure Janet
    Napolitano would be elected, as she was one of us and would be a real
    asset to our group. No one could touch us since we are so powerful.''
        Mr. Hopkins was setting me up to show I was stealing from him. He
    wanted me to quit but I needed the job to support my children and
    myself. I was looking for another job.
        Mr. Hickson and Mr. McCormick were informed of this. I asked them
    to check into my background as I was very proud of my work especially
    my ethics. I have always believed in our Government, and tried to do
    what is right by all. I believed in Mr. McCormick, he was always very
    professional and I believed in our government.
        My name was sealed by court order, and was not to be released for
    any reasons until my family and I were safe. That was our agreement.
    First and foremost was my children's safety.
        When it was about time for Mr. Hopkins to go before the Judge, Mr.
    Metcalf, U.S. Attorney General, was the prosecuting attorney for the
    IRS. Mr. McCormick and I both stressed that it was very important my
    name stay out of anything because of the death threats. Mr. Metcalf
    didn't believe anything I said. He said he had meet ``Don'' and he was
    a very pleasant and nice man. Mr. Metcalf said I don't know why you are
    causing such a nice man like Don so much trouble. You are a typical
    woman, that is only good for spreading your legs, raising kids.'' Don
    was right about you. How can you cause this poor man such pain and
    suffering.''
        Mr. Hopkins has a personality like Dr. Jekyll and Mr. Hyde. He goes
    from one extreme to the other, mainly mad. Mr. Hopkins has a persona
    about him, especially when his lively hood is being challenged.
        Mr. Hopkins has no respect for women, children, and colored people.
    He was always making very sexist comments and displays.
        Please understand I have been backed into a corner, my children are
    my life. They are everything to me and now I can't see or be with them,
    as they are afraid. I have nothing more to lose.
        PLEASE PLEASE PLEASE PLEASE can someone help us.
        We had to leave the state of Arizona to stay alive. I was thrown
    into jail. I found out that Mr. Hopkins paid some people to kill me
    while I was in jail, except I managed to stay alive and get out. My
    children have been put in jail for no reason, except to get to me. This
    was a known fact. We all have been shot at numerous times, this was
    documented but yet no help. My dog was shot while standing by me. Our
    vehicles have been run into in the parking lot, one vehicle caught fire
    due to someone messing with the gas lines. This goes on and on. Mr.
    McCormick is aware of all of this and can verify these incidents.
        Please help us. Any help would be of great appreciation.

                                   __________

                 Statement of the American Bankers Association

         The American Bankers Association (ABA) is pleased to have an
    opportunity to submit this statement for the record on Recommendations
    of the National Commission on Restructuring the Internal Revenue
    Service, S. 1096, and H.R. 2676.
         The American Bankers Association brings together all categories of
    banking institutions to best represent the interests of the rapidly
    changing industry. Its membership which includes community, regional
    and money center banks and holding companies, as well as savings
    associations, trust companies and savings banks makes ABA the largest
    banking trade association in the country.
         At the outset, we would like to commend Chairman William Roth (R-
    DE) for holding this hearing to further examine the June 25, 1997
    report of the National Commission on Restructuring the IRS. We would
    also like to commend Senator Bob Kerrey (D-NE) for his work as co-
    chairman of the Commission and for the introduction, along with Senator
    Charles Grassley (R-IA) of the ``Internal Revenue Service Restructuring
    and Reform Act of 1997,'' S. 1096. This important legislation would
    provide a number of incentives to encourage the electronic filing of
    tax and information returns. It would also authorize appropriate
    amendments to the Internal Revenue Code to ``facilitate paperless
    electronic filing.''
         We further commend Chairman Roth for his interest in strengthening
    the burden of proof provision of the instant legislation.
      the irs should be authorized to pay service fees to private sector
                         credit and debit card systems
         The ABA has worked closely with the Commission to develop
    proposals to improve compliance through the effective use of advanced
    technology. The ABA supports efforts to move towards expanded
    electronic filing of tax and information returns. Electronic filing
    would significantly improve efficiencies and promote the goals of the
    financial services industry to expand new products and services while
    also promoting IRS efficiency and other objectives.
         However, we are most concerned that the Taxpayer Relief Act of
    1997 (P.L. 105-34) [hereinafter TRA] contains a provision, which if
    left uncorrected, will impede rather than encourage electronic filing.
    Specifically, the TRA prohibits the payment of any fees by the IRS for
    use of a credit card tax payment service. By contrast, the instant
    legislation, section 205(b) of S. 1096, would provide for a separate
    budget appropriation for payment of credit card fees. H.R. 2676 does
    not contain a proposal relating to paperless payment. For the reasons
    that follow, ABA urges you to correct the current law and pass
    legislation that would allow the IRS to pay appropriate merchant fees
    in connection with credit card payment of taxes.
         Currently, governmental entities at all levels, state and local as
    well as federal, are allowing taxpayers to make payment by credit card.
    The TRA provision prohibiting the IRS from paying ordinary merchant
    fees departs from current practice and discourages acquiring credit
    card banks from offering card services to consumers wishing to expedite
    the filing and payment of federal taxes through the use of credit
    cards. It is axiomatic that anyone buying a service should pay a fair
    value for said service. The proposal in S. 1096 to permit IRS payment
    of credit card merchant fees would not provide any special treatment
    for merchant banks. Indeed, it would simply restore the level business
    playing field that the Taxpayer Relief Act inadvertently upset.
    shift of the burden of proof should include gift, estate and generation
                            skipping transfer taxes
         The burden of proof provision would provide that the IRS shall
    have the burden of proof in certain court proceedings involving income
    tax liability. The legislation is silent with respect to gift, estate
    and generation skipping transfer taxes. Thus, in the case of a dispute
    encompassing both income and transfer taxes, based upon the same
    pertinent facts, the burden may be shifted to the IRS for income tax
    litigation purposes but not for transfer tax litigation.
         We see no reason in principle for such distinction and believe it
    would create another tax trap for the unwary. Moreover, in its current
    form, this provision would add unnecessary complexity and confusion to
    tax controversy matters. Accordingly, we urge you to include gift,
    estate, and generation skipping transfer taxes in the provision
    providing for shift in the burden of proof.
                                   conclusion
         The ABA urges you to pass legislation that will allow the IRS to
    pay the appropriate merchant fees in connection with tax payments made
    by credit card. Without modification, as provided in S. 1096, the
    current law will continue to impede and discourage the electronic
    filing of tax and information returns. We further urge you to include
    gift, estate, and generation skipping transfer taxes in any burden of
    proof provision adopted by this Committee.
         We appreciate having this opportunity to present our views. We
    look forward to working with you in the further development of Internal
    Revenue Service restructuring.

                                   __________

      Statement of the American Institute of Certified Public Accountants

                           innocent spouse tax rules

    Introduction
        The American Institute of CPAs (AICPA) is the national professional
    organization of CPAs, with more than 320,000 members. Many of our
    members are tax practitioners who, collectively, do tax planning and
    prepare income tax returns for millions of Americans.
    Background
        Currently, when a married couple files a joint federal income tax
    return, each spouse is individually responsible for paying the entire
    amount of tax associated with that return. Because of this joint and
    several liability standard, one spouse can be held liable for tax
    deficiencies assessed after a joint return was filed that were solely
    attributable to actions of the other spouse. The current ``innocent
    spouse'' relief provisions are not effective, are too restrictive to
    help very many aggrieved taxpayers, and are in need of reform. The
    AICPA urges that the current innocent spouse rules be modified and
    expanded.
        In addition, due to the high divorce rate in this country, the
    current inequitable divorce taxation rules affect a large percentage of
    taxpayers, many of whom do not have or cannot afford sophisticated tax
    advice available to them. For obvious reasons, these taxpayers are not
    communicating well with each other, nor functioning well as one unit.
    Tax filing is further complicated for separated taxpayers, who still
    qualify for filing joint tax returns. Many times separated taxpayers
    file joint tax returns because the total tax liability on the joint
    return is less than the total tax liability on two married filing
    separately tax returns, without considering the joint and several
    liability standard. In addition, the innocent spouse rules are
    ineffective for many aggrieved spouses. The government's involvement in
    divorce and separation matters should be as unintrusive as possible.
    Section 321 of H.R. 2676
        We note that Section 321 of H.R. 2676 generally makes innocent
    spouse relief easier to obtain. It eliminates the understatement
    thresholds, requires only that the understatement be attributable to an
    erroneous (not just a grossly erroneous) item of the other spouse, and
    allows relief on an apportioned basis. The provision also grants the
    Tax Court both jurisdiction to review any denial of relief (or failure
    to rule) by the IRS and authority to order refunds if it determines the
    spouse qualifies for relief and an overpayment exists as a result of
    the spouse so qualifying. The provision requires the development of a
    form and instructions for use by taxpayers in applying for innocent
    spouse relief. The provision is to be effective for understatements
    with respect to taxable years beginning after the date of enactment.
        The AICPA supports this provision in H.R. 2676, but urges that the
    relief being granted be made retroactive to apply to returns for the
    last three taxable years provided the specific issue has not already
    been addressed by a final court determination rendered with respect to
    the taxpayer.
    Examinations and Collections
        Both spouses should be notified and involved in examinations of
    joint tax returns. This is one area that needs further study as there
    may be notification issues for both divorcing taxpayers and the IRS.
    Congress should consider the appropriate steps that should be taken in
    contacting both spouses early in the examination process of a joint
    return. We support procedures that require, at the initiation of an
    examination, the absent spouse to acknowledge by signature whether the
    other spouse may, or may not, represent the absent spouse. Since the
    IRS probably will not know about a separation or divorce, the spouses
    may need to notify the IRS of their separated status or divorce and how
    they can be contacted, similar to notifying the IRS of an address
    change by filing a Form 8822, Change of Address. Perhaps Form 8822
    could be modified for such purposes. Additionally, legislation may be
    required to ensure that disclosure laws are changed to provide adequate
    information to the divorced spouse in community property states.
        Currently, as described in the AICPA testimony before the House
    Committee of Ways and Means Subcommittee on Oversight at the March 24,
    1995 hearing on taxpayer bill of rights legislation, often a divorced
    spouse is not aware that a liability has been created in an examination
    process where the other spouse was the party examined, as in a
    situation where one individual has a Schedule C, Profit or Loss from
    Business (Sole Proprietor). Yet, after the assessment is made, the IRS
    will attempt to collect the tax from either party. If the taxpayers are
    divorced or separated and now live in different regions, or even
    different districts, collection efforts often only occur against the
    spouse living in the area of the IRS office assigned the collection
    case, even though the distant spouse may be the source of the
    liability. The root of the problem is in the examination procedures
    that do not (but should) require both spouses to be involved in an
    audit.
        We are pleased to see (in Announcement 96-5, item 7, 1/5/96) the
    IRS administrative adoption of a rule allowing the IRS to notify one
    spouse of collection activity against the other spouse with regard to a
    joint return liability, and amending the Internal Revenue Manual to
    provide uniform procedures for such notifications. The disclosure of
    collection activities to divorced spouses is an improvement to the
    current situation.
        In addition, due to the joint and several liability that exists
    today, many divorced individuals avoid contacting the IRS in hopes that
    the money will be collected from the other spouse, or in fear that they
    will have to pay the entire balance once they come forward. This new
    administrative change will help--allocating the liability (as discussed
    below) would be better.
    Innocent Spouse Rules
        The present innocent spouse rules are statutorily too narrow--many
    aggrieved spouses do not qualify under the current innocent spouse
    rules, but should be granted relief. Very few aggrieved spouses qualify
    as an innocent spouse due to knowledge requirements that imply that
    virtually all middle-income or higher income taxpayers ``knew or should
    have known'' all financial matters. This knowledge standard typically
    ignores the ``division of duties'' concept still prevalent in and
    maintained by countless family units.
        The innocent spouse rules need a complete overhaul. At a minimum,
    if the current joint and several liability system is retained, the
    innocent spouse rules need to be modified. Furthermore, an allocated
    liability standard (as discussed below)--where known tax liabilities
    are fixed at the time of filing and unknown liabilities are fixed at
    divorce--would reduce (or eliminate) the need for innocent spouse
    provisions.
        Alternatively, if the allocated liability standard is rejected,
    further consideration should be given to eliminating joint tax returns
    and developing a rational, individual separate tax return filing system
    for all taxpayers.
    Allocated Liability Standard
        We suggest an allocated liability standard as a replacement to the
    joint and several liability standard. A system that allows the known
    (reported) tax liability to be allocated between the spouses at the
    time of filing with each spouse's percentage of liability to be clearly
    stated on the face of the return (above the signature line or part of
    the tax liability line on the Form 1040), and any unknown tax liability
    (e.g., liabilities other than those already reported on returns) to be
    allocated between the spouses at the time of divorce (similar to every
    other liability of a married couple in the divorce process) would
    improve the fairness and equity of the system, as well as improve the
    speed and equity of the collection process. Defaults could be built
    into the system to allocate the liability differently if there has been
    undue manipulation of the rules, step transactions or fraud (including
    disposition or allocation of marital assets). Further analysis is
    needed on abusive situations and possible procedures, as well as
    possible transition rules for treating tax liabilities that arise from
    a year prior to the effective date of an allocated liability standard.
        Retention of the joint tax return--allocation of the liability.
    Under this approach to the allocation of a known tax liability, the
    spouses would determine their respective allocation percentages of the
    total liability reflected on the joint return. The determination would
    be at the taxpayers' discretion. If the taxpayers did not want to be
    burdened with determining a specific allocation based on a detailed
    income/deduction analysis, they could agree on any general allocation
    percentage, or not determine an allocation at all. If no allocation is
    chosen, the default allocation would be 50/50. It would be in the
    spouses' best interest to agree to the liability allocation at the time
    of filing and clearly state their allocation percentages on the face of
    the return. Furthermore, withholding, estimated, and other tax payments
    could be allocated in a similar way. The IRS would have the authority
    to reallocate in situations where there is undue manipulation of the
    rules, step transactions, or fraud. This approach is referred to as the
    ``allocated liability standard'' throughout the rest of our comments.
        Unknown liabilities could be allocated primarily by the divorce
    decree and separate maintenance agreement. If the divorce decree or
    separate maintenance agreement is silent on this matter, the percentage
    allocation of the unknown liability would be the same as the percentage
    allocation of the known liability on the return filed for the tax year
    in question. Absent any indication in the divorce decree/separate
    maintenance agreement or on the tax return, the allocation would be 50/
    50. It would be in the spouses' best interest to agree to the unknown
    liability allocation in the divorce decree/separate maintenance
    agreement. Any situation involving undue manipulation of the rules,
    step transactions, or fraud would invalidate these allocations and the
    IRS would have the authority to reallocate.
        In summary, the allocated liability standard suggested above would
    set the allocation of the known liability at the time of filing and the
    unknown liability at the time of divorce, with adequate backup
    procedures and safeguards for abusive situations. These methods would
    most likely eliminate, or substantially reduce, the problems associated
    with the unfair results and ineffectiveness of the current innocent
    spouse rules, and would ultimately provide simpler and more equitable
    rules concerning the tax aspects of divorce and separation.
        Separate tax returns. An alternative to the allocated liability on
    a joint return would be to allow individual tax liability to be
    calculated on a separate return for each spouse. This approach could
    eliminate or mitigate the marriage penalty (and filing status concerns)
    assuming that the rate/bracket structure is modified so that there is
    one filing status and, therefore, only one set of tax brackets/rates
    that apply to all taxpayers. In addition, this approach would allow the
    IRS to deal with only one individual at a time and would eliminate the
    frequent confusion involving social security numbers of taxpayers who
    marry and divorce. While a separate return approach would result in a
    more precise allocation of the liability, we recognize that in adopting
    such a system there would be inherent administrative complications and
    burdens for both the IRS (increased number of returns to be processed
    and examined) and practitioners/taxpayers (additional inquiries and
    schedules). Therefore, further study regarding separate returns is
    needed.
        As part of any study considering changing the system of liability
    allocation, we suggest that, in evaluating whether joint and several
    liability should be retained, Congress should consider whether joint
    and several liability may, in some cases, actually be a hindrance to
    collection since some spouses may be inclined to delay the collection
    process in the hope that the other spouse will ultimately pay the tax.
    SPECIFIC COMMENTS (based on the questions in IRS Notice 96-19)
    Administrative Burden
        An allocated liability standard would be an equitable improvement
    over the current joint and several liability standard, without
    increasing the administrative burden of either the IRS or taxpayers. We
    suggest an allocated liability standard where the tax liability would
    be allocated between the spouses based on their agreement rather than a
    mathematically calculated proportionate liability standard. We believe
    an allocated liability standard would be better than a proportionate
    liability standard because there would be no analyses required to
    determine the breakdown (unless the taxpayers chose to do such
    analyses).
        We anticipate, that for the vast majority of married taxpayers, the
    allocated liability standard would not increase their compliance burden
    because they likely will either not respond to the optional allocation
    question on the tax return or simply respond with a 50/50 allocation
    since they probably view themselves as an equal partnership of a single
    economic unit. For the remainder of married taxpayers, the
    determination of the allocation would be based on an arms length
    negotiation or analysis undertaken by the taxpayers, not by the IRS.
    The ``complexity'' and ``administrative burden,'' if any, would be
    voluntary. Therefore, the responses to questions 1-6 below focus on an
    allocated liability standard rather than a proportionate liability
    standard. We also note that our alternate proposal of separate return
    filings would resolve the issues of either proportionate or joint and
    several liability.
    Spouses Not Cooperating
        As stated in the allocated liability standard section above, if the
    liability is known and the spouses are not cooperating with each other,
    the allocation of liability would be determined on the tax return. If
    no allocation is on the return, a default allocation of 50/50 would be
    used. The IRS could reallocate in abusive situations.
        If the liability is unknown and the spouses are not cooperating
    with each other, the allocation would be based on what is stipulated in
    the divorce decree or separate maintenance agreement. If the divorce
    decree/separate maintenance agreement is silent on this matter, the
    default would be the known liability allocation stated on the return
    for the year in question. If the allocation is not stated on the return
    for that year, then a 50/50 allocation would be used. The IRS could
    reallocate in abusive situations.
    No Undue Advantage of the Tax System
        An allocated liability standard would not allow taxpayers to take
    undue advantage of the tax system because spouses typically negotiate
    their divorce decree/separate maintenance agreement (and would
    negotiate their tax return liability allocation) at arms length.
    However, the IRS would retain the right to reallocate the liability if
    there is undue manipulation of the rules, step transactions, or fraud.
    Further analysis is needed on possible reallocation procedures. We note
    that there may be an increase in collections due to fairer, simpler
    rules.
        Under an allocated liability standard, the Service would not need
    to trace assets and allocate deductions and credits between spouses to
    determine the correct liability; rather the allocation would be
    determined on the return for known liabilities or in the decree/
    separate maintenance agreement for unknown liabilities. Since the IRS
    would know from the allocation which spouse to collect the specific
    funds from, the need to trace assets would be removed, which should
    lead to a more efficient collection process. Assets would only need to
    be traced in the (hopefully few) cases involving abuse of the system.
    No Burdensome Filing Requirements
        An allocated liability standard would not create burdensome filing
    requirements because additional schedules and columns for reporting the
    items attributable to each spouse would not be necessary. The taxpayer
    would not be required to file any additional schedules showing how the
    allocation percentages were derived. However, at the option of the
    taxpayer, detailed schedules could be computed and retained for
    reference.
        Regarding the allocation of unknown liabilities, perhaps a filing
    should be required to report the percentage allocation from the
    divorce, similar to Form 8379, Injured Spouse Claim and Allocation.
    These forms would qualify for electronic filing. Our comments above
    regarding notification of divorce status and addresses of both spouses
    for examination purposes may also be relevant here and may need further
    study.
    Changes Concerning Communications, Examinations, Assessments,
            Collections, Payments and Refunds of tax, Penalties and
            Interest
        If an allocated liability standard is adopted, minor changes would
    be needed concerning communications with taxpayers, examinations,
    assessments, collections, payments and refunds of tax, penalties and
    interest, in order to ensure that the proper spouse was contacted for
    the proper allocated amount. The IRS would communicate with the
    appropriate spouse(s) pertaining to the appropriate allocated amount(s)
    due. This extra burden would result in the proper person being
    contacted about the proper amount.
        We note that the IRS changed the communication rules recently to
    ensure both spouses are notified of all collection activities. The IRS
    can already contact both spouses, so the change would be that the
    communication would now include an allocated amount for each spouse.
    Regardless of the liability standard, both spouses should be notified
    of all matters concerning communications, examinations, assessments,
    collections, payments and refunds, interest, and penalties.
        Absent, or prior to, the adoption of an allocated liability
    standard, the IRS should pursue enhanced administrative procedures in
    the area of aggrieved spouses. The IRS should be directed to develop
    internal procedures relating to collection that would call for
    ``patience and restraint'' when IRS agents attempt to collect from the
    ``appropriate party'' so as to avoid, whenever possible, unfairly
    burdening the ``wrong'' spouse. The IRS should be told to make every
    effort to first collect from the spouse responsible for the liability,
    as opposed to first attempting to collect from the spouse easiest to
    contact and with the most liquid and accessible assets. This may
    require patience on the part of the IRS, but may resolve many of the
    aggrieved spouse situations and would result in the proper person
    paying the liability.
    Effect on State, Local, and Other Tax Systems
        Adoption of such an allocated liability standard would not
    significantly affect state, local, and other tax systems. Presently, 44
    states (including the District of Columbia) impose individual income
    taxes, and eight states presently calculate taxes on a separate basis.
    Many states do not rely on the federal tax calculations, and many
    states impose their own tax system different from the federal system.
        Specifically, if separate federal returns are filed, the federal
    income and deduction amounts could be easily combined for combined
    state return filings, and duplicated for the separate state return
    filings. On the other hand, if joint federal returns are filed, the
    income and deduction amounts could be duplicated for joint state return
    filings, and for the separate state return filings, the taxpayer could
    (with the states' approval) either use the allocated amounts from the
    federal return or the amounts derived under the current system.
        With respect to state tax collection matters, it would be up to
    each state to consider an allocated liability standard or continue with
    their present system.
    Divorce Decree, Separation Agreement, or Other Property Settlement
        Basing the respective spouses' tax obligations and liabilities on
    the terms of a divorce decree, separation agreement, or other property
    settlement would only apply to unknown liabilities. In such a case, the
    allocation would be fair and simple. All other liabilities of a divorce
    are allocated according to the divorce decree, and the strength of the
    state laws would add to the collection of federal tax.
        This would not require the IRS to be a party to divorce proceeding.
    Rather, the interests of the government could be represented in such
    cases by the arms length negotiations that occur under state law and
    the default provisions. In addition, the IRS would retain the right to
    reallocate the liability if there is undue manipulation of the rules,
    step transactions, or fraud. We note that there already is precedent
    concerning the Service relying on divorce decrees in the areas of
    alimony and exemptions.
        As stated above, if the divorce decree or separation agreement does
    not provide for allocation of the unknown tax liability, the tax
    allocation (for known liabilities) on the tax return in question would
    be used, and if no allocation was determined, a 50/50 allocation
    default would be used, which would be equitable in most divorce cases.
        Those spouses less able to influence the terms of a divorce decree
    or separation agreement would not be adversely affected by this system
    because any situations involving manipulations or under-reporting of
    tax liability by one spouse would be categorized as an abusive
    situation whereby the IRS would be allowed to reallocate liability
    based on the facts and circumstances. Also, where inadequate legal
    representation of both parties results in the divorce decree/separation
    agreement being silent on this matter, the defaults (i.e., back to the
    return and then to 50/50 allocation), should protect the spouses and
    would be better than under the current rules.
    Reform the innocent spouse provisions
        As we stated above in our comments on innocent spouse rules, there
    are many situations in which the present innocent spouse provisions do
    not function in an appropriate manner. Since the rules are based on
    adjusted gross income levels and two different standards (i.e., the
    income and knowledge standards), they are not fair and many truly
    aggrieved spouses are not allowed relief. The current presumption that
    taxpayers ``should have known'' effectively eliminates the vast
    majority of taxpayers from successfully qualifying as an innocent
    spouse and receiving the appropriate relief. The access to innocent
    spouse relief should be expanded and simplified. In addition, the facts
    and circumstances should be considered when determining innocent
    spousal relief.
        Specifically, we think I.R.C. section 6013(e)(4) is overly complex
    and sets differing standards for innocent spouses based on the level of
    adjusted gross income, thus punishing innocent spouses with adjusted
    gross income (AGI) of more than $20,000. This section holds spouses
    with AGI in excess of $20,000 to a higher standard than those with AGI
    of $20,000 or less. For example, the tax for a taxpayer with AGI of
    $20,100 in the preadjustment year would have to be understated by more
    than $5,025 (i.e., more than 25 percent of AGI) before the taxpayer
    could qualify for innocent spouse relief, while a taxpayer with AGI of
    $20,000 would only need an understatement of $2,001 (i.e., more than 10
    percent of AGI) to qualify for innocent spouse relief.
        We note that section 6013(e)(4) can be easily simplified by
    eliminating subparagraphs B and D, and revising subparagraph A as
    stated on page 6 in our March 1995 legislative proposal. Section
    6013(e)(4)(A) should be changed to remove the different percentage
    calculations based on different levels of adjusted gross income and
    apply the 10 percent of AGI threshold to all aggrieved spouses
    regardless of their level of AGI. This change would eliminate the need
    for section 6013(e)(4)(B).
        Further, the preadjustment income of the person seeking innocent
    spouse relief should not include anyone else's income, such as a new
    spouse. This is another discriminatory provision. A person applying for
    innocent spouse status should not be treated differently whether
    remarried or single. Section 6013(e)(4)(D), which includes the income
    of another spouse in computing the income of the ``claiming spouse''
    for purposes of determining the AGI threshold, should be eliminated.
        Any situations involving manipulations or under-reporting of tax
    liability by one spouse should allow relief to the other aggrieved
    spouse, and should allow the IRS to step in and reallocate liability
    based on the facts and circumstances. We note that an allocated
    liability or separate return standard would significantly reduce the
    need for these rules.
        Expanded innocent spouse relief might be abused in only a few
    limited situations, and in those cases, the IRS should have the right
    to not apply the innocent spouse relief rules. Those cases might
    involve undue manipulation of the rules, step transactions, or fraud.
    The relief granted to those truly in need, but excluded by the present
    innocent spouse rules, should outweigh the limited abusive situations.
        There are several changes to the Service's administrative practices
    that should be made with respect to the innocent spouse provisions.
        An administrative change that could be implemented now to help many
    divorcing and separated spouses (not just innocent spouses) is to amend
    Form 1040-ES, Estimated Tax for Individuals. The form should provide
    for two amount fields so that the taxpayers can allocate the payment to
    each spouse's account when they are filing joint income tax returns.
    This would be very useful for those years during which a divorce or
    separation occurs. The AICPA discussed this suggested change with the
    IRS Tax Forms Development Committee on June 3, 1996, and included this
    suggestion in the AICPA 1996 Recommendations for the Revision of Tax
    Forms and Publications, submitted to the IRS on June 25, 1996.
        In addition, as discussed above, regardless of liability standard,
    the IRS should pursue enhanced administrative procedures in this area
    of aggrieved spouses.
        Lastly, we have developed regulatory domestic relations tax
    proposals, including a proposal to modify Treas. Reg. Sec. 1.6013-5(b)
    regarding the criteria applying to innocent spouse relief provisions.

