[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. 
[GRAPHIC] [TIFF OMITTED] T7361.001

[GRAPHIC] [TIFF OMITTED] T7361.002

[GRAPHIC] [TIFF OMITTED] T7361.003

               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.''