                                   __________

                    Statement of Timothy Anderson, Tempe, AZ

        Greetings. Thank you for this opportunity to contribute my
    offerings to this forum, and thank you for holding these hearings in
    the interest which they address, that of enhancing ``taxpayer due
    process.''
        It has long been recognized and accepted that ``the power to tax is
    the power to destroy.'' Tragically for America, The IRS has used that
    power aggressively, liberally, tyrannically, and literally in the
    actual and virtual destruction of many American's, all without the
    protective blessings of Due Process. Thus, it is most encouraging to
    see this Committee finally representing the interests of the people, by
    Congressional concern with Due Process for the Citizen in the Citizen's
    dealings with the Internal Revenue Service.
        The ``Notice of Levy'' is by far the IRS most abusive tool afforded
    to them by Congress under the authority of Section 6331 of the Internal
    Revenue Code. Of particular interest to myself, and I am sure millions
    of other tax payers (not taxpayers) is the issue of the IRS using the
    collection practice of issuing ``Notice of Levys'' upon the banks,
    employers, and other holders of assets, belonging to individuals from
    whom the IRS seeks to collect an alleged debt.
        As aired in the ``Oversight Hearings on IRS Operations'' of
    September 1997, this levy process, absent due process and the order of
    any court of competent jurisdiction, is used against millions of
    individual taxpayers, and tax payers, each year. The IRS' levy process
    and procedure is the basis for the total financial ruination of many
    thousands of Citizens. Because the IRS' levying process is executed
    outside of the authority and oversight of any Judicial Branch's court
    order, the victim is rendered voiceless and defenseless. The use of
    such unrestrained power by any government agency, to destroy an
    individual's and his family's lives is unjust, immoral, and outside of
    the intent and reason for the establishment of the American Republic.
        The financial holders, upon whom the ``Notice of Levys'' are
    issued, are intimidated by citation of law pointing out statues, on the
    reverse side of the Notice, portending penalties against such holders
    for non compliance with the demands of the Notices. While the holder is
    induced to commit the crime of conversion on behalf of the IRS, few if
    any individuals, whose property is turned over to the IRS by the
    holder, are able to fight back because the levy process is designed to,
    and does, take away all financial means of doing so. Attorneys and CPAs
    will not even talk to one who is so set upon by the IRS, and thus, one
    who cannot pay attorney's fees for representation.
        The IRS' levy process, if not an act of overt extortion, certainly
    skirts the edges thereof. However, one may not lay the full blame upon
    the IRS.
        Given such unrestrained power, most entities eventually will
    exercise that power to it's fullest limits. That is the reason I am
    pleased to see that this Committee has finally opened this Nation's
    eyes to the need for (in the words of Senator Roth) ``reform [that]
    must go beyond a few minor improvements at strengthening taxpayer
    protections, to literally address the balance of power between the
    taxpayer and the agency.'' In our form of government-by-the-people, the
    scales measuring that ``balance of power'' must always weigh most
    heavily on the sides of the people, lest the government be defined as
    the people's master, and not the reverse.
        Therefore, it is fitting that these hearings address that balance,
    which is manifest in the peoples access to Judicially administered Due
    Process.
        It is further fitting, and overdue, that Congress reign in the
    awesome powers it has given to the IRS OVER the people whom Congress is
    sworn to protect and to serve, and whom the IRS has and does
    consistently abuse by it's well documented, and in millions of cases,
    unremedied exercises of such extensive power.
        It is not my intent herein to merely point out what we already
    know. Rather, the purpose of this statement is to offer my
    recommendations from the view point of one of the IRS' abused tax
    payers, myself. The IRS' unlawful and abusive destruction of my
    family's and my own lives, by it's powers to bypass Judicial DUE
    PROCESS in exercising it's Section 6331 levy powers, has caused me the
    necessity of doing something too few individuals ever have the time and
    opportunities do: In defense of my self, I have had to research, study,
    and understand, the laws surrounding my rights, and the Internal
    Revenue Code (IRC) through which Congress has granted the IRS the
    abusive powers to destroy people at will without the benefit of an
    order of the court.
        Since my 30 year career has been destroyed and my job has been
    since out-sourced, I have had the time to make use of the Law Library
    to study. As a result of that study, I now have several recommendations
    for this Committee's consideration towards the goal of (again in the
    words of Senator Roth) ``root[ing] out abuses . . . .''
        Before the presentation of those recommendations, it is imperative
    that I first point out some complicitory behavior on the parts of all 3
    Branches of Government, where such behavior supports a course which is
    contrary to the stated intent of ``IRS Reform.'' I am speaking of the
    liberal use of the word ``taxpayer'' in reference to Americans, and use
    of the intentionally negative and provocative label of ``tax
    protestor,'' as it is applied to Citizens prior to any proper
    adjudication via the guarantees of lawful DUE PROCESS.
    Taxpayer
        It is at best a deception to refer to Americans as ``taxpayers.''
    This term is created in the IRC, and as both Congress and the IRS know,
    ``taxpayer,'' as so used, is a term which identifies no specifically
    designated person in the Internal Revenue Code. One becomes this
    ``taxpayer'' not by virtue of his/her American Citizenship, but rather
    by the act of voluntarily complying. To refer to the American public at
    large as ``taxpayers'' is in itself abusive. Judges, the President,
    Treasury Secretaries, IRS Commissioners, and even several Senators who
    participated in the September 1997 IRS Oversight Hearings, frequently
    use and used the phrase ``voluntary compliance'' in referring to the
    income tax system. It is also so designated in the Code of Federal
    Regulation. By publicly and liberally referring to the American public
    as ``taxpayers,'' the fact of the ``voluntariness'' of the income tax
    system is deceptively given the aura of mandated participation for all
    of the public who is being addressed. This is dishonest and must be
    stopped. I shall again address the issue of the term ``taxpayer'' in my
    recommendations.
    Tax protestor
        Of all of the abusive terminology in the IRS vocabulary, usage of
    this one is the most subversive, and probably the single most powerful,
    label used by Congress and the IRS to repress the rights of individuals
    who challenge the IRS' rightful and lawful entitlement to such
    individuals earnings and personal properties.
        ``Tax Protestor'' (also Protester) is yet another linguistic
    creation of the IRS. When used by the IRS to designate an individual,
    there are certain procedures which are undertaken in the handling of
    the tax related affairs of such individuals by the IRS, which include
    but are not limited to, audits, criminal investigation, and levies.
        Yet, there exist no statutory and regulatory provisions for the
    legal, nor lawful, definition of ``tax protestor.'' Also, there are not
    any such laws and rules, which designate and define the application of
    procedures for the handling of the tax related affairs of ``tax
    protestors'' by the IRS. In plain English the designation of
    individuals as ``tax protestors,'' and the subsequent ``variant''
    treatment of such individuals by the IRS, as a result of that
    designation, is unauthorized by law. Where injuries and or damages
    occur, as a result of such designation and treatment, a crime has been
    committed against that individual.
        What is even more a disservice to the American public than the
    abusive purpose and use of the ``tax protestor'' label by the IRS, whom
    we have come to expect to stand outside of both law and morality, is
    the use of the term by Congress and other government officials.
        On September 3rd, 1997, Senator Roth said, `` There will be no
    condoning of tax protesters, 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 . . . .''
        It must be remembered that the IRS in it's demands, whether
    directly or through the law, for payment of an alleged tax obligation
    (debt), is still a creditor. The person upon which the IRS' claim and
    demand is made has the right to deny such obligation and to counter-
    demand that the IRS demonstrate it's rightful and lawful, as well as
    legal, entitlement to the payment of tax debts that the IRS creditor
    demands. No American should be pre-judged and excluded from the forum,
    as Senator Roth did, based upon the individual's insistence that such
    entitlement to such demanded obligations be proven as lawfully
    applicable to that individual personally.
        Due to being designated a ``tax protestor,'' and absent his day in
    court, the tax payer is summarily branded and then targeted and
    financially neutered, without justification or adjudication, simply
    because he disagrees with the IRS. One CANNOT lawfully or justly be
    designated a tax protester, with all it's attendant consequences, until
    after and unless he has had the opportunity to present his case in a
    true judicial court. I don't mean the Tax Court, which is yet another
    legislative gift of Congress to the IRS' power arsenal, and is not a
    judicial body of the Judicial Branch, governed by the Federal Rules of
    Civil Procedure which insures and directs the course of due process in
    civil matters.
        Once this label is applied, even those in Congress adopt a
    vindictive attitude towards the unfortunate individual, based solely
    upon the designation of the IRS's arbitrary and contrived agenda. No
    American who merely insists that his Constitutional rights be
    respected, should be stigmatized and ostracized by the application of
    such a label and all of the negative consequences and scorn that go
    with it, without FIRST securing that individual his RIGHTFUL day in
    court.
        The lack of due process in this regard amounts to punitive measures
    and damning opinions being taken against the individual without the
    benefit of any lawful hearing. Such is the intent of labeling, and it's
    use by Congress is dishonest and appauling.
        All government officials are sworn to support the Constitution, of
    which the guarantee of ``due process'' is a vital part. For any elected
    representative to engage in the use of such labeling tactics to exclude
    the concerns of any segment of the American public, based upon the
    unsubstantiated label of ``tax protestor,'' goes against their duty to
    the public that they are elected to represent and serve.
        It is my sincere hope and request that Congress and all other
    government officials cease the practice of assisting the IRS in it's
    abusive behavior by giving aid and comfort through the use of these two
    deceptive and misleading terms, which are outside of the proper
    sanction of a lawful application thereof.
    Recommendations
        There are many federal court cases, which can be cited, in which
    conflicting opinions from circuit to circuit, court to court, and Judge
    to Judge can be demonstrated. Such conflicts exist, due in large part,
    to too many re-definitions of commonly used terms employed within the
    IRC. Between Congress, the IRS, Courts, and the public, there exist a
    gulf of misunderstanding of the true meanings of the tax laws,
    resulting in the needs for interpretation of both the meaning of the
    statutes, and of the intent of Congress. These needs for interpretation
    in turn spawn an unjust application of law, with such unjust
    application then being based upon the luck of the draw as to which
    court is doing the interpretation.
        This is not how our systems of law and justice are designed to be
    administered, nor can true justice even be administered through the
    law, where that law is written unclearly. And where such conflicts do
    occur, by logical reasoning, in one case or another, due process itself
    is not being administered properly and/or justly.
        The following are my comments and recommendations towards the
    purposes of serving the right of Due Process by adjusting ``the balance
    of power between the taxpayer,'' the individual American tax payer, and
    the IRS:
              1. Make the IRC's language and terminology understandable and
            accessible to all individuals of the non-law-trained, general,
            American public who are of average and reasonable intelligence.
              Do so by removing and/or replacing, through-out the IRC, the
            deceptive and unclear language, where by words of common usage,
            as such are used by the general public, are redefined in the
            IRC to have meanings that are totally different than those
            meanings which are commonly understood to be by the non-law-
            trained public.
              2. Clarify WHO the ``taxpayer'' is in the Internal Revenue
            Code.
              Eliminate the term ``taxpayer'' and replace it with specific,
            unambiguous, designations, spelled out plainly and clearly in
            terms such as ``United States citizens, American citizens,
            corporations . . . ,'' ETC. Such designation should detail
            ``Who'' the tax payer is, and not what duties or obligations
            the tax payer has, which evasively does not specify ``Who.''
              Define specifically what sub-chapters of the IRC pertain to
            what specific persons, as such person will be defined in place
            of the current term ``taxpayer,'' for instance; 26 USC Section
            6331 Levy and Distraint.
              3. Eliminate the real and potential abuse of individuals, by
            the application of labels, which are legally undesignated and
            unsubstantiated, such as ``tax protestor,'' by requiring the
            IRS to sue the disputing tax payer, in a civil Judicial Branch
            court action, just as any other creditor must do when their
            claims are disputed. This will properly dispose of ALL
            illegitimate tax protests, and establish non conflicting case
            precedents, which will in turn, smooth the operations of the
            courts, and reduce costs to the IRS, and the disputer, by
            permitting the court to quickly (and more importantly) justly,
            dispose of any frivolous cases. This will also preclude any
            need for a legislative ``Tax Court'' and it's associated
            overheads and lack of civil procedural rules and protections.
              4. Remove the ``criminal'' language from the IRC. It's
            neither criminal to owe a debt, nor is it criminal to challenge
            an alleged debt's validity. If there are legitimate criminal
            offenses possible in the areas of income taxes, those offenses
            are more properly defined and lodged, with all other such
            statutes, in Title 18 of the United States Code.
              The IRS is not an official United States Government's law
            enforcement agency, and therefore, the IRS' administration of
            law enforcement activities as applied to Americans is both,
            unlawful and unjust. The proper venue and jurisdiction for such
            lawful law enforcement activity is the United States Department
            of Justice, NOT the IRS.
              Remove the ``law enforcement'' language from the IRC, as well
            as the functions and powers which such language authorizes.
            With criminal code related to the internal revenue properly
            lodged in Title 18, consistently, the law enforcement functions
            regarding the internal revenue, must also be vested in the
            Department of Justice, who administers Title 18.
              5. Finally, preface the IRC with the inclusion of language
            overtly revealing the true Constitutionally voluntary nature of
            participation in the federal income tax system. Those who wish
            to contribute may and will. Those who do not wish to volunteer
            and contribute, which is their right, must not be compelled
            either by coercion, extortion, nor deceit and non-disclosure,
            to participate against their will and/or wishes.
    End of recommendations
        Please accept this statement in the spirit in which it is offered,
    that of the betterment of the conditions of all Americans, and towards
    the just applications of the systems of public taxation.

                                   __________

               Statement of the Association of American Railroads

        Mr. Chairman and Members of the Committee.
        The Association of American Railroads (AAR) \1\ appreciates the
    opportunity to present these comments for the record of the Committee's
    hearing on restructuring of the Internal Revenue Service (IRS).
    ---------------------------------------------------------------------------
        \1\ AAR is a trade association whose members account for 75% of
    total rail line-haul mileage, generate 93% of total rail freight
    revenues, and employ 91% of the freight railway workforce.
    ---------------------------------------------------------------------------
        In recent months, much of the discussion about IRS reform has
    focused on the individual taxpayer and the abuses they have suffered.
    However, as a trade association representing Coordinated Exam Program
    (CEP) taxpayers, we would like to comment with respect to the
    administration of the tax collection system and how it does not work.
    In large part, we believe many of our issues with the IRS are directly
    traceable to its size, bureaucratic nature, and misguided management
    practices. Four examples follow:
              1. Whenever a high-ranking IRS official speaks to a group of
            tax professionals, the message focuses on how fair and
            impartial the IRS tries to be as taxpayers navigate through the
            process of complying with the tax laws and procedures. These
            same officials also proclaim the Service's willingness to be
            flexible and innovative in resolving conflicts and express a
            desire to apply the APA process to other disputes with large
            case taxpayers. However, our experience tells us that this
            message is not getting through to the audit or field level
            agents. Simply put, too many agents assigned to our members'
            cases make it difficult if not impossible, to comply with the
            tax laws and procedures. The fairness and impartiality message
            must be communicated to the agents and reinforced with
            policies, procedures, and reward mechanisms that are internally
            consistent and reinforce the desired behavior. In fact, the
            principles found in the IRS' own Mission Statement (a copy of
            which is attached), if understood and followed regularly and
            systematically at all levels in the IRS, would go a long way
            towards substantially improving the IRS' administration of the
            Internal Revenue Code.
              2. The IRS has created an Industry Specialization Program
            (ISP), which focuses on specific tax issues within various
            industries such as banking, insurance, health care, and
            transportation. ISP team members from the Examination Division,
            Appeals Division and District Counsel work together on the
            development, coordination and resolution of tax issues within
            these industries. If properly administered, the ISP program can
            facilitate the resolution of troublesome industry-wide tax
            issues on a consistent and equitable basis without costly and
            time-consuming litigation.
              One ISP industry settlement initiative has been successfully
            pursued in the railroad industry through hard work and mutual
            cooperation between the ISP team and industry representatives.
            Unfortunately, the other two attempts to use the ISP process in
            the railroad industry were not successful. In both of these
            situations, the IRS did not clearly define the authority of ISP
            teams to negotiate and implement industry-wide settlement
            agreements. Such authority must be clearly defined for the
            program to achieve its objectives.
              For example, on one major ISP issue--Track Repair--our
            members have been unable to determine who the ultimate decision
            maker is, i.e., whether it is the support Case Manager, the key
            district Case Manager, the Exam ISP, the Appeals ISP, the
            Accounting Methods ISP, one of any number of IRS counsel who
            are involved, the Appeals Office, the National Office, etc.
            This illustrates that establishment of clear lines of authority
            and responsibility are necessary for the ISP program to work.
              3. A third example involves the IRS' tax treatment of
            expenditures associated with the railroad industry's compliance
            with federal environmental, safety, and health regulations. The
            cost of compliance is increased by the IRS' insistence that
            many of the expenditures incurred to implement these
            regulations be capitalized rather than allowed as ordinary and
            necessary business expenses. The IRS' policy is in direct
            conflict with the social and public policy objectives which
            these environmental, safety, and health regulations are
            intended to achieve, in that it discourages attainment of these
            objectives.
              For example, the IRS continues to require that taxpayers
            capitalize the costs of asbestos removal and certain soil
            remediation costs. In the former case, the costs are recovered
            over the life of the structure while in the latter the taxpayer
            cannot recover the costs until the land is disposed of or sold.
            Whereas Congress and the IRS have historically passed laws and
            issued regulations to prevent taxpayers from claiming
            deductions for expenditures that violate public policy, the IRS
            should be directed to administer the law and issue regulations
            that encourage--or at a minimum do not penalize--taxpayers'
            investment in activities (such as safety and environmental
            remediation programs) that clearly promote the public's
            interests.
              4. The recent IRS restructuring hearings made it clear that
            job performance at the IRS and, as a result, compensation, is
            in part measured by statistics, e.g., how much additional
            liability is identified by the agent at the examination level.
              That specific performance standard often leads to tax
            adjustments that have little or no basis for being included in
            a Revenue Agent's Report (RAR). Invariably, the taxpayer will
            devote significant time at the exam level to reverse the
            adjustment, generally with little or no success, as there is no
            incentive for the agent to reverse a proposed adjustment.
            Thereafter, taxpayers most likely will take those issues to
            Appeals, or directly to court. In either case, taxpayers will
            spend considerable additional time and effort to refute the
            adjustments. The IRS Appeals Office likewise must devote time
            and effort to understand all the adjustments that are
            protested. Studies show that of all the additional CEP case
            liability dollars taken to Appeals, only one in five is
            sustained by the IRS. Although there are a number of reasons
            for this result, one of the more significant ones is that there
            is often no basis for the adjustment in the first place.
              Although this is only one of many problems with the
            management system in effect today, this one could be resolved
            by ensuring that the measurement device used by the IRS is
            consistent with the IRS' Mission Statement, as referenced
            above. AAR suggests that an agent's job performance should be
            measured by the agent's adherence to the Mission Statement and
            the rate of the agent's adjustments that are ultimately
            sustained through Appeals and the courts, not by what the agent
            includes in the RAR.
        Again, AAR appreciates the opportunity to present the perspective
    of the railroad industry on this important issue. We would be pleased
    to work with the Committee as it examines the changes that are needed
    in the IRS.

                                   __________

                 Statement of the Federal Managers Association

                          [submitted by ken mcdaniels]
         Thank you for allowing the Federal Managers Association (FMA) to
    provide its views on the efforts to restructure and reform the Internal
    Revenue Service. FMA represents the interests of the over 200,000
    managers and supervisors within the Federal Government. This includes
    approximately 8,500 front-line and mid-level managers working for the
    IRS.
         The Internal Revenue Service has a unique and important role in
    our government. As an agency that employs 102,000 people and interacts
    with tens of thousands of Americans on a daily basis, it plays a
    critical role in governmental operations. FMA praises the effort of
    Chairman Roth and members of the Finance Committee and their staffs in
    tackling the difficult goal of improving operations at the IRS, while
    trying to ensure a fair and appropriate balance in obtaining public and
    employee input in the process.
         FMA believes that front-line managers play a key role in bringing
    about change in an agency. By adding the Federal Managers Association
    to the National Partnership Council (E.O. 12983, 12/21/95), President
    Clinton recognized the benefit of the valuable experience and input
    provided by front-line managers. It is front-line managers who
    implement policy at the level that most directly impacts the public. In
    many situations, IRS front-line managers have a vastly different
    prospective than top level IRS executives who are involved in policy
    making. Although front-line managers may have the best insight into how
    to make reforms work, they have rarely been allowed to provide real
    input into agency reforms.
         The following are our comments on selected provisions of H.R.
    2676:
                       creation of an irs oversight board
         We have serious concerns about the provision of H.R. 2676 which
    provides the union with a seat on the Oversight Board, while management
    associations, such as FMA, do not have one. In order to achieve balance
    and the success envisioned in H.R. 2676, management representatives
    need to have their voices heard. We recognize the obstacles to
    expanding the Board. Therefore, we believe that a suitable alternative
    to create balanced employee input would be to create an ex-officio
    committee consisting of representatives of the union and management
    associations, such as FMA, that would meet with the Oversight Board on
    a regular basis.
                             personnel flexibilities
         The Federal Managers Association believes that the new IRS
    Commissioner needs to have adequate personnel flexibilities in order to
    make reforms work. However, there must be an eye toward ensuring IRS
    adherence to Merit System Principles. An area of the bill that concerns
    us is the issue of the veto authority given to the union. We fear that
    managers could end up being treated unfairly in a system where the
    union would be able to veto any personnel changes as they apply to
    bargaining unit employees, while managers would have no such veto power
    on changes that impact them. Also, this veto authority would allow the
    union an opportunity to prevent any changes it does not support, while
    allowing the Commissioner no recourse to pursue these changes.
                                taxpayer advocate
         Since the Senate Finance Committee hearings last fall, the IRS has
    made great strides in the area of improving taxpayer service. This has
    included the ``Problem Solving Days,'' which, by all accounts, have
    been extremely successful. We believe that the IRS should be commended
    for these efforts and be allowed to continue its work in this area.
    This should include allowing the Taxpayer Advocate Office to remain
    within the agency. Attempts to remove the Taxpayer Advocate Office from
    the agency would serve to undermine the voluntary compliance system
    that has historically served our country well.
                                 burden of proof
         FMA is concerned about Section 301 of H.R. 2676 which would shift
    the burden of proof to the IRS in any court proceeding with respect to
    a factual issue. We acknowledge that, on its face, this appears to be a
    sound and popular provision. However, we believe this change would
    likely lead to a series of unintended negative consequences that would
    defeat the reasons for the shift of the burden in the first place. Its
    passage would undoubtedly cost the government a great deal of revenue
    as taxpayers will be more likely to claim non-deductible expenses, as
    they will see the shifting of the burden of proof to the IRS, perhaps
    mistakenly, as protection against a disallowance of the deduction.
         Furthermore, examiners may believe that they must use the
    available enforcement tools, such as summons or third party interviews,
    to verify actual matters more often than they do now. It would indeed
    be ironic if a provision intended to protect taxpayers may actually
    result in IRS actions which may be more intrusive. FMA, therefore,
    urges reconsideration of this provision.
                                   conclusion
         During the past year, many have expressed the view that IRS
    managers need to be held accountable for their actions. Additionally,
    on numerous occasions, as in the case with the Field Office Performance
    Index, it has been stated that IRS front-line managers in the field
    misinterpreted the guidance provided by the National Office. These same
    front-line managers who were not involved in the formulation of many
    policies and procedures which were criticized during past Senate
    Finance Committee hearings, have not been adequately included in the
    effort to reform the agency.
         We strongly believe that management associations, such as the
    Federal Managers Association, provide decision makers in the
    Legislative and/or Executive Branches their only opportunity to receive
    unfiltered and essential input from front-line managers, the people
    closest to the service to the public. A large majority of IRS managers
    do not feel that they can provide honest feedback in the current
    climate. Your work to help ensure the inclusion of their input in the
    ongoing process of reforming and improving the agency would help to
    alleviate these concerns.
         Once again, we thank you for allowing us this opportunity to
    provide our opinions on the important work before the Senate Finance
    Committee.

                                   __________

                          Statement of Harold J. Krent

                          Professor and Associate Dean,
                                   Chicago-Kent College of Law,
                                      Illinois Institute of Technology.

                                      February 3, 1998.
    Hon. William V. Roth, Jr.,
    Chairman, Senate Finance Committee,
    U.S. Senate,
    Washington, DC.

         You have requested my views as to the constitutionality of the
    Internal Revenue Oversight Board as constituted under the House bill,
    H.R. 2676. The bill creates an Oversight Board composed of eleven
    members, and delegates to the Board tax policymaking authority. The
    constitutional question centers upon the appointment and removal
    provisions governing the member of the Board who is to be ``a
    representative of an organization that represents a substantial number
    of Internal Revenue Service employees.'' Sec. 7802(b)(1)(D).
         As an initial matter, the appointment and removal provisions are
    only problematic if the members of the Board are considered ``officers
    of the United States.'' Under Buckley v. Valeo, 424 U.S. 1, 125-26
    (1975), officers include ``any appointee exercising significant
    authority pursuant to the laws of the United States.'' Although there
    may be an argument that the Board is to serve principally in an
    advisory capacity, it appears that the Board exercises sufficient
    authority under Section 7802(d) that the members must be considered
    officers of the United States. See also Freytag v. Commissioner, 501
    U.S. 868, 880-82 (1991) (concluding that special trial judges are
    officers). The bill would vest in the Board, among other
    responsibilities, the power to ``approve strategic plans of the
    Internal Revenue Service'' and to ``approve the budget request of the
    Internal Revenue Service.'' The House Report notes that ``[w]ith
    respect to those matters over which the board has approval authority,
    the Board's decisions are determinative.'' Assuming that adverse
    consequences would flow from the Board's refusal to accept the IRS's
    strategic plans or budget requests, then members of the Board would
    plainly exercise the type of authority that can only be exercised by
    officers of the United States.
         Officers of the United States must be appointed by the President
    with the consent of the Senate.[1] Two reasons underlie the decision to
    vest appointment authority exclusively in the President. First, because
    the President's superintendence over execution of laws is tied so
    closely to appointments, restrictions on his appointment power would
    undermine the President's ability to fulfill that responsibility.
    Presidents can influence implementation of federal policy through their
    choice of officials. Cf. Public Citizen v. United States Dep't of
    Justice, 491 U.S. 440 (1989) (stating that, to apply FACA to ABA
    committee consideration of judicial candidates could well interfere
    with the President's appointment authority). As the Court stated in
    Buckley,
              The vesting of the executive power in the President was
            essentially a grant of the power to execute the laws. But the
            President alone and unaided could not execute the laws. He must
            execute them by the assistance of subordinates. . . . As he is
            charged specifically to take care that they be faithfully
            executed, the reasonable implication, even in the absence of
            express words, was that as part of his executive power he
            should select those who were to act for him under his direction
            in the execution of the laws.

    424 U.S. at 135-36.

         Second, if Congress imposes too many restraints on the President's
    appointment power, then Congress in essence assumes the appointment
    power for itself. Congress cannot take part so directly in the
    execution of the laws it fashions. As Justice Kennedy has written,
    ``[n]o role whatsoever is given either to the Senate or to Congress as
    a whole in the process of choosing the person who will be nominated for
    appointment.'' Public Citizen, 491 U.S. at 483. Otherwise, Congress
    would be able to both make and execute the laws, circumventing the
    checks and balances system enshrined in the Constitution.
        There are two substantial constitutional problems raised by the
    structure of the Oversight Board. First, under Section 7802(b)(1)(D),
    one member of the Board must be ``a representative of an organization
    that represents a substantial number of Internal Revenue Service
    employees.'' Second, that same member under Section 7802(b)(4)(C)
    ``shall be removed upon termination of employment, membership, or other
    affiliation with the organization'' described above. No clear precedent
    exists to control either issue. After studying the provisions, my best
    guess is that courts would strain to find the first provision
    constitutional if a case or controversy were properly presented to the
    courts--which is unlikely-- and conclude that the removal provision is
    constitutionally infirm.
        1. Section 7802(b)(1)(D). Congress oftentimes specifies
    qualifications for officeholders as part of its responsibility to
    determine how laws should be implemented. For instance, Congress has
    directed that International Trade Commissioners must have
    ``qualifications requisite for developing expert knowledge of
    international trade problems.'' 19 U.S.C. Sec. 1330(a). Similarly, the
    Solicitor General must be ``learned in the law.'' 28 U.S.C. Sec. 505.
    Congress has also directed that some offices be filled by a mixture of
    Republicans and Democrats. No more than three of the six commissioners
    on the International Trade Commission can be from the same political
    party. 19 U.S.C. Sec. 1330(a). Analogous restraints govern appointment
    of members of the National Mediation Board and the Federal Election
    Commission (among others). 45 U.S. C. Sec. 154; 2 U.S.C.
    Sec. 437c(a)(1). In addition to qualifications, Congress has also
    directed that certain individuals serve on agencies by virtue of
    service in another federal office. Indeed, in this case, the Secretary
    of the Treasury and the Commissioner of Internal Revenue serve on the
    Oversight Board. Seven of the twelve members of the Federal Open Market
    Committee serve because of their position on the Board of Governors of
    the Federal Reserve Board. See 12 U.S.C. Sec. 341.
         Congress presumably can impose reasonable restraints on the
    President's choice of whom to appoint to various offices. Those
    qualifications seem ancillary to Congress's unquestioned authority to
    create and disband agencies. In delegating authority, Congress can
    select which office should carry out the delegated tasks, and what the
    qualifications of officeholders should be. Presidents have generally
    acquiesced in such restrictions, but while abiding by congressional
    directions, they have claimed the discretion to depart from such
    restrictions if the situation warranted. For relatively recent
    examples, see, e.g., Statement on Signing the Cranston-Gonzales
    National Affordable Housing Act, 26 Weekly Comp. Pres. Doc. 1930, 1931
    (Nov. 28, 1990); Statement on Signing the National and Community
    Service Act of 1990, 26 Weekly Comp. Pres. Doc. 1833, 1834 (Nov. 16,
    1990); Statement on Signing the Intelligence Authorization Act, Fiscal
    Year 1990, 25 Weekly Comp. Pres. Doc. 1851, 1852 (Nov. 30, 1991).
         No case has arisen testing the limits of Congress's power to
    restrict the President's appointment power by imposing too stringent
    qualifications. The lack of a test case is not surprising. If the
    President decides to abide by the restrictions, no justiciable case
    seems possible. The President may have selected the same official
    irrespective of the qualifications, or may just be bowing to the
    practical need for obtaining senatorial consent for the appointment.
    Conversely, the President has little incentive to flout congressional
    will when the Senate can block any appointment it deems unwise. The
    congressional limitation, therefore, will not cause injury in fact,
    even if unconstitutionally restricting the President's appointment
    authority. (A disappointed appointee can never show that the Senate
    would have ratified the appointment but for the restriction). If the
    President ignores the restrictions, a case conceivably could arise if
    the Senate then ratified the President's choice. Anyone who later
    claims injury in fact due to that officer's action might assert that
    the officer was appointed counter to legitimate congressional
    directions. To my knowledge, this situation has never arisen.
         Analogies are sparse, but perhaps the closest lies with Congress's
    decision to vest appointment authority of inferior executive officials
    outside of the executive branch. In Morrison v. Olson, 487 U.S. 654
    (1988), the Court considered the extent to which Congress can vest in
    the courts of law the power to appoint inferior officers in the
    executive branch. The Court held that such interbranch appointments
    were permissible as long as not ``incongruous.'' Id. at 677. See also
    Ex parte Siebold, 100 U.S. 371, 397-98 (1880). Such an approach, if
    adopted in this context, would permit congressional restrictions upon
    the appointment power as long as the qualifications--whether political
    affiliation or educational pedigree--were not incongruous in light of
    the duties exercised by the officer.
         At some point, Congress's restriction of options would violate the
    Appointments Clause, irrespective of the relevance of the
    qualifications imposed. For instance, if Congress directed the
    President to appoint the head of ``an organization that represents a
    substantial number of Internal Revenue Service employees'' then only
    one person would fit that description. The fit between the
    qualifications imposed and the duties to be imposed is loose--one can
    represent employees without serving as head of the union. More
    importantly, if Congress so limited the President's choice to only one
    individual, it would be exercising a power clearly denied it under the
    Constitution. Cf. Olympic Fed. Sav. & Loan Ass'n v. Director, Office of
    Thrift Supervision, 732 F. Supp. 1183, 1193 (D.D.C.), dismissed as
    moot, 903 F.2d 837 (D.C. Cir. 1990) (When Congress ``abolished one
    agency and removed its three officers, yet designated one of the three
    as the head of the newly-created successor agency, Congress exercised
    the kind of decisionmaking about who will serve in Executive Department
    posts that the Constitution says it cannot''). Congress must leave at
    least some room for choice to the President, and the qualifications
    must be germane to the delegated authority.[2]
         Those defending the appointment limitation can argue that Congress
    has a stronger reason for the appointment qualification here than in
    Olympic Federal. The goal of the appointment provisions in the bill is
    to ensure that different interest groups are represented on the
    Oversight Board. Not only are those involved in various walks of
    private life to be represented--such as those expert in customer
    service or taxpayer needs, Sec. 7802(b)(2)(A)--but so is the
    Commissioner of Internal Revenue and a member of an employee
    organization. Congress cannot accomplish its goal of representing
    different interests on multi-member Boards without imposing significant
    restrictions on the President's appointment authority. Consider that
    Congress has directed interest groups to be represented on other multi-
    member executive commissions, principally those that serve advisory
    functions. See, e.g., Modernization Transition Committee under Weather
    Service Modernization Act, 15 U.S.C. Sec. 313; National Homeowner
    Trust, 42 U.S.C. Sec. 12851; Agency for Health Care Policy & Research,
    42 U.S.C. Sec. 299; National Institute of Building Sciences, 12 U.S.C.
    Sec. 1701j-2.
         In short, the House bill restricts presidential appointment power
    to a far greater degree than prior statutes. The President's choice for
    this particular member of the Board is circumscribed by the
    qualification that he or she be a representative of an employee group.
    Nonetheless, Congress's power to ensure that different interest groups
    be represented on a multi-member Board would likely sway a court to
    uphold the restrictions. In any event, the appointments provision is
    unlikely to be raised in a properly drawn case or controversy.
        2. Section 7802(b)(4)(C). Under the proposed statute, the President
    retains the authority to remove all members of the Oversight Board at
    will. In our jurisprudence, ``the power of removal [is] incident to the
    power of appointment.'' Ex parte Hennen, 38 U.S. (13 Pet.) 230, 259
    (1839). The removal power represents the only formal means by which
    Presidents can control their subordinates' ongoing exercise of power
    and ensure unified execution of the law. The power to remove an
    official is emblematic of a continuing relationship between the
    President and subordinate officials, and in the public eye links that
    official's conduct to the Presidency itself. In isolation, the removal
    authority recognized in Sec. 7802(b)(4) guarantees that the President
    can exercise supervision over the members' exercise of significant
    federal authority. Or, as the Supreme Court summarized in Morrison, as
    long as the President retains ``sufficient control . . . to ensure that
    the President is able to perform his constitutionally assigned
    duties,'' 487 U.S. at 696, no constitutional problem arises.
         But the difficulty here is that Congress has authorized the IRS
    employee group to exercise the removal power as well. Under this
    provision, once a representative of the Internal Revenue Service
    employees is terminated from ``membership, or other affiliation with
    the organization'' he or she is removed from the Oversight Board. Thus,
    while the President enjoys the plenary authority to remove the
    representative, Sec. 7802(b)(4)(A), that authority is shared in part
    with the employee organization itself. Should the organization rescind
    the representative's membership or other affiliation with the
    organization, then he or she is removed from office. The employee
    organization may have rules protecting representatives from expulsion
    or disaffiliation, but those rules can be modified. The exercise of
    removal authority by private parties is, with the possible exception of
    the FOMC discussed below, unprecedented.
         Nonetheless, defenders of the provision might make several
    arguments to preserve the removal provision. First, the power to remove
    in this case is exercised not by Congress as in Myers and Bowsher but
    by private parties, namely the employee organization. A defender of the
    removal provision might therefore argue that less of a separation of
    powers problem arises, for private parties have long enjoyed some power
    to shape policies affecting their lives. For instance, in cases such as
    Currin v. Wallace, 306 U.S. 1 (1939), and United States v. Rock Royal
    Cooperative, Inc., 307 U.S. 533 (1939), the Supreme Court sustained
    marketing orders proposed by the Department of Agriculture that would
    only go into effect if the affected private parties approved the orders
    through a referendum. The Court in Currin reasoned that ``Congress has
    merely placed a restriction upon its own regulation by withholding its
    operation as to a given market unless [the growers approve it].'' 306
    U.S. at 15. The Court has also sustained a delegation to the American
    Railway Association to establish a mandatory drawbar height. Saint
    Louis, Iron Mountain & Southern Ry. v. Taylor, 210 U.S. 281 (1908).
         When Congress assigns private parties such roles, however, it
    undermines executive branch control over delegated authority. The
    exercise of removal authority threatens presidential supervision more
    directly than direct delegations to private parties as in Rock Royal
    and Saint Louis, Iron Mountain & Southern Ry. Each exercise of
    delegated authority by the Oversight Board will in part by overseen by
    the employee group. And, the authority of the IRS Oversight Board
    extends well beyond the interests of the employee group. Indeed, the
    Supreme Court in Carter v. Carter Coal Co., 298 U.S. 238 (1936),
    invalidated delegation to coal producers and miners to set maximum
    hours and minimum wages for the industry. The terms set were in turn to
    be enforced by steep financial sanctions. In striking down the Act as
    an excessive delegation, the Court reasoned in part that unaccountable
    private parties could not exercise such a fundamental say in execution
    of the laws: ``This is legislative delegation in its most obnoxious
    form, for it is not even delegation to an official or an official body,
    presumptively disinterested, but to private persons whose interests may
    be and often are adverse to the interests of others in the same
    business.'' Id. at 311. The question presented here, therefore, is
    whether the private group's exercise of the removal authority affords
    it too much say in implementation of the laws governing the entire
    nation.
         The private organization's power of removal carries with it the
    power to control. As the Court stated in Humphrey's Executor v. United
    States, 295 U.S. 602, 629 (1935), ``it is quite evident that one who
    holds his office only during the pleasure of another, cannot be
    depended upon to maintain an attitude of independence against the
    latter's will.'' The court further explained in Bowsher v. Synar, 478
    U.S. 714, 727 n.5 (1986), that it is the officer's ``presumed desire to
    avoid removal by pleasing Congress, which creates the here-and-now
    subservience to another branch that raises separation-of-powers
    problems.'' If Congress enjoyed any role in the removal process, then
    it could exercise too much ``control over the execution of the laws.''
    Id. at 726. Thus, the Court invalidated the congressional power to
    initiate removal in Bowsher. See also Myers v. United States, 272 U.S.
    52, 161 (1925) (stating that, to permit Congress to ``draw to itself,
    or to either branch of it, the power to remove or the right to
    participate in the exercise of that power . . . would be . . . to
    infringe the constitutional principle of the separation of governmental
    powers''). Had the Brookings Institute, instead of Congress, wielded
    the removal power over the Comptroller General, the constitutional
    infirmity would not disappear.
         As an analogy, if Congress determined that the Solicitor General
    must be a member of the American Bar Association, and that the
    Solicitor General may be removed from office if the ABA canceled the
    Solicitor General's membership, the constitutional difficulty I think
    would be clear.[3] A private group would have excessive influence over
    the Solicitor General's actions. The Solicitor General would recognize
    that any step taken at odds with official ABA positions could
    jeopardize his tenure in office. The fact that the President also could
    exercise removal authority would not be a sufficient safeguard, for any
    successor in office would owe allegiance to the private employee group
    or face dismissal. The Solicitor General would have to please two
    masters, and the continuing loyalty to the private group undermines the
    presidential control that the Supreme Court found essential in
    Morrison. Exercise of the removal authority by anyone other than the
    President, therefore, cannot easily be squared with our system of
    separated powers.
         Second, one can argue that the statutory removal provision should
    not be treated as a removal provision per se, but rather as a
    recognition that certain individuals serve on the Board only by virtue
    of their office, and thus can no longer serve on the Board after their
    position ceases. For instance, the Secretary of the Treasury also
    serves on the Oversight Board, and would no longer serve after
    resignation or discharge by the President.
         The closest analogy presented may be the membership of the Federal
    Open Market Committee. Five out of twelve of the members of the FOMC
    are not appointed by the President. Rather, they serve on the committee
    by virtue of their status as presidents or vice-presidents of the
    twelve regional Federal Reserve Banks, which are privately owned, 12
    U.S.C. Sec. 448(f), although the Board of Governors of the Federal
    Reserve can remove them from office for cause. Presumably, if a
    president of a regional Federal Reserve Bank is removed from office
    during a term by the private boards of directors of the regional banks,
    his or her role on the FOMC automatically ends.
         The FOMC analogy, however, is of only limited persuasive force. It
    is likely far easier for the employee organization to remove a
    representative from a position of authority than it is for the regional
    Federal Reserve Banks to remove a President or vice-President.
    Moreover, no definitive precedent upholds the constitutionality of the
    FOMC. Most cases have refused to reach the merits of challenges to the
    constitutionality of the composition of the group. See, e.g., Committee
    for Monetary Reform v. Board of Governors of the Federal Reserve
    System, 766 F/2d 538 (D.C. Cir. 1985); Riegle v. FOMC, 656 F.2d 873
    (D.C. Cir. 1981); Bryan v. FOMC, 235 F. Supp. 877 (D. Mont. 1964). One
    district court dismissed a constitutional challenge to the FOMC,
    Melcher v. FOMC, 644 F. Supp. 510 (D.D.C. 1986), but that decision was
    reversed on justiciability grounds by the D.C. Circuit. 836 F.2d 561
    (D.C. Cir. 1987). Even then, the court relied on historical arguments
    that private members of the Board should not be considered officers of
    the United States, an argument which would be unavailing in this
    context. Finally, the employee representative of the IRS employee group
    serves not merely by virtue of his or her position, but because the
    President deemed the individual best suited for the office.
         Irrespective of the FOMC precedent, permitting an organization to
    remove an officer of the United States seems problematic even when
    Congress's very purpose is to ensure that the views of the private
    organization be represented in the agency. If a private group deems
    that the Solicitor General is no longer ``learned in the law,'' 28
    U.S.C. Sec. 505, authorizing removal would allow too great a role in
    the officer's enforcement of the law. Similarly, if Republican and
    Democratic party leaders could remove members of the International
    Trade Commission whose views no longer reflected the views of party
    faithful, then the party leadership would have too great a role in how
    the International Trade Commission exercised its functions. Exercise of
    the removal authority by a private organization threatens principles of
    executive accountability underlying Article II.
         Third, unlike in Bowsher, the officer on the IRS Oversight Board
    exercises power only as one out of eleven members. The private group
    unquestionably would have greater control if it could remove all eleven
    members of the Board. Nonetheless, the vote of one member of the group
    may prove dispositive in any particular close vote. I doubt that courts
    would excuse any separation of powers violation on the ground that the
    officer was not important enough. Indeed, in FEC v. NRA Political
    Victory Fund, 6 F.3d 821 (D.C. Cir. 1993), cert. dismissed, 115 S. Ct.
    537 (1994), the D.C. Circuit invalidated the composition of the FEC
    because Congress had placed two of its agents as non voting members on
    a committee comprised of six voting members.
         In short, vesting a private group with removal authority over an
    officer of the United States undermines the President's ability to
    coordinate execution of the laws. The officer would have divided
    allegiance, and consequently less reason to adhere to the President's
    policy priorities. The President's retained removal authority would be
    insufficient, by itself, to ensure adequate control. The Court
    therefore will likely strike down the removal provision providing that
    the employee representative's role on the Board will be automatically
    terminated if the employee organization severs its relationship to the
    officer.
         Please let me know if I can provide you with any additional
    information.

               Sincerely,
                                       Harold J. Krent.
                                    endnotes
    [1]: The Appointments Clause provides in pertinent part that the
            President ``shall nominate, and by and with the Advice and
            Consent of the Senate, shall appoint Ambassadors, other public
            Ministers and Consuls, Judges of the supreme Court, and all
            other Officers of the United States, whose Appointments are not
            herein otherwise provided for, and which shall be established
            by Law.'' U.S. Const. Art II, 2, cl.2.
    [2]: Interestingly, some state courts have invalidated legislative
            delegations to private regulatory entities. See, e.g.,
            Toussaint v. State Board of Medical Examiners, 329 S.E.2d 433
            (S.C. 1985); Rogers v. Medical Ass'n of Georgia, 259 S.E.2d 85
            (1979).
    [3]: The departure from separation of powers principles would be even
            greater had Congress directed that the Solicitor General's
            duties were to be performed by the President of the ABA.
            Congress in essence usurps the President's appointment
            authority by vesting such significant duties in private
            parties.

                                   __________

                Statement of the Illinois State Bar Association

                        legislative recommendation adopt
                at the board of governors meeting july 18, 1997

       to amend the internal revenue code of 1986 to prohibit the use of
                                    national
                          and local expense standards
           in determining a taxpayer's ability to pay for purposes of
                installment agreements and offers in compromise
                          suggested statutory language

         Section 1. Section 6159(b) of the Internal Revenue Code of 1986 is
    amended by adding the following:

              (b) EXTENT TO WHICH AGREEMENTS TO REMAIN IN EFFECT.
                      (1) IN GENERAL--Except as otherwise provided in this
                    subsection, any agreement entered into by the Secretary
                    under subsection (a) shall be based upon the taxpayers'
                    ability to pay and shall remain in effect for the term
                    of the agreement.

                      (6) ABILITY TO PAY. In determining ability to pay,
                    the Secretary shall take into account the taxpayer's
                    necessary living expenses based solely upon the
                    taxpayer's facts and circumstances and without regard
                    to national or local standards.

         Section 2. Section 7122 of the Internal Revenue Code of 1986 is
    amended by adding the following as new subsection (c):

               (c) ABILITY TO PAY. In evaluating the sufficiency of an
            offer of compromise, the Secretary shall take into account the
            taxpayer's ability to pay as determined in accordance with
            section 6159(b).

         Section 3. The amendments made by sections 1 and 2 shall be
    effective upon enactment.
                                    comments
         Section 6159 of the Internal Revenue Code of 1986, (26 USC
    Sec. 6159)(the ``Code'') authorizes the Secretary of the Treasury to
    enter into written agreements with any taxpayer for the satisfaction of
    a tax liability imposed under Title 26 of the United States Code in
    installment payments if the Secretary determines that such agreement
    will facilitate the ultimate collection of tax.
         Section 7122 of the Code authorizes the Secretary to compromise
    any civil or criminal case arising under the internal revenue laws.
    Prior to 1992, the Internal Revenue Service had a low rate of
    acceptance for Offers in Compromise. In many Districts around the
    country Offers in Compromise were discouraged by Internal Revenue
    Service employees. There was great disparity among the Districts as to
    the standards for Offers in Compromise. On February 26, 1992, the
    Internal Revenue Service announced new procedures for Offers in
    Compromise. Those procedures greatly liberalized the Offer in
    Compromise process and greatly increased the chances that a troubled
    taxpayer might be able to make a partial payment in settlement of his
    tax liability. The Service adopted the following policy statement:

              ``The Service will accept an Offer when it is unlikely that
            the tax liability can be collected in full and the amount
            offered reasonably reflects collection potential. An Offer in
            Compromise is a legitimate alternative to declaring a case as
            currently not collectible, or to a protracted installment
            agreement. The goal is to achieve collection of what is
            potentially collectible at the earliest possible time and at
            the least cost to the government.
              ``In cases where an Offer in Compromise appears to be a
            viable solution to a tax delinquency, the Service employee
            assigned to the case will discuss the compromise alternative
            with the taxpayer and, when necessary, assist in preparing the
            required forms. The taxpayer will be responsible for initiating
            the first specific proposal for compromise.
              ``The success of the Offer in Compromise program will be
            assured only if taxpayers make adequate compromise proposals
            consistent with their ability to pay and the Service makes
            prompt and reasonable decisions. Taxpayers are expected to
            provide reasonable documentation to verify their ability to
            pay. The ultimate goal is a compromise which is in the best
            interest of the taxpayer and the Service. Acceptance of an
            adequate Offer will also result in creating, for the taxpayer,
            an expectation of and a fresh start toward compliance with all
            future filing and payment requirements.'' (Policy Statement P-
            5-100.)
         In accordance with this new policy statement the Internal Revenue
    Service adopted manual provisions and created an entirely new
    environment. Since the adoption of the new procedures in 1992, Revenue
    Officers have solicited Offers in Compromise cases where in the past no
    compromise would have been available. Internal Revenue Service
    employees exhibited a great deal of flexibility during the negotiation
    process after the adoption of the 1992 policy revisions. The
    environment from February 1992 to September 1995 greatly contrasts with
    past policies of the Service where Offers in Compromise were not
    encouraged and in fact some Districts seem to do their best to thwart
    Offers.
         By administrative pronouncement effective August 29, 1995, the
    Internal Revenue Service began using national and local standards to
    decide a taxpayer's ``ability to pay'' for purposes of Installment
    Agreements and Offers in Compromise. These standards, which are derived
    from Bureau of Labor Statistics, establish predetermined levels of
    necessary living expenses based on family size, monthly income, and
    county of residence. Those necessary living expenses are then compared
    with monthly income to determine the taxpayer's ability to pay a
    delinquent tax. Taxpayers wanting to pay their tax delinquencies in
    installments or who seek to compromise their tax liability because of
    doubt as to liability or doubt as to collectibility have experienced
    adverse consequences as result of the use of these standards.
         First, a taxpayer's ability to pay a tax liability is no longer
    based upon the taxpayer's particular facts and circumstances, but
    rather, on standards established by the Internal Revenue Service. These
    standards establish predetermined levels of allowable expenses based
    solely upon factors such as family size, monthly income and county of
    residence. Often these standards have resulted in the determination of
    the taxpayer's ability to pay which bears no rational relationship to
    the taxpayer's particular facts and circumstances.
         Second, the standards have effectively taken away the Internal
    Revenue Service employee any discretion in determining whether the
    Installment Agreement or Offer in Compromise will facilitate collection
    of the liability. Under current practices, an Internal Revenue Service
    employee's recommendation will be based upon the determination of a
    taxpayer's ability to pay after allowance for necessary expenses,
    including expenses determined by reference to national and local
    standards. While the employee has authority to make exceptions with
    respect to Installment Agreements (provided the employee can justify
    the proposed departure), he has no corresponding authority with respect
    to Offers in Compromise.
         In our opinion this policy has not facilitated the collection of
    tax; but rather, has become an impediment to the approval of
    Installment Agreements and Offers in Compromise. As a result, many tax
    practitioners believe that more and more taxpayers are seeking relief
    under the bankruptcy statutes rather than paying tax liabilities
    according to their ability to pay. This is a trend which is the direct
    result of tax policy and is one which should be reversed.
         We recommend that these national and local standards be abandoned
    in favor of a methodology for determining a taxpayer's ability to pay
    which reflects the taxpayer's particular facts and circumstances.
                                *   *   *   *   *
         No member of the Board of Governors or Council of the Section on
    Federal Taxation of the Illinois State Bar Association is known to have
    a material interest in the Recommendation by virtue of a specific
    employment or engagement to obtain the result of the Recommendation. We
    recommend that the amendment be given only prospective application.

                                   __________

                          Statement of Robert D. Long

              the need to protect the irs from powerful taxpayers
        Many people have now made known their needs and desires in the
    ongoing effort to bring reform to the IRS. I fully agree with all these
    efforts, but I also wish to insert a cautionary note. In building a
    ``kinder, gentler'' IRS we must also guard the interests of taxpayers
    in making sure that the IRS will be able to operate effectively in
    ensuring compliance with the tax code. It is in the interests of
    everyone that all pay their fair share of the tax burden. This is not
    merely a need to maintain the status quo; it is a need to guard the IRS
    against the abuses of powerful taxpayers who have tremendous resources
    to bring to bear in bending the IRS to their will. This is a situation
    which we have seen manifest in recently published accounts of dealings
    between the IRS and Scientology.
        It may seem odd that in view of the testimony already given about
    the abuses of the IRS against taxpayers that I would be urging you to
    also protect the IRS from the abuses of organizations who would use
    their resources against the IRS. However, I believe that any successful
    reform of the IRS must take into account both of these issues. To do
    one without the other will surely prevent the IRS from successfully
    (and equitably) carrying out its mission.
        We have been conditioned to think only in terms of how the
    government becomes overbearing in its dealings with the citizenry of
    this country. But it is also true that the citizenry can become
    overbearing in its dealings with a government agency. This has been
    true in abuses of the Welfare and Social Security agencies where
    individuals have used their resources in attempts to defraud these
    agencies. Although it may be a foreign concept for us to think in terms
    of an organization using its resources against the IRS, the evidence is
    that this situation has already occurred.
        The case I have in mind which illustrates better than I ever could
    the abuses which are possible, is the case of the long history of
    dealings between the ``Church'' of Scientology and the IRS. It is not a
    case in which one could describe either side on the conflict as having
    entirely clean hands. But it is a good example of the weaknesses in the
    current IRS structure and where change is needed.
        In relating this information I must say that not all details of
    this situation have been made public. I am relying heavily on my own
    experiences as a member of Scientology in the 1970's (an organization
    which I have disavowed any connection to since 1978--even though they
    still send me junk mail and count me as a member for promotional
    purposes). I also rely upon the published IRS closing agreement with
    Scientology (which has not been validated by the IRS, but which I have
    every reason to believe is genuine). I am also basing my statements on
    published evidence gathered by the U.S. government and made available
    through FOIA, the statements of other former members of Scientology,
    and news reports.
        For decades the IRS denied tax-exempt status to Scientology
    organizations, and denied tax deductions for payments to Scientology by
    individual Scientologists for courses and personal services (a position
    supported by a U.S. Supreme Court ruling). The IRS in 1993 suddenly and
    mysteriously announced that it was reversing course and granting tax
    exempt status to Scientology and its related organizations, and allowed
    individuals to deduct payments made to Scientology for personal
    services.
        The circumstances and details of this sudden change in policy have
    been cloaked in mystery ever since. Tax Analysts has fought an ongoing
    battle with the IRS to force legal disclosure of the mysterious closing
    agreement made with Scientology, an agreement which the IRS has
    steadfastly refused to disclose even with redaction's. No one outside
    of Scientology leadership and the IRS knew what the exact terms of the
    agreement were until someone leaked it to the media a couple of months
    ago.
        The agreement, disclosed by the Wall Street Journal, contains far
    more than ``taxpayer return'' information as alleged by the IRS. It
    includes evidence that strongly suggests that the agreement was the end
    result of an orchestrated campaign of harassment of the IRS by
    Scientology. Its terms indicate a ``caving in'' to the demands of
    Scientology and contain unprecedented concessions to the organization.
    As part of the terms of the agreement, the IRS even agreed to circulate
    a ``Church Fact Sheet'' about Scientology to foreign governments, which
    was prepared by Scientology and contains material false statements. In
    view of the subsequent secrecy accorded the agreement and supporting
    documentation by BOTH Scientology and the IRS, the question of whether
    there was impropriety involved in obtaining the agreement must be
    asked.
        Scientology has a public policy of using the law to harass and
    punish rather than to win on issues. At the heart of the negotiated
    deal between the IRS and Scientology is an agreement to effectively end
    over 2000 lawsuits against the IRS. The bulk of these lawsuits were
    based on the non-tax deductibility of payments to Scientology by
    individuals, an issue already brought once to the Supreme Court and
    ruled in favor of the IRS. Some of the other lawsuits were similarly
    meritless and other lawsuits were brought against individual IRS
    agents. All in all, they accomplished Scientology's stated policy of
    using lawsuits to harass rather than to win.
        Scientology has also publicly commented on the fact that it
    extensively employs private investigators in dealing with its enemies.
    Accounts from many people have indicated that these PI's are not just
    gathering information, but furthering Scientology's goals of using
    harassment as a tool for dealing with enemies. There are also
    allegations of criminal acts committed by at least one of their PI's in
    carrying out Scientology's wishes. Scientology has sued individual IRS
    agents in its quest for tax exempt status and undoubtedly employed its
    PI's in attempts to find any dirt they can on IRS employees. It has
    been alleged that Scientology had specific knowledge of wrongdoing of
    some IRS employees. Was this information used as further leverage
    against the IRS to accomplish its ends?
        Several media accounts have characterized the terms of the
    agreement as being tantamount to the IRS asking for a token payment in
    exchange for a cessation of hostilities. Clearly, Scientology brought
    massive resources to bear in a campaign of harassment of the IRS in
    order to get its way. Several newspaper articles have questioned
    whether this sends a signal that it does pay to harass the IRS in order
    to get what you want. Clearly we need to do something about this.
        I believe the steps needed to prevent further abuses of the IRS by
    organizations, which could potentially bring large amounts of resources
    to bear on the agency, include the following:
              (1) The most important first step is that you continue your
            efforts to ensure that the IRS deals equitably with all
            taxpayers
              (2) Take steps to ensure proper oversight of the IRS and its
            agents. This will reduce the possibility that inappropriate
            behavior may be used as leverage against the agency or its
            agents
              (3) Sunshine disinfects--publicly disclose all but actual
            taxpayer return information in the Scientology and all other
            cases like this where non-public agreements have been made. A
            non-profit organization is in a sense a public trust. In
            exchange for recognition that the organization is intended to
            benefit others rather than itself, it is being exempted from a
            normal obligation that we all have. The public has a right to
            know upon what basis an organization is operating as non-profit
            and what arrangements it has made with the IRS to ensure
            compliance with its obligations (specifically, to operate as a
            legitimate non-profit entity in lieu of paying taxes). In the
            case of a church, school, or religious organization they should
            have a limited expectation of privacy except as to the details
            of their internal financial dealings. This is the cost of doing
            business as a public trust.
              (4) In the Scientology case, upper management of the IRS
            bypassed normal approval channels for the Closing Agreement.
            This introduces a significant possibility of abuse of power. It
            also gives this specific case a prominent appearance of
            impropriety, even if none exists in actual fact. Situations
            like this need proper oversight, possibly requiring approval or
            review by the Joint Committee on Taxation. I believe that the
            Joint Committee on Taxation should be asked to immediately
            review this and all similar cases of irregular Closing
            Agreements with non-profit entities.
              (5) Scientology is a ``poster child'' for why we need tort
            reform in this country. As long as an organization like
            Scientology is allowed to run rampant in abusing the legal
            system with the time, resources, and cost of litigation to
            defend oneself against meritless lawsuits being the punishment
            meted out to the luckless victims of this abuse, one can expect
            such abuses to continue
              (6) Expenditure of significant resources on political
            lobbying is grounds for denial of non-profit status.
            Expenditure of significant resources on investigations and
            litigation initiated by an organization should likewise be
            grounds for denial of non-profit status.
        I thank you for your consideration in this matter. I hope my
    insights are of some help to you in your current efforts to restructure
    the IRS. I commend you for doing a very necessary and important job.

                                   __________

    Statement of the New York State Society of Certified Public Accountants

                    [submitted by robert l. goldstein, cpa]

                                    NYSSCPA

                   1997-1998 Tax Division Executive Committee

    Harold F. Soshnick, Chair
    Stuart Becker
    Franklin H. Federmann
    Howard S. Fleischman
    David H. Gerson
    John O. Hatab
    Janice M. Johnson
    Michael J. Knight
    Jeffrey M. Rosenbaum
    Stephen P. Valenti
    Warren Weinstock
    Maryann M. Winters

                                    NYSSCPA

                          Relations with IRS Committee

    Robert L. Goldstein, Chair
    Lawrence S. Albert
    Ruth A. Sattig Betz
    Gerard I. Borod
    James E. Brennan
    Stephen R. Buschel
    Sandra Camhi
    Steven E. Cohen
    James P. Constantino
    Stuart H. Damens
    Glenn E. Davis
    Ralph J. DeFilippo
    Alan J. Dlugash
    Louis E. Feinstein
    Sheldon J. Ganis
    Arnold J. Gould
    Martin P. Hacker
    Seymour Heinberg
    Eugene Heyward
    Neil J. Hornstein
    Robert Kaplan
    Laurence Keiser
    Audry Z. Landau
    Kevin M. Levine
    Gary P. Liga
    Thomas A. McCormack
    Pete J. Medina
    Jacob G. Meyer
    Steven Mutino
    Eugene M. Nadel
    John J. Pearl
    Joel D. Rothstein
    David Sands
    Douglas Schnapp
    Sharon P. Sheinfeld
    Richard B. Sherman
    Fred Slater
    Robert L. Steele
    Joel B. Steinberg
    Eugene L. Stoler
    Mark P. Stone
    Warren Weinstock
    Eugene L. Winston
    Paul J. Wrobleski
    Thomas H. Zick
    Renee Diane Zuppone

                                    NYSSCPA

                          IRS Restructuring Task Force

    Michael J. Knight, Chair
    Robert S. Fink
    Robert L. Goldstein
    Arthur S. Hoffman
    Mark R. Imowitz
    Janice M. Johnson
    Eugene M. Nadel
    Alan E. Weiner
    Warren Weinstock

                              Director--Tax Policy

    James A. Woehlke

                                  introduction
        The New York State Society of Certified Public Accountants
    (hereinafter the ``Society'' or ``NYSSCPA''), with over 31,000 members
    is the largest and oldest state professional CPA professional
    organization. Our members practice locally, nationally, and
    internationally as the primary tax advisers to millions of individual
    and business taxpayers. It is our belief that the Congress, the
    Internal Revenue Service (hereinafter the ``Service'' or ``IRS''), and
    we have a common constituency: the American taxpayer. It is from this
    vantage point that we provide this committee with our comments on H.R.
    2676, the Internal Revenue Service Restructuring and Reform Bill of
    1997.
        The NYSSCPA wrote and testified before the National Commission on
    Restructuring the Internal Service (the National Commission) and the
    Senate Finance Committee during the past year. On both occasions, we
    stressed the profound need for a change in the culture at the IRS from
    an organization that views itself as a law enforcement agency to a
    customer-service agency with a law enforcement component. Equally
    important, the IRS must be viewed as a customer-service agency by the
    American taxpayer. Since the September 1998 Senate Finance Committee
    oversight hearings, others, including Commissioner Rossotti, have
    echoed this call. Though we have often criticized the Service for what
    we believe to be compelling reasons, we believe that the IRS plays a
    vital role in our voluntary system of tax compliance, the chief
    beneficiary of which is our ``civil society.'' We further believe that
    the vast majority of IRS employees are dedicated workers who do the
    best job they can with the tools available to them.
        Over a long period of time, however, the public's faith in the
    Service's ability to carry out its mission has eroded. The oversight
    hearings held by this committee in September 1997 and the results of
    the Service's Internal Audit Review of the Use of Statistics and
    Protection of Taxpayer Rights in the Arkansas-Oklahoma District
    Collection Function were clearly a wake-up call to the IRS. Since that
    time, the Service has:
      --Instituted monthly problem-solving days
      --Dramatically expanded telephone service
      --Initiated a review to improve its lien and levy procedures
      --Reinforced its prohibition on the use of enforcement statistics in
            evaluating front-line managers
      --Undertaken to improve and expand the Problems Resolution Program
      --Resolved the cases involving the four taxpayers who appeared before
            this Committee in the oversight hearings and has begun to
            establish new procedures to monitor such complaints. While the
            steps taken by the Service outlined above are a good beginning,
            it is clear that new, profound structural and cultural changes
            are required. We support, in the main, the report of the
            National Commission, A Vision for A New Internal Revenue
            Service, and Internal Revenue Service Restructuring and Reform
            Bill of 1997 (H.R.2676) passed by the House of Representatives
            late in 1997. We have been asked for our comments on this
            proposed legislation to aid in your deliberations. Accordingly,
            we respectfully submit our comments in the areas of governance,
            taxpayer bill of rights, and congressional accountability for
            the Internal Revenue Service.
           title i--executive branch governance and senior management
        The Society believes that fundamental change is required in the
    governance of the IRS to:
      --Change the culture of the Service to one of customer service
      --Prepare viable long-term strategic plans
      --Design and implement a successful taxpayer system modernization
            program
      --Fulfill its proper role in assisting the Congress in simplification
            of the tax law
      --Hire, train, and retain the highest qualified personnel
      --Improve the financial management of the Service
      --Utilize private sector expertise
        Accordingly, the Society supports the proposal in H.R. 2676 to
    create an independent Internal Revenue Service Oversight Board
    (``Board''). In this connection, however, we make the following
    comments:
              1. Some have expressed concern that the Board, with its
            independent access and reporting responsibility to the
            Congress, will undermine the effectiveness of the Treasury
            Department to set tax policy and sow discord in the
            relationship between the Service, the Treasury, and the
            Congress. On the contrary, we believe that, with its
            independence, the Board will have the opposite effect. We
            believe that this cooperative effort will make the IRS more
            responsive to public concerns, because through the Board the
            Congress, the representatives of the people, will be better and
            more timely informed. We further believe that a private-sector
            view will enhance, not diminish the information, talent, and
            expertise available to the Service.
              2. We agree with the staggered, five-year terms, which
            together with the proposed fixed five year term for the
            Commissioner (Sec.7803(a)(1)(A)) will provide and enhance
            continuity in the overall management of the Service.
              3. Section. 7802(c) enumerates the general responsibilities
            and specific exclusions of the Board. The section in part
            states:
                      (C) General Responsibilities--
                              (1) In General--The Oversight Board shall
                            oversee the Internal Revenue Service in its
                            administration, management, conduct, direction
                            and supervision of the execution and
                            application of the internal revenue laws or
                            related statutes and tax conventions to which
                            the United States is a party.
                              (2) Exceptions. The Oversight Board shall
                            have no responsibilities or authority with
                            respect to--
                                      (A) the development and formulation
                                    of Federal tax policy relating to
                                    existing or proposed internal revenue
                                    laws, related statutes and tax
                                    conventions,
                                      (B) law enforcement activities of the
                                    Internal Revenue Service, including
                                    compliance activities such as criminal
                                    investigations, examinations, and
                                    collection activities, or
                                      (C) specific procurement activities
                                    of the Internal Revenue Service.
        The exceptions in subsection (2) will seriously impinge on the
    Board's ability to fulfill the ``General Responsibilities'' enumerated
    in subsection (1). How can the Board ``oversee'' the management,
    conduct, direction, and supervision of the execution and application of
    the internal revenue laws and related statutes if they are constricted
    by the exceptions in (2)?
        We are in full agreement with the concept of taxpayer
    confidentiality and do not believe that the Board should have access to
    specific taxpayer information. However, to effectively oversee and
    assist in changing the culture of the Service, the Board must have some
    responsibility for overseeing the ``law enforcement activities of the
    Internal Revenue Service including compliance activities such as
    criminal investigations, examinations, and collection activities.'' In
    addition, it seems logical to us that the Service would welcome the
    input of the Oversight Board in procurement activities, certainly to
    the extent that it affects the Board's mission.
        Our objections to this section would be alleviated by the insertion
    of the word ``specific'' in two places as follows:
                              (2) Exceptions-The Oversight Board shall have
                            no specific responsibility or authority with
                            respect to--* * * (B) law enforcement
                            activities of the Internal Revenue Service,
                            including compliance activities such as
                            specific criminal investigations, examinations,
                            and collection activities. [Emphasis added.]
        Without such a change, the Board will be reduced to consulting on
    strategic plans and reviewing operational functions (see testimony of
    Commissioner Rossotti, January 28,1998, regarding General Governance).
    We do not believe that this was the intention of the National
    Commission. Nor do we believe such a limited scope will result in a
    Board that would be adequate to the task of changing and subsequently
    monitoring changes to the culture of the Service.
              4. Much has been written about the potential for conflict of
            interest of part-time Board members who would earn the bulk of
            their livelihood in the private sector. The Board is to focus
            on overall governance of the IRS and (even with the suggested
            changes to the legislation above) would not deal with the day
            to day decisions or specific law enforcement matters. We do not
            foresee this as a problem since as ?special governmental
            employees,'' Board members would be subject to existing
            conflict-of-interest rules. There are, therefore, adequate
            safeguards in the law.
                               taxpayer advocate
        We have previously written and spoken enthusiastically in support
    of the Problems Resolution Program. The beneficial impact of the
    Taxpayer Advocate and the Problems Resolution Process has been made
    abundantly clear in testimony before the National Commission and the
    Finance Committee. We heartily support the measures in H.R. 2676 and
    acts by the Service to strengthen and expand this program.
        However, we strenuously disagree with that portion of H.R. 2676,
    which would prohibit the Taxpayer Advocate from accepting any
    employment with the Service for at least five years after ceasing to be
    the Taxpayer Advocate. This prohibition will discourage talented career
    IRS employees, who are not near retirement, from seeking this position.
    Further, it is exactly the culture, training, and ability to
    pragmatically solve problems embodied in the Problems Resolution
    program, which is so necessary to the rest of the Service. Why would
    the Congress wish to deny this asset, an experienced former Taxpayer
    Advocate, to the Service?
                   title iii--taxpayer protection and rights
        We substantially support the expansion of taxpayer rights, also
    known as Taxpayer Bill of Rights 3. (``TBOR 3'') We do have comments
    regarding specific portions of the TBOR 3.
              1. To remove a serious trap for the unwary, we strongly
            encourage the passage of Section 341-Privilege of
            Confidentiality Extended to Taxpayer's Dealing With Non-
            Attorney Authorized to Practice Before Internal Revenue
            Service. Taxpayers choose from among several types of
            professionals when seeking tax advice. Most prominent among tax
            advisers are attorneys, CPAs, and enrolled agents. Currently,
            taxpayers need to be wary in making this choice, because only
            confidential communications between a taxpayer and an attorney
            are protected from discovery by the government. This protection
            resulted from the ages-old legal doctrine called attorney-
            client privilege. Because of this situation, taxpayers
            occasionally fall into a trap. To correct a previous tax-filing
            error, a taxpayer might seek out a tax adviser and confide in a
            CPA or enrolled agent the circumstances of his or her error. In
            so doing, the taxpayer relates information that is later
            discoverable by the government. Had the taxpayer first sought
            the advice of an attorney, the communication would not have
            been discoverable. Section 341 would remove this unfortunate
            trap for the unwary.
              2. We also support section 312-Civil Damages For Negligence
            In Collection Actions. However, we suggest that a procedure be
            developed to settle such matters if the IRS acquiesces in and
            is desirous of avoiding the costs and risks of litigation. We
            recommend that the provision be expanded to cover wrongfully
            filed tax liens.
              3. Regarding section 321-Spouses Relieved in Whole or In part
            of Liability in Certain Cases-we suggest that this provision be
            made retroactive to cover tax returns filed for the three years
            prior to the date of enactment.
              4. We suggest that section 346-Offers-In-Compromise-be
            amended to reflect that revenue officers are encouraged, not
            just allowed to use their discretion to permit variations from
            local and national standards when the circumstances are
            appropriate. We believe that the national and local standards
            should be updated annually for changes in the cost of living.
            Offers that are deficient in a clerical matter or have
            nonmaterial omissions should not be rejected outright. Rather,
            the revenue officer should contact the taxpayer or his or her
            representative in an attempt to secure such information before
            rejecting the request
              5. Concerning section 376-Limitation of Penalty on
            Individual's Failure To Pay For Months During Period of
            Installment Agreement-we believe that there should be no
            penalties while the installment agreement is in effect and the
            taxpayer is fulfilling his or her obligations. To assess
            penalties in these situations is counterproductive to the
            process of bringing the taxpayer's obligations current. These
            taxpayers often desperately want to comply with tax
            obligations, but their financial limitations preclude them from
            complying as quickly as they would wish.
              6. Regarding section 381-Review of Penalty Administration and
            Development of Recommendations-we recommend that the review
            address all penalty issues and include abatement practices.
              7. You should not include Section 301--Burden of Proof--in
            the TBOR 3. Unlike a criminal matter, it is the taxpayer who
            asserts the positions taken on his or her tax return. It is,
            therefore, incumbent on the taxpayer to provide the support for
            the positions he or she asserts. This provision would shift the
            burden of proof under certain conditions in court proceedings.
            Relatively few taxpayer audits result in litigation; so
            relatively few taxpayers would be impacted by this proposed
            change. Yet, we anticipate the change will result in
            significant changes in tax auditor behavior that will adversely
            impact all audited taxpayers. Among the behavioral changes we
            anticipate are
                      A. Agents will feel compelled to make broad document
                    requests during examination to assure that they have
                    taken all precautions to have sufficient documents in
                    the event of a burden shift
                      B. To protect the government from the eventuality of
                    a burden shift, Revenue Officers will begin asking for
                    excessive documentation to put the taxpayer in the
                    position of being unable to satisfy the conditions for
                    a burden shift.
                      C. The question of whether the taxpayer has fully
                    cooperated and provided sufficient documentation will
                    now become another area for an already overburdened
                    court system to consider.
        We suggest the following additional provisions should be added to
    the TBOR 3:
              1. Interim extensions (July 15, for partnerships and trusts
            and August 15, for individuals) should be eliminated and the
            initial extensions should be for six 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. The 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.
              2. 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
            take with these issues. Nevertheless, Congress should give
            consideration 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 be filed superseding
            the one on the tax return.
    title iv--congressional accountability for the internal revenue service
              1. H.R. 2676 calls for two hearings a year to be attended by
            representatives of all the congressional committees and
            subcommittees charged with IRS oversight. While this is a step
            forward, there is nothing in this legislation which either
            coordinates the activities of these committees and
            subcommittees with a view to avoiding duplication or
            overlapping investigations and hearings. Further, there does
            not appear to be a mechanism for the coordination of the
            reporting responsibilities of the Oversight Board or the
            Taxpayer Advocate to the various committees of the Congress.
              2. The complexity of the tax law is a major problem for the
            Congress to address. 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 exacerbate the
            Service's challenges in administering the tax system and the
            taxpayers' difficulties in comprehending and meeting their tax
            obligations. There is also a very large backlog of Treasury
            Regulation projects. 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.
        We believe that this complexity 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 the Congress
    first securing from the IRS a draft of tax form changes that would be
    required. This discipline would help avoid complexity. 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 legislative proposals
    would be clearer to members of the staff. Further, the practitioners
    may be able to suggest ways for the Congress and their staffs to
    accomplish their objectives in a simpler manner without sacrificing
    fairness or sacrificing the objective of the legislation.
        We thank the Committee for allowing the NYSSCPA to present the
    views and suggestions of its members. We are prepared to assist you in
    any way that you deem relevant to reform the IRS into a true taxpayer
    service agency.

                                   __________

                   Statement of Amy M. Powers, Littleton, CO

        At the encouragement of my family and the recent publicity of the
    IRS hearings, I would like to bring your attention to my experiences
    with the IRS and a joint tax return I signed 11 years ago. I have
    summarized my current negotiations with the IRS and have also listed
    the other individuals and attorneys I have contacted. Following that,
    is the history in detail of my contact with the government over the
    past 11 years.
        My current situation is this. I have submitted an Offer and
    Compromise which has taken nearly a year and a half to be approved. The
    first offer of $8,000 (the original taxes assessed on the 1986 joint
    return) was rejected, but my recent counter offer has been accepted and
    my deadline to pay the sum of $25,000 is March 15, 1998. The $25,000
    represents more than half of the amount due ($42,000 with interest and
    penalties). I am in the process of obtaining funds to meet this
    deadline, and I--as much as I do not want to pay one dime--I realize I
    may have to continue in this direction and meet the deadline, while at
    the same time seek action against the IRS or support from other members
    of the government and the public sector.
        I have written to or contacted the following individuals:
       Senator Allard, CO
       Senator Campbell, CO
       Ms. Gayla Russell, CPA (pro-bono work for innocent spouses),
            FL
       David Keating, Attorney with National Taxpayers
            Organization, Alexandria, VA
       Peter Moison, current Attorney, Denver, CO
        With the March 15th deadline quickly approaching, I am torn between
    reneging my Offer and Compromise which would ultimately give rise to a
    more aggressive stance from the IRS and/or pursuing a greater support
    structure from my local Senators, the Senate Finance Committee, and
    other activist groups supporting the thousands of other women who face
    the same risks. I am sure with the recent publicity, the government's
    sense of urgency to collect this money is just as great as mine not to
    pay and succumb to their threats. However, I do have a family and other
    bills and do not want to jeopardize my current financial standing.
        Meanwhile, my ex-husband also submitted an Offer and Compromise
    which was subsequently rejected and he in turn declared bankruptcy.
    Detailed History:
        Below I have documented the key events throughout these 11 years.
        Eric R. Hammond (ERH): I met ERH in 1984 while attending Principia
    College in Illinois. Eric attended one quarter that year. While
    attending Principia, he was also working on a computer game as a
    contractor for Electronic Arts (EA), one of the most successful video
    entertainment companies today located in Northern California. Eric was
    asked to return to California to complete the final details of his
    project. The game he created was ``One-on-One with Larry Bird and Dr.
    J.'' At the time, it was the highest grossing game for EA and Eric,
    consequently, was making royalties and was extremely successful. After
    One-on-One, Eric worked on a football game for EA, as well as some
    others. He maintained a contractor status. All of this success came
    before we were married. In other words, the finances in question
    resulted in his earnings prior to our marriage.
    Key Dates:
    July 26, 1986--Amy McCain married Eric Rayburn Hammond (ERM) in
            California.
    April 1987--Filed taxes for 1986, owing approx. $8,000. Signed joint
            tax return. I believe ERH did the taxes himself. In past years,
            his mother had done his taxes. I also believe these were
            quarterly taxes. In 1986, I was working for a department store
            part-time and taxes were appropriately being deducted. ERH was
            not working at this time.
    September, 1987--Separated from ERH and moved to Atlanta. ERH did not
            want to be married anymore and I had a good friend in Atlanta.
            We had an amicable separation. Our divorce was finalized in
            February.
    April, 1988--I filed my 1987 tax return in Georgia. I filed ``Married--
            Filing Separate.''
    January, 1989--Sought legal council on divorce process. ERH and I
            discussed the process and he agreed to take full responsibility
            for any debt we had incurred while married (IRS and any credit
            cards). The papers were drawn up and included, was a paragraph
            stating he would be responsible for said debt.
    February, 1989--Both parties signed divorce papers.
    April, 1989--I filed by 1988 tax return in Georgia. I filed ``Single.''
    1990--ERH joined the U.S. Navy--joined the U.S. Navy Seals. He was in
            for approximately 6 months when he quit. It is my
            understanding, from a conversation we had and one his mother
            had with my mother, that the U.S. Navy made a deal with ERH to
            ``overlook'' his past debts with IRS and tax liens because on
            his entrance exam he scored a perfect score.
    April, 1990--I filed by 1989 tax return in Georgia. I filed ``Single.''
    April, 1991--I filed by 1990 tax return in Georgia. I filed ``Single.''
    April, 1992--I filed by 1991 tax return in Georgia. I filed ``Single.''

        During this period from September, 1987 to November, 1992, I
    received NO communication from the IRS regarding any debt or any back
    taxes owed.

    November 3, 1992--Received a certified letter from the IRS demanding
            payment of approximately $35,000 for a 1986 tax return.
    November 4, 1992--Contacted law offices of Chamberlain, Hrdlicka, White
            in Atlanta. Obtained legal council from Scot Kirkpatrick and
            Joe Odom. They were given power of Attorney and communicated my
            stance to the IRS. They did not pursue--in fact, they asked for
            assistance from me to located ERH.
    November, 1992--Requested copy of 1986 tax return and detail concerning
            it from the IRS. Request was denied.
    November 24, 1992--Submitted another letter to IRS agent J. Gonzales
            and Judy Martin requesting same information.
    December 16, 1992--Finally received 1986 income tax transcript.
    November 28, 1992--Married Justin C. Powers in Denver, Colorado.
    January, 1993--Conversation with ERH and Joe Odom. ERH was contracting
            again for Electronic Arts. Was working with Mr. Gonzales, IRS
            agent, to make payment arrangements.
    February 5, 1993--Letter to Mr. James Austin, Atlanta IRS agent,
            explaining current situation.
    January, 1994--Requested another transcript of 1986 income tax.
    July 1, 1994--Justin and I moved to Denver. We were expecting our first
            child.
        During this period of approx. 2 years (January '94 to March '96, I
    received NO communication from the IRS.

    March 25, 1996--Received another letter from the IRS demanding payment
            of approx. $40,000 for 1986 tax debt.
    June, 1996--Obtained legal council from Peter Moison and Marty Green,
            attorneys. The IRS took a very aggressive stance right away. On
            advice of my attorneys it was time to ``accept'' the
            responsibility and pay the piper. Also during this time, I
            inadvertently received a copy of an ``Investigation History''
            from Willy Wilcox, IRS agent. It revealed that the IRS was also
            going after ERM's current wife, Cindy Siegmund Hammond.
    July 31, 1996--Received notice from the IRS to Levy wages and salary.
            Notice also went to employer.
    August 6, 1996--Submitted Offer in Compromise to IRS to pay original
            debt of $8,000.
    August 13, 1996--Received letter from IRS to release Levy on wages.
    August 28, 1996--Offer returned from IRS with letter stating, ``. . .
            originals must be submitted, no facsimiles or copies . . .''
        Resubmitted Offer
    November 14, 1996--Offer returned again. Apparently submitted on an
            ``obsolete'' form.
    February 5, 1997--Resubmitted Offer again.
        I may be pointing out the obvious here, but with the ``pettiness''
            of an original carbon conform vs. a photo copy (which this
            attorney has used in the past) just highlights more of the
            waste, fraud and quasi-extortion within the IRS.
    April 30, 1997--Received letter from IRS--notifying me of an overload
            in offer investigations and an offer investigator will be
            contacting me by May 24th.
    May 14, 1997--Received letter--Offer has been assigned to Robert Evers,
            IRS. I am requested to pull together personal financial
            information.
    May 19, 1997--Notice of Federal Tax Lien assessed against me.
    June 19, 1997--Submit personal financial data and letter to Robert
            Evers.
    October 10, 1997--Received letter from IRS--still reviewing Offer.
    November 17, 1997--Receive letter from Robert Evers. Offer was rejected
            and they (IRS) were prepared to go the next step. They assessed
            my earnings and those of my husband's too, and determined I
            could afford to ``pay in excess of $27,000.''
    January 30, 1998--Resubmitted Offer in Compromise to IRS to pay
            $25,000.
    March 15, 1998--Deadline for $25,000 payment to IRS.

        So there is the history and based on these dates, I would like to
    add a few comments.
        Once I moved to Atlanta in 1987, ERH and I still kept in touch. He
    would move around from place to place--sometimes staying with friends.
    I believe the IRS was attempting to collect from him and I also believe
    that was the reason for his travels. I also understand that the 1986
    tax debt is not his only outstanding debt to the government.
        What I find ironic is that I maintained 3 residences in the city of
    Atlanta for almost seven years and filed tax returns dutifully each
    year, and yet was never notified of this debt. It was as if the seven
    year statute was ready to expire and up-popped my name in the computer
    as someone to start collecting from. One would assume that a joint-
    return would entitle me to copies of correspondence over the past 11
    years. I have discovered the hard way that the IRS does not have to
    same assumption. I was told through my attorney that one IRS agent said
    . . . ``if this was such a concern of hers, she should have contacted
    us.''
        Furthermore, within the last week, my attorney submitted a request
    to the IRS to obtain copies of Eric's Offer and Compromise and any
    correspondence the IRS had with him. We discovered another
    communication barrier within the IRS. My Power of Attorney is not
    ``good enough'' for the IRS and therefore they responded to the request
    stating that I, personally, must submit the request. This is just
    another example of the waste, fraud and corruption within the system.
    Meanwhile, interest and penalties continue to increase.
        I respect the laws of the government and for the most part believe
    in the basic principles of the IRS, however, I must now side with the
    thousands of other women in the same situation. It is not right for the
    IRS to hold any spouse liable for past debt, especially if it is
    unknown to the other spouse. I recall from recent hearings that a judge
    ruled against one women because she had a bachelor's degree and should
    have ``known better'' about her ex-husbands fraudulent investments.
    What does one have to do with the other?! My ex-husband wrote computer
    games and made close to $80,000 for a few years. He did not have a
    college degree. And because I have a degree, the IRS sees my earning
    potential greater than his.
        Moreover, I believe there has been a significant effort put forth
    to track me down, as opposed to my former husband, Eric Hammond. And in
    one instance in Atlanta, an IRS agent left his business card in the
    front door of my house with a message reading `` . . . call be before
    midnight. You can reach me at home . . . .'' Unfortunately, we never
    used the front door and we discovered the card several weeks after it
    had been left there. Additionally, the IRS has on several occasions
    contacted me to help them locate Eric.
        Understanding that I did sign a joint return, my total income for
    the year in question was substantially less than that made by my former
    husband and the withholding from that income more than covered my share
    of the tax liability. My former husband has demonstrated the ability to
    earn a considerable income at a very young age and I strongly believe
    this was not a ``once in a lifetime opportunity.'' I know what he is
    capable of earning and believe he should be forced to do so, as I am.
        In closing, I would like to add that I am remarried and have been
    for 5 years and have a 3-year-old daughter. After 11 years, I do not
    feel that my husband should, in anyway, be held responsible for this
    so-called debt. This situation has strapped us financially and we have
    been forced to access our retirement accounts, as well as a bank loan
    to pay this off. Meanwhile, my ex-husband has declared bankruptcy. And
    as far as I can tell, the IRS has given up on him. Wouldn't jail be the
    next logical step?
        I thank you for speaking with me and encouraging this letter and as
    I mentioned, I am willing to participate in any future hearings that
    may be planned and could be in Washington, D.C. with a day's notice.

                                   __________

                Statement of the Securities Industry Association

        The Securities Industry Association (``SIA'') appreciates the
    opportunity to submit written testimony on the proposals to restructure
    the Internal Revenue Service. We commend Chairman Roth and all the
    members of the Committee for holding these extensive hearings on the
    proposals to restructure the Internal Revenue Service.
        The SIA brings together the shared interests of nearly 800
    securities firms throughout North America to accomplish common goals.
    SIA members--including broker-dealers, investment banks, specialists,
    and mutual fund companies--are active in all markets and in all phases
    of corporate and public finance. Many of these firms are small
    businesses that affiliate with entrepreneurs who provide financial
    planning and/or accounting services as well as stock brokerage
    services. In the United States, SIA members collectively account for
    approximately 90 percent, or $100 billion, of securities firms'
    revenues. They manage the accounts of more than 50 million investors
    directly and tens of millions of investments indirectly through
    corporate, thrift, and pension plans.
        The securities industry provides taxpayers with information that
    enables them to file timely and accurate returns--an important role in
    the tax filing process. We also provide the IRS with similar
    information that enhances the agency's ability to administer the
    federal tax laws. The securities industry is proud of our extensive
    compliance efforts, and of the cooperative spirit in which we have
    worked with the IRS to assure that taxpayer income is fully reported.
    IRS statistics bear out the fact that compliance levels for securities
    industry filings are very high.
        We strongly believe that changing the current information return
    deadline would benefit both taxpayers and the IRS, and substantially
    improve the tax filing process. We urge the Committee to thoroughly
    review the process and timetable for delivering information returns.
    Role of Securities Firms In Tax Filing Process
        The securities industry is a major filer of information returns,
    providing returns each year to 50-million investors. Our firms pride
    themselves on their track records for accuracy and timeliness.
    Nevertheless, a number of factors contribute to the need for payers to
    file amended and corrected returns after the original due date. Amended
    and corrected returns are a processing and compliance nightmare, which
    cost taxpayers, financial firms, and the IRS a tremendous amount of
    money, time, and effort.
        The most significant contributing factor is the short time frame
    for processing and providing information to taxpayers. Even under
    optimal circumstances, it is difficult to meet the current deadlines.
    While payers have until January 31 to mail information returns to
    payees, most large firms must cease processing on or about January 15.
    This is necessary to ensure sufficient time to print, insert, and mail
    millions of consolidated information reporting forms by the required
    mail date. Since this information is not available before year end,
    there is not much time to review the integrity of the information being
    sent. If processing problems arise, and they frequently do, securities
    firms have only a few days to correct such problems before they are
    required to provide amended and corrected returns.
        Secondly, the financial information required to be reported is not
    only generated internally, it is also collected from outside sources.
    The most significant outside information relates to the
    characterization of distributions from Regulated Investment Companies
    (RICs) and Real Estate Investment Trusts (REITs). Income
    classifications (e.g., capital gain versus ordinary dividend) are
    normally not available from the companies themselves until the second
    week in January, leaving virtually no processing time. Moreover, these
    initial classifications/allocations are frequently wrong, causing
    mutual funds and securities firms alike to file amended returns with
    their shareholders and investors.
        Classification information is not only limited to REITs and RICs,
    but extends to corporations as well. Corporations may also change the
    taxability of their distributions due to insufficient earnings and
    profits or other corporate actions (e.g., taxable mergers, exchanges,
    spin-offs, and other reorganizations). Again, the securities industry
    is at the mercy of these companies to provide this tax reporting
    information during the first two weeks of January. If such firms fail
    to meet this deadline, corrected and amended returns must be sent to
    payees and the IRS.
        Finally, the information that is provided from outside sources is
    provided on paper, and not in a uniform format. Once received,
    securities firms must take the information, format it, create computer-
    readable files to analyze, and prepare Forms 1099. While the securities
    industry has worked with other industry groups and vendors to provide a
    standardized flow of information, the result has been less than
    perfect. Consequently, this limitation adds further stress to a process
    that is already overburdened.
    Need To Change Information Return Deadline
        Beginning with the Revenue Act of 1962, payers have been required
    to provide information returns to the IRS and payees. Since then,
    information reporting requirements have exploded in scope and
    complexity. Most recently, for example, the Tax Reform Act of 1997
    required that capital gain distributions from RICs and REITs be
    classified for 1997 as either long-term, mid-term, and unrecaptured
    Section 1250 capital gains. Obtaining this information from all RICs
    and REITs, and developing a means of effectively conveying it to
    investors, will be a tremendous challenge since current 1099 Forms do
    not accommodate this type of information.
        While reporting requirements have increased, so too have the number
    of taxpayers receiving the information. Tens of millions of middle-
    class Americans have invested in the market over the past fifteen years
    as the Dow Jones average has soared from 800 to more than 8,000.
    According to a NBC/Wall Street Journal poll published last year, 51
    percent of adults say they own stock shares or mutual funds. The growth
    in mutual fund shareholders confirms this trend. The total number of
    mutual fund shareholder accounts increased from 24.6 million in 1983 to
    151.0 million in 1996. In light of the ever-increasing complexity of
    reporting, increasing numbers of investors, and inadequate time frames
    for providing information, there is little doubt that if the deadline
    for providing returns is not extended, the trend towards amended and
    corrected returns will continue.
    Recommendation
        Accordingly, SIA recommends that Congress facilitate the flow of
    timely and accurate information returns to taxpayers and the IRS by
    changing the mailing date of Forms 1099 to February 15 from January 31,
    and the filing due date to the IRS from February 28 to April 15. This
    recommendation is consistent with the proposal contained in the
    National Commission on Restructuring the Internal Revenue Service.
    These changes in the mailing and filing dates would dramatically reduce
    the number of amended and corrected returns provided to taxpayers and
    the IRS since payers will have more time to ensure the integrity of the
    information provided. This reduction in corrected returns will enable
    taxpayers to file their tax returns correctly the first time, instead
    of having to file amended returns in order to ``get it right.''
    Similarly, such a reduction will minimize the number of IRS inquiries
    due to mismatched income amounts, as well as reduce the processing that
    multiple tax filings require of the IRS. In short, such a change will
    save taxpayers, financial firms, and the IRS significant resources
    while making the process more efficient.

                                   __________

                   Statement of James I. Shepard, Fresno, CA

        The issue which I wish to address is the provision of H.R. 2676,
    the Internal Revenue Service Restructuring and Reform Act of 1997, that
    would change the burden of proof in trials in Tax Court.
        When a taxpayer files an income tax return he or she affirmatively
    states in writing that the amount of tax shown is the correct amount
    due. Currently, if questioned on audit, should the taxpayer chose to
    file a petition in Tax Court the taxpayer bears the burden of proof on
    the only issue before the court, what is the correct amount of tax due.
    My concern for the proposed change arises from my experience as both a
    tax practitioner and a tax lawyer. For more than 20 years, as a lawyer
    in Denver, Colorado, and Allison, Iowa, and as a tax consultant with an
    accounting firm in Fresno, California, I prepared state and federal
    income tax returns as part of my practice. During this time I attended
    countless audits on behalf of my clients, processed administrative
    appeals and tried cases in Tax Court. Based on my experience and my
    knowledge of the taxpayers' attitude, I am strongly opposed to the
    change in the burden of proof and urge the Senate to reject that part
    of the bill.
        My concerns are as follows:
              1. The Change Will Cause a Revenue Loss. If the proposed
            change is made, tax practitioners across the country will find
            that their clients will be more aggressive in their attitude,
            particularly in claiming deductions. As the taxpayers learn
            that the IRS has the difficult task of proving the unknown,
            taxpayers will begin to deduct questionable or improper
            expenses knowing that the IRS may never audit the return, but
            more importantly, may never be able to prove that a claimed
            deduction is illegal. The revenue loss arising from a change in
            public attitude of this nature may not be immediate, but it is
            inevitable.
              2. The Revenue Loss Will Flow Through to the States. Because
            most state income taxes are computed by reference to the
            adjusted gross income shown on the federal income tax return,
            the shift in the burden of proof will cause a loss of income
            tax revenue to the states.
              3. Small Taxpayers Bear the Burden of Revenue Loss. Perhaps
            more importantly, is that it is natural to expect the wealthier
            taxpayers to become more aggressive in their tax reporting
            duties than the smaller taxpayers-the smaller taxpayer is far
            more likely to decide to pay a tax found due on audit then to
            litigate a case in Tax Court simply to take advantage of the
            taxpayer favorable burden of proof. Thus the smaller taxpayers
            will pay a tax asserted due after an audit, where a deduction
            is dependent on the taxpayer's intent, for instance, while the
            wealthy taxpayer will refuse to pay such a tax, being able to
            pay the cost of going to Tax Court.
              4. The Audit Process Will Become Less Efficient. In order to
            adjust for the loss of revenue, the return examination process
            will likely become more stringent. As Office Auditors and
            Revenue Agents become more aware of the change in the burden of
            proof and the need for detailed information at trial they will
            require taxpayers to produce more documents and information and
            to provide detailed narrative reports of transactions. This
            more stringent examination process will eventually increase the
            cost of audits and reduce the number completed-the system will
            become less efficient and more costly, all at the expense of
            the taxpayers.
              5. The Change is Counter-Productive. A likely consequence of
            the proposed change is that the taxpayer will face more
            burdensome audits. Office Auditors and Revenue Agents
            inevitably will adjust their methods to account for the change
            in the burden of proof, a greater emphasis will be placed on
            gathering evidence to sustain that burden, should the matter go
            to trial. The taxpayer will be required to spend more time and
            effort to provide information designed to satisfy the burden of
            proof, because it will be more expedient to develop a case at
            the audit level than many months later when a case is pending
            in court. Thus, the average taxpayer undergoing an audit will
            encounter more rigid requirements for the substantiation of
            deductions and other items reported on their returns.
              6. The Voluntary Self-Assessment System of Taxation Will
            Become Less Effective. The fundamental fatal flaw in this
            proposal, which appears to be designed more to punish the IRS
            than to accomplish a meaningful improvement in our tax system,
            is that we have a voluntary, self-assessment system of
            taxation. Like it or not, until we change to an involuntary tax
            system, a national sales tax, for instance, our government is
            at the mercy of the taxpayer to report the tax which the
            taxpayer determines to be due.
        The principal compliance enforcement mechanism, the taxpayer audit,
    simply cannot examine every return filed to ensure taxpayer compliance.
    Thus the system is dependent on taxpayers' properly reporting the true
    nature of their transactions-the taxpayer not only has all of the books
    and records but solely possesses most of the knowledge of the nature of
    the underlying transactions. While the IRS Reform bill makes certain
    provisions for requiring the taxpayer to produce books and records,
    books and records which the taxpayer creates and which may be of
    questionable veracity, where the proper tax is dependent on a
    taxpayer's intent it may likely be impossible for the IRS to
    demonstrate the absence of a claimed intent. Whether an expense is
    business or personal in nature, or whether property was used in the
    taxpayer's business, for instance, are questions often dependent on the
    taxpayer's intent which cannot be disproved by use of books and
    records. The present system accounts for these factors by requiring the
    taxpayer to sustain the burden of proof where the court is able to
    judge the taxpayer's veracity when testifying about such transactions-
    if the court finds the taxpayer's testimony believable it will find for
    the taxpayer. Requiring the IRS to call a taxpayer to testify to prove
    a negative is an entirely different matter.
        The Internal Revenue Code is replete with instances in which the
    taxation of a particular transaction is dependent on ``all facts and
    circumstances.'' Many of the ``all facts and circumstances'' situations
    are heavily dependent on the taxpayer's intent. To require the IRS to
    prove the absence of a specific state of mind creates a loophole for
    the wealthy taxpayer through which countless dollars of revenue will
    disappear.
              7. Tax Professionals Oppose the Change. Every accountant, tax
            lawyer or knowledgeable individual with whom I have discussed
            the issue agrees, the burden of proof should not be changed.
            Further, a Tax Advisory Committee, a group of experienced,
            knowledgeable tax professionals and educators appointed to
            assist the National Bankruptcy Review Commission, adopted a
            proposal to specify that the debtor-taxpayer would bear the
            burden of proof in the determination of tax makers in
            bankruptcy court, consistent with the current rule in Tax
            Court. The Commission unanimously adopted the proposal. This
            proposal is based on the knowledge that forcing the taxing
            authority to prove what only the debtor-taxpayer knows creates
            an opportunity for coercive style litigation tactics,
            prevarication and, in many cases, outright fraud.
              8. The Lawyers are the Big Winners. Section 301 of H.R. 2676
            provides that the burden of proof shifts to the IRS when, ``the
            taxpayer has fully cooperated with the Secretary with respect
            to such issue, including providing, within a reasonable period
            of time, access to and inspection of all witnesses,
            information, and documents within the control of the taxpayer,
            as reasonably requested by the Secretary, . . .'' (Emphasis
            supplied). The italicized portions of the proposed statutory
            language are open invitations to litigation-none of these terms
            are subject to ready definition and all potentially require
            judicial determination in every case.

                                   __________

                        Statement of Jonathan R. Siegel

                                      February 5, 1998.
    Senator William V. Roth, Jr.,
    Hart Senate Office Building,
    U.S. Senate,
    Washington, DC.

    Dear Senator Roth: You solicited my opinion regarding the
    constitutionality of some provisions of H.R. 2676, the Internal Revenue
    Service Restructuring and Reform Act of 1997. I am very happy to
    provide this reply.
                                executive summary
         I conclude, first, that members of the IRS Oversight Board
    contemplated by the bill would be ``officers'' (or at least ``inferior
    officers'') of the United States subject to the Appointments Clause of
    the Constitution.
         I next conclude that the provision requiring the President to
    appoint a ``union representative'' as a member of the Board would
    probably not be held unconstitutional by a court. Courts could take the
    view that provisions restricting the President's appointment power are
    constitutional because they are best viewed as nonbinding expressions
    of the Senate's intentions regarding confirmation of nominees.
    Moreover, a challenge to the provisions is unlikely to arise in any
    justiciable form. In addition, even if the restrictions in the
    appointment provision would be binding, they could be ``reasonable and
    relevant qualifications,'' which the Supreme Court has suggested are
    permissible.
         Finally, I recommend deleting the provision requiring the removal
    of the ``union representative'' from the Board upon the termination of
    that member's association with the union. This provision would give a
    private group the power to remove a federal official from office. Such
    an arrangement would, so far as I am aware, be unprecedented. It would
    combine two constitutional concerns: delegation of power to private
    parties and interference with the President's control over executive
    officials. While there are reasonable arguments that this provision is
    constitutionally permissible, it would pose a significant risk of
    undermining actions taken by the Oversight Board.
                      the statutory provisions in question
         You asked about two provisions of the bill relating to the
    appointment of members of the Internal Revenue Service Oversight Board
    that the bill contemplates. The first states that one member of the
    Board must be ``a representative of an organization that represents a
    substantial number of Internal Revenue Service employees and who is
    appointed by the President, by and with the advice and consent of the
    Senate.'' The other states that this member would be removed from
    office ``upon termination of employment, membership, or other
    affiliation'' with said organization. See H.R. 2676, Sec. 101, which
    would be codified at 26 U.S.C. Sec. 7802(b)(1)(D), (b)(4)(C).[1]
         In my opinion, these provisions of the bill raise three
    constitutional questions. First, would members of the proposed IRS
    Oversight Board be ``officers'' or ``inferior officers'' of the United
    States to whom the Appointments Clause of the Constitution would apply?
    Second (assuming the answer to the first question is yes), would the
    appointment provision improperly interfere with the President's
    appointment power? Third (again assuming the answer to the first
    question is yes), would the removal provision impermissibly grant
    authority to a private entity to remove a federal official?
    1. The Powers of the Oversight Board Would Make Its Members
            ``Officers'' (or at Least ``Inferior Officers'') Subject to The
            Constitution's Appointments Clause
         The first question is whether members of the IRS Oversight Board
    would be ``officers'' (or ``inferior officers'') of the United States
    to whom the Constitution's Appointments Clause would apply. An
    appointee who exercises ``significant authority pursuant to the laws of
    the United States'' is an ``officer'' subject to the Appointments
    Clause. Buckley v. Valeo, 424 U.S. 1, 126 (1976). By contrast, if an
    agency's powers are ``of an investigative and informative nature,
    falling in the same general category as those powers which Congress
    might delegate to one of its own committees,'' so that the agency's
    functions are ``merely in aid of the legislative function of
    Congress,'' then the agency's members may be appointed in any manner
    that Congress may provide. Id. at 137-39.
         The current text of H.R. 2676 leaves some ambiguity as to the
    nature of the Oversight Board. The Board's ``specific
    responsibilities'' are listed in Sec. 7802(d). Some of these
    responsibilities could, plainly, be exercised by persons not appointed
    in accordance with the Appointments Clause. For example, under the
    bill, the Board would have the responsibility to ``recommend to the
    President candidates for appointment as Commissioner of Internal
    Revenue and recommend to the President the removal of the
    Commissioner.'' Sec. 7802(d)(3)(A). Since any citizen could make such
    recommendations, and since there is no requirement in the bill that the
    recommendations be followed, these functions would not by themselves
    make the Board members constitutional officers. Similarly, the Board's
    role in the preparation of an IRS budget request, which would be
    transmitted to Congress together with the President's budget request
    for the IRS, Sec. 7802(d)(4), could reasonably be characterized as
    action taken ``in aid of the legislative function of Congress,'' since
    the budget request would not, by itself, have any operative effect. The
    Board's power to ``review'' the operational functions of the IRS,
    Sec. 7802(d)(2), would seem to be in the same category.[2]
         The status of some of the Board's other responsibilities is less
    clear. The bill provides that the Board would ``review and approve''
    strategic IRS plans. Sec. 7802(d)(1) (emphasis added). The words ``and
    approve'' suggest that the Board would have power to affect actual IRS
    operations. However, the bill does not clearly establish what would
    follow from the Board's refusal to approve a strategic plan. Similarly,
    it is not clear whether the Board's general responsibility to
    ``oversee'' the IRS, Sec. 7802(c)(1), entails power to affect actual
    IRS operations, or whether this responsibility is akin to the oversight
    of executive agencies routinely carried out by congressional
    committees.
         However, there is one specific responsibility of the Board and one
    other power that it would have that lead me to conclude that the
    Board's members would be subject to the Appointments Clause. The first
    is the Board's responsibility to ``review and approve the
    Commissioner's plans for any major reorganization of the Internal
    Revenue Service.'' Sec. 7802(d)(3)(C). The natural interpretation of
    this provision would be that the Commissioner could carry out a major
    reorganization of the IRS only with the approval of the Board. Turning
    to the House Report for additional guidance confirms this conclusion.
    The Report provides that ``[w]ith respect to those matters over which
    the Board has approval authority, the Board's decisions are
    determinative.'' H.R. Rep. No. 364, 105th Cong., 1st Sess. [hereafter
    House Report] 36 (1997) (emphasis added).
         Construing the text of H.R. 2676 together with the House Report,
    it therefore appears that the Board's decisions would affect actual IRS
    operations. The Commissioner, for example, would be unable to effect a
    major consolidation of IRS regions or districts without Board
    approval.[3] The power to block the IRS Commissioner on a major
    decision of this kind is certainly an important executive power that
    Congress could not delegate to one of its own committees, because it
    would ``alter[] the legal rights, duties, and relations of persons . .
    . outside the legislative branch.'' Immigration & Naturalization
    Service v. Chadha, 462 U.S. 919, 952 (1983).
         In addition, under H.R. 2676 the Board's approval would be
    required for the appointment of the Taxpayer Advocate. See Sec. 102,
    which would be codified at 26 U.S.C. Sec. 7803(c)(1). The Taxpayer
    Advocate has significant executive power under 26 U.S.C. Sec. 7811 and
    is therefore a constitutional ``officer'' or ``inferior officer.''
    Since Congress could not assign to itself or one of its committees the
    appointment of executive officers, see Buckley v. Valeo, supra, the
    role of the Board in the appointment of the Taxpayer Advocate further
    demonstrates that its members would be subject to the Appointments
    Clause.
         Some clarification of the Board's authority to affect actual IRS
    operations might be desirable. However, for the reasons given above, I
    conclude that the members of the Oversight Board would be ``officers''
    (or at the least, ``inferior officers'') of the United States subject
    to the Appointments Clause of the Constitution[4] and to other
    separation of powers principles governing executive officers.
     2. It is Unlikely that a Court Would Hold the Appointment Provision to
            Be Unconstitutional
         H.R. 2676 provides that the President, by and with the advice and
    consent of the Senate, must appoint as one member of the IRS Oversight
    Board ``a representative of an organization that represents a
    substantial number of Internal Revenue Service employees.''
    Sec. 7802(b)(1)(D). The question is whether this restriction
    impermissibly interferes with the President's appointment power.
    Although the question is difficult to answer with confidence, because
    the constitutional issues raised by statutory restrictions on the
    President's appointments power have never really been decided by the
    Supreme Court or even by courts of appeals, I conclude, for three
    different reasons, that courts would be unlikely to hold this
    appointments provision unconstitutional.
                 a. The Appointment Provision, Viewed as a Nonbinding
                        Expression of the Senate's Intentions Regarding
                        Confirmation of Nominees, Would be Constitutional
         The Constitution provides that the President shall appoint all
    officers of the United States whose appointments are not otherwise
    provided for. U.S. Const., art. II, Sec. 2. Justice Kennedy has
    concluded that the Constitution gives ``[n]o role whatsoever . . .
    either to the Senate or to Congress as a whole in the process of
    choosing the person who will be nominated for appointment'' and that
    the judiciary should not ``tolerate any intrusion by the Legislative
    Branch'' into powers that the Constitution textually commits to the
    President. Public Citizen v. United States Department of Justice, 491
    U.S. 440, 483-485 (1989) (Kennedy, J., concurring).[5]
         On the other hand, the Constitution grants the Senate an important
    role in the appointments process. The President's power is to appoint
    officers ``by and with the Advice and Consent of the Senate.'' U.S.
    Const., art. II, Sec. 2. The Constitution places no restrictions on the
    Senate's Advice and Consent authority. The Senate may reject or approve
    the President's nominees ``for whatever reason it deems proper.''
    Federal Election Comm'n v. NRA Political Victory Fund, 6 F.3d 821, 825
    (D.C. Cir. 1993), cert. dismissed, 513 U.S. 88 (1994).
         Putting these two points together, one may conclude that statutory
    restrictions on the President's ability to appoint executive officers
    who are subject to Senate confirmation are constitutional because they
    are best viewed as nonbinding expressions of the intentions of the
    Senate regarding its exercise of its Advice and Consent power. That is,
    an apparent statutory restriction on the President's appointment power
    should not be viewed as imposing an actual legal barrier to the
    appointment of any candidate of the President's choosing. Rather, it
    should be viewed as an advance statement of the Senate's intention to
    reject any nominee who does not meet stated criteria.
         This view is suggested by the D.C. Circuit's opinion in NRA
    Political Victory Fund, supra. In that case, the court observed that
    congressional limitations on the President's appointment power may
    raise serious constitutional questions and that Presidents have often
    viewed such limitations as not being legally binding. See 6 F.3d at
    824. However, the court also noted that such legislation may impose
    ``political restraints'' because of the Senate's power to reject a
    presidential nominee for any reason. Id. at 825. The court observed
    that a Senate resolution or even an informal communication to the
    President regarding the Senate's intentions would have the same effect
    as a statutory restriction. Id. On this view, the President's
    appointments power is in fact restricted, not by an apparent statutory
    limitation, but by the President's ``perception of the present Senate's
    view as it may be assumed to be reflected in the statute.'' Id.
         Since the Senate may reject a presidential nominee for any reason,
    it would follow that any set of qualifications may be inserted into an
    agency's organic statute, on the understanding that these restrictions
    do not actually prevent the President from submitting any nominee to
    the Senate, but only indicate to the President that the Senate will
    reject nonconforming nominees. Taking the view suggested by the D.C.
    Circuit in NRA Political Victory Fund, the restriction contained in
    Sec. 7802(b)(1)(D) of H.R. 2676 would be constitutional.
                 b. The Constitutionality of the Appointment Provision
                        Would Be Unlikely to Come Before a Court in a
                        Justiciable Case
         In addition to being concerned about the constitutionality of
    Sec. 7802(b)(1)(D), the Senate may wish to know whether this section,
    if enacted into law, would actually lead to a judicial judgment that
    the IRS Oversight Board is unconstitutionally constituted. There is
    another reason why this likelihood of such a judgment is very low. So
    long as the President complies with statutory restrictions regarding
    the qualification of appointees, legal challenges based on those
    restrictions are nonjusticiable. In NRA Political Victory Fund, supra,
    the D.C. Circuit held that it could not assume that apparent statutory
    restrictions on the President's appointment power, with which the
    President had complied, had in fact limited his power to appoint
    whomever he wanted, since there was no way of knowing whether he would
    have appointed different people in the absence of the restrictions.
    Accordingly, the court refused to hear a challenge to the restrictions.
    6 F.3d at 824-25.
         A similar result would follow in the case of a challenge to
    Sec. 7802(b)(1)(D) of the present bill. So long as the President chose
    to respect the qualification requirements contained in the provision,
    no one would be in a position to prove that the President would have
    chosen differently absent the statutory qualifications, and a court
    therefore could not pass on a challenge to them. A justiciable
    controversy could arise, as the D.C. Circuit remarked, only if the
    President chose to disregard the statutory qualifications and the
    Senate confirmed a presidential nominee who did not meet the
    qualifications. See 6 F.3d at 825. I am aware of no case in which such
    disregard of the qualifications by both the President and the Senate
    has ever occurred.[6] I conclude, therefore, that it is extremely
    unlikely that the provisions of Sec. 7802(b)(1)(D) would ever lead to a
    judgment of unconstitutionality.
                 c. Even if Binding, the Qualifications Contained in the
                        Appointment Provision Would Probably Not Be Held
                        Unconstitutional
         Finally, I will consider the constitutionality of 7802(b)(1)(D)
    from one other viewpoint. Assuming that the provision would be an
    enforceable restriction on the President's power of appointment, and
    imagining that a justiciable case testing its constitutionality somehow
    arose, would a court hold the provision unconstitutional?
         Justice Kennedy, as noted above, appears to have concluded that
    Congress may not restrict the President's appointment power. However,
    the Supreme Court as a whole has never taken that view. Indeed, the
    Court has never passed upon the question at all. Such hints as may be
    gleaned from occasional comments in Court opinions suggest that the
    Court would take a more flexible approach to the issue of statutory
    qualifications for presidential appointees.
         For example, even in Myers v. United States, 272 U.S. 52 (1926),
    in which the Court took its most Executive-favoring view of the
    President's power concerning executive officers,[7] the Court stated
    that Congress may ``prescrib[e] . . . reasonable and relevant
    qualifications and rules of eligibility of appointees.'' Id. at 129.
    The only limitation on Congress's power that the Court mentioned was
    that the qualifications could not ``so limit selection and so trench
    upon executive choice as to be in effect legislative designation.'' Id.
    at 128; see also Mow Sun Wong v. Hampton, 435 F. Supp. 37, 42 n.6 (C.D.
    Cal. 1977), aff'd 626 F.2d 739 (9th Cir. 1980), cert. denied, 450 U.S.
    959 (1981).[8]
         Such an approach would be consistent with the Supreme Court's
    general approach to many separation of powers questions. Currently, the
    Court analyzes many separation issues using a flexible balancing test.
    With regard to limitations on presidential powers concerning executive
    officers, the Court has permitted such limitations so long they do not
    aggrandize the powers of Congress and so long as they are not ``of such
    a nature that they impede the President's ability to perform his
    constitutional duty.'' Morrison v. Olson, 487 U.S. 654, 691 (1988); see
    also Nixon v. Administrator of General Services, 433 U.S. 425, 443
    (1977); Bowsher v. Synar, 478 U.S. 714 (1986) (rule against
    congressional self-aggrandizement).
         The statutory qualifications contained in Sec. 7802(b)(1)(D) of
    H.R. 2676 would not violate the constitutional rule against
    congressional self-aggrandizement by giving Congress or any of its
    officers a role in the nomination of any member of the IRS Oversight
    Board. Given the generous interpretation of the word ``representative''
    suggested by the House Report that accompanies the bill,[9] the
    qualifications would not so limit the President's selection so as to
    be, in effect, legislative designation of a Board member. The statutory
    qualifications would be no more restrictive than some found in other
    agency organic statutes, past and current.[10]
         Moreover, the qualifications would appear to be ``reasonable and
    relevant.'' While there is no official, judicially articulated
    explanation of this phrase, I would hazard the statement that a
    qualification is ``reasonable and relevant'' if it bears a rational
    relation to a legitimate congressional goal. Here, it seems apparent
    that the goal of section 7802(b)(1)(D) is to promote good labor
    relations between the IRS and its employees by ensuring that the IRS
    Oversight Board will have a member who will give appropriate voice to
    employee needs, concerns, and interests. This would seem to be a
    perfectly legitimate goal for Congress. The qualification that the
    Board member be a ``representative of an organization that represents a
    substantial number of Internal Revenue Service employees'' bears a
    rational relation to this goal.
         Finally, given the limited powers to be exercised by the IRS
    Oversight Board under the bill (see point 1, above), I would say that
    the statutory qualifications on this Board member would not likely be
    held to impede the President's ability to perform his constitutional
    duty. This conclusion is buttressed by the fact that, under the bill,
    Board members would be removable from office at the will of the
    President. Sec. 7802(b)(4)(A). I therefore conclude that the
    qualifications provided in Sec. 7802(b)(1)(D) would not likely be held
    to be unconstitutional.
     3. The Removal Provision Should be Deleted from the Bill
         H.R. 2676 provides that the member of the IRS Oversight Board
    appointed pursuant to Sec. 7802(b)(1)(D) ``shall be removed upon
    termination of employment, membership, or other affiliation with the
    organization described in'' that subsection. Sec. 7802(b)(4)(C). The
    effect of this provision is to give the private labor union to which
    the member belongs the power to remove a federal official from office.
    I conclude that, while there are reasonable arguments as to the
    validity of such a power, the delegation to a private organization of
    the power to remove federal officials from office would pose a
    substantial risk to the validity of actions of the Oversight Board and
    that this removal provision should therefore be deleted from the bill.
                 a. The Delegation, to a Private Group, of the Power to
                        Remove a Federal Official Poses Substantial
                        Constitutional Difficulties
         Supreme Court concern about the delegation of federal power to
    private parties played a role in one of the very small set of cases in
    which federal statutes have been struck down on nondelegation grounds.
    In Carter v. Carter Coal Co., 298 U.S. 238 (1936), the Court
    invalidated a statute authorizing coal producers and miners, by a
    supermajority vote, to fix minimum wages and maximum hours. The Court
    stated that ``[t]his is legislative delegation in its most obnoxious
    form; for it is not even delegation to an official or an official body,
    presumptively disinterested, but to private persons whose interests may
    be and often are adverse to the interests of others in the same
    business.'' Id. at 311. A similar concern could be raised here. In
    determining whether to take action that could remove the ``union''
    member from the Oversight Board, the union might not inquire
    disinterestedly whether the member was serving the public interest, but
    rather seek to advance its own interests.
         Moreover, the particular power that would be delegated to a
    private group here is the power to take action that removes a federal
    official from office. The nondelegation problem would therefore combine
    with concerns about interference with the President's control over
    executive officials. This combination would make Sec. 7802(b)(4)(C) a
    particular concern for those judges, such as Justice Scalia, who
    believe in a unitary executive branch in which the President must
    retain ``exclusive control'' over the exercise of executive power. See
    Morrison v. Olson, 487 U.S. at 705 (Scalia, J., dissenting).
         Finally, Sec. 7802(b)(4)(C) is of concern because it is, so far as
    I am aware, without parallel in federal law. I know of no other federal
    statute, past or present, that gives a private party the power to
    remove a federal official from office.[11] Certainly I know of no case
    in which such a power has received judicial approval.
         There are, it should be noted, reasonable arguments that the
    removal provision would be constitutional. Despite Carter Coal, federal
    statutes, past and present, have successfully placed some federal power
    directly in private hands, particularly where the power is exercised in
    conjunction with federal employees so as to promote its being exercised
    in a public-regarding way. For example, federal statutes provide that
    certain orders issued by the Secretary of Agriculture may become
    effective only upon receiving approval from private producers and
    handlers of agricultural products. See, e.g., 7 U.S.C. Sec. 608c(8);
    Block v. Community Nutrition Institute, 467 U.S. 340, 342 (1984). The
    Supreme Court approved a similar scheme in Currin v. Wallace, 306 U.S.
    1, 15-16 (1939).[12]
         Here, one might argue that the union would not directly exercise
    federal executive power, but only retain some power over one member of
    a multi-member federal body exercising such power. The union would not
    retain authority to remove that member at will; it could act only by
    expelling that member from the union, an action that would be
    constrained by other federal laws such as the Labor-Management
    Reporting and Disclosure Act. See 29 U.S.C. Sec. 411(a)(5) (member of a
    labor organization may be disciplined only after full and fair hearing
    upon written specific charges). Furthermore, under H.R. 2676 the
    President would also have the power, at will, to remove any member of
    the IRS Oversight Board. The President's power would help satisfy the
    rule of Morrison v. Olson, that interferences with the President's
    power over executive officials must not impede the President's ability
    to perform his constitutional duty.
         However, the foregoing points notwithstanding, the removal
    provision of the bill would raise serious constitutional concerns. It
    would delegate federal power to private parties in a way that, so far
    as I am aware, would be unprecedented and that has never received
    judicial approval, and it would combine the already delicate issue of
    delegating federal power to private parties with the equally delicate
    issue of interference with the President's ability to control federal
    officers. The result is substantial uncertainty that poses a
    significant risk to the constitutionality of the bill.
                 b. The Removal Provision Could Lead to a Judgment
                        Invalidating Actions of the IRS Oversight Board
         Moreover, the removal provision should be of particular concern,
    because, unlike the appointment provision, it could lead to a court
    challenge that could vitiate Board actions. The Supreme Court's cases
    show that if there is a problem with the provisions governing the
    removal of a federal executive official, a person harmed by an action
    of that official may raise a challenge to the validity of the action,
    even if the improper removal power is never exercised. In Bowsher v.
    Synar, 478 U.S. 714 (1986), plaintiff challenged powers exercised by
    the Comptroller General on the ground that the Comptroller General, who
    was removable by act of Congress, could not constitutionally exercise
    executive power. The Court permitted the case to go forward even though
    Congress had never removed or threatened to remove the Comptroller
    General for reasons of policy, because Congress's power to remove the
    Comptroller General created a ``here-and-now subservience'' that made a
    challenge to the Comptroller's exercise of power ripe. Id. at 728 n.5.
         It would follow that any person harmed by an action of the IRS
    Oversight Board could challenge that action on the ground that one of
    the Board's members was subject to a constitutionally invalid removal
    power. There would be no need to show that the member was in any danger
    of actual removal. The result is that this removal provision could cast
    a cloud of doubt over all actions of the proposed IRS Oversight
    Board.[13] Of course, given the limited powers to be exercised by the
    Board (see point 1, above), there may not be many cases where someone
    can demonstrate injury from a Board action, which would be a
    prerequisite for suit. In any such case, however, the removal provision
    would be a ground for challenge.
         Whether or not the removal provision for the union member would
    ultimately be held to be invalid by the courts, I suspect that Congress
    would be loath to imperil the entire enterprise of creating an IRS
    Oversight Board for the sake of this provision. I would therefore
    recommend that this provision be deleted.
                 c. Deleting the Removal Provision Would Probably Not
                        Substantially Detract from Congressional Goals
         Deleting the removal provision, I note, would probably not
    substantially undermine the congressional objectives with regard to the
    union member of the Board. The restrictions in the appointment
    provision would still ensure that the President would choose a person
    who would likely be a good representative on the Board of the interests
    of IRS employees. The Senate, through the appropriate use of its Advice
    and Consent power, could further ensure that this goal is met. While
    the deletion of the removal provision would mean that this Board member
    could, in theory, continue to serve on the Board even after ceasing to
    be affiliated with the union he or she represented at the time of
    appointment, in practice, it would probably happen in most cases that
    the member would continue to be affiliated with the union throughout
    his or her term as a Board member. And finally, if the union member did
    cease to be affiliated with the union and yet continued to serve on the
    Board, the President could always choose to remove the union member
    from the Board, since the bill provides that all members of the Board
    would serve at the pleasure of the President. It therefore seems that
    the deletion of this provision would create only a small likelihood
    that the union member of the Board would fail to represent IRS employee
    interests appropriately.
         In short, I think that deleting this provision would remove a
    substantial risk that the actions of the new IRS Oversight Board would
    be held constitutionally invalid without markedly undermining the
    congressional purposes of including the union member on the Board. On
    balance, it seems to me that deleting this provision would be the
    wisest course.
                                   conclusion
         I conclude that while the appointment provision of
    Sec. 7802(b)(1)(D) is unlikely to be held unconstitutional, the removal
    provision contained in Sec. 7802(b)(4)(C) raises serious constitutional
    concerns and would best be deleted. I hope this letter is of assistance
    to you, your committee, and to the Senate.[14]

          Respectfully yours,
                                     Jonathan R. Siegel
                            Associate Professor of Law.
                                    endnotes
    [1]: For convenience, I will hereafter refer to provisions within
            section 101 of the House bill by giving the section numbers
            that they would have within Title 26 after codification if the
            bill were enacted into law.
    [2]: H.R. 2676 would also require the Commissioner of Internal Revenue
            to ``consult'' with the Oversight Board concerning the matters
            specified in Sec. 7802(d)(2) and (3). See Sec. 102 (which would
            be codified at Sec. 7803(a)(3)). Again, however, it is not
            clear what is entailed by this duty of consultation; the text
            of the bill does not appear to require the Commissioner to act
            in accordance with the desire of the Oversight Board on matters
            as to which consultation is required.
    [3]: See House Report at 36 (citing such a consolidation as an example
            of a ``major reorganization'').
    [4]: It is unnecessary to determine more specifically whether the Board
            members would be ``officers'' or whether they would be
            ``inferior officers.'' The Appointments Clause of the
            Constitution applies to both.
    [5]: Justice Kennedy's opinion was joined by Chief Justice Rehnquist
            and Justice O'Connor. In the Federalist Papers, Alexander
            Hamilton also stressed the importance of placing the
            appointment power solely in the President's hands. He stated
            that the power should be ``[t]he sole and undivided
            responsibility of one man,'' who would exercise ``his judgment
            alone;'' pointing out a candidate would be ``his sole duty.''
            The Federalist No. 76 at 455-57 (C. Rossiter ed. 1961).
    [6]: Although the D.C. Circuit did not mention it, a justiciable
            controversy could presumably also arise if the President used
            his recess appointment power to install an appointee in
            disregard of the statutory qualifications. Again, however, I am
            unaware of any case in which such presidential action has
            occurred.
    [7]: In Myers, the Court held that Congress could not by statute
            restrict the President's power to remove a postmaster first
            class from office.
    [8]: Even when he was Assistant Attorney General for the Office of
            Legal Counsel, Professor Walter Dellinger agreed that the case
            law suggests that Congress has the power to impose reasonable
            qualifications for presidential appointees. See Walter
            Dellinger & H. Jefferson Powell, The Constitutionality of the
            Bank Bill: the Attorney General's First Constitutional Law
            Opinions, 44 Duke L.J. 110, 132 (1994).
    [9]: The House Report states that ``[i]n appointing the union
            representative, the President is not constrained to choose an
            individual recommended by a union covering IRS employees, but
            may choose whoever the President determines to be an
            appropriate representative of the union.'' House Report at 36
            n.11.
    [10]: For example, the current statute concerning the board of
            directors of Amtrak provides that the President must choose,
            among others, one director ``from a list of 3 qualified
            individuals submitted by the Railway Labor Executives
            Association'' and one director ``selected as a representative
            of business with an interest in rail transportation.'' 49
            U.S.C. Sec. 24302. Congress once required the President to
            choose three members of the Railroad Labor Board from six
            nominees made by railroad employees and three members from six
            nominees made by carriers. Act of Feb. 28, 1920, c. 91,
            Sec. 304, 41 Stat. 456, 470. Justice Brandeis's opinion in
            Myers v. United States contains an extensive catalogue of
            statutory restrictions on the President's appointment power.
            See 272 U.S. at 265-274 (Brandeis, J., dissenting).
    [11]: Some statutes are ambiguous. For example, 12 U.S.C. Sec. 263
            provides that certain members of the Federal Open Market
            Committee ``shall be'' presidents or first vice presidents of
            certain Federal Reserve banks, which are private organizations.
            The natural implication of the words ``shall be'' would seem to
            be that such members of the FOMC would lose their membership
            upon ceasing to be a president or first vice president of a
            Federal Reserve bank. However, the statute does not expressly
            say so, and, moreover, it is not clear whether FOMC members are
            federal ``officers'' subject to the Appointments Clause at all.
            See Melcher v. Federal Open Market Committee, 644 F. Supp. 510
            (D.D.C. 1986) (holding that they are not), aff'd on other
            grounds, 836 F.2d 561 (D.C. Cir. 1987), cert. denied, 486 U.S.
            1042 (1988)
    [12]: An extensive catalogue of federal statutory delegations of power
            to private parties may be found in Harold J. Krent, Fragmenting
            the Unitary Executive: Congressional Delegations of
            Administrative Authority Outside the Federal Government, 85 Nw.
            U. L. Rev. 62 (1990). Professor Krent, while expressing the
            view that delegations of federal power to private parties are
            difficult to reconcile with modern separation-of-powers
            doctrine, explores the possibility that the separation of
            powers can be preserved if the delegates' authority is
            sufficiently constrained by executive branch supervision or
            external pressures. Id. at 95-105; see also Harold H. Bruff,
            Public Programs, Private Deciders: The Constitutionality of
            Arbitration in Federal Programs, 67 Tex. L. Rev. 441, 463
            (1989) (``powers granted to private deciders must be structured
            so that both internal incentives and outside supervision
            conform their decisions to the public interest'').
    [13]: This doubt would apply regardless of whether the union member of
            the Board cast a deciding vote on any particular Board action.
            In Federal Election Comm'n v. NRA Political Victory Fund, 6
            F.3d 821 (D.C. Cir. 1993), cert. dismissed, 513 U.S. 88 (1994),
            the court overturned an action of the Federal Election
            Commission on the ground that the Commission contained two
            improper members even though those members had no vote at all.
    [14]: I noticed one other, very minor, point while reading Sec. 7802
            that I thought I would call to your attention, although it is
            not related to the question you asked. The bill provides that
            ``[n]o return, return information, or taxpayer return
            information (as defined in section 6103(b)) may be disclosed to
            any member of the Oversight Board described in subsection
            (b)(1)(A) or (D).'' Sec. 7802(c)(3). Interpreted literally,
            this provision would make it unlawful for the IRS to provide a
            Board member with a copy of his or her own return, a result
            Congress could hardly intend. Perhaps this problem could be
            fixed by inserting, before the period at the end of the
            sentence, the phrase ``, except for any return, return
            information, or taxpayer return information that the member
            would be entitled to receive if he or she were not a member of
            the Oversight Board.''