[Senate Hearing 105-581]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 105-581


 
                   INTERNAL REVENUE SERVICE'S METHODS

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                               __________

         Printed for the use of the Committee on Appropriations



                               


 Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

                                 ______

                     U.S. GOVERNMENT PRINGING OFFICE
 49-746 cc                   WASHINGTON : 1998
_______________________________________________________________________
            For sale by the U.S. Government Printing Office
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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky            FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana                TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama           BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire            HARRY REID, Nevada
ROBERT F. BENNETT, Utah              HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado    PATTY MURRAY, Washington
LARRY CRAIG, Idaho                   BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina      BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director
                                 ------                                

            Subcommittee on Treasury and General Government

              BEN NIGHTHORSE CAMPBELL, Colorado, Chairman
RICHARD C. SHELBY, Alabama           HERB KOHL, Wisconsin
LAUCH FAIRCLOTH, North Carolina      BARBARA A. MIKULSKI, Maryland
TED STEVENS, Alaska                  ROBERT C. BYRD, West Virginia
  (ex officio)                         (ex officio)
                           Professional Staff
                          Patricia A. Raymond
                              Tammy Perrin
                              Lula Edwards
                     Barbara A. Retzlaff (Minority)



                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening remarks of Senator Campbell..............................     1
Statement of Linda Sanders, Littleton, CO........................     4
    Prepared statement...........................................    12
Remedy for abuses................................................    13
Statement of Dennis Marty, Grand Junction, CO....................    14
Statement of Amy Powers, Littleton, CO...........................    16
Statement of Katherine Morehead, Aurora, CO......................    20
    Prepared statement...........................................    23
Senator's examples of other cases................................    25
Statement of Alvin Stjernholm, Lakewood, CO......................    25
    Prepared statement...........................................    27
Statement of Robert Lesher, Lakewood, CO.........................    28
    Prepared statement...........................................    31
Need for major changes...........................................    33
Statement of Doris Martinez, former IRS revenue agent, president, 
  Associated Tax Centre, Inc.....................................    33
Taxpayer Advocate and Problem Resolution Program.................    34
Disparate treatment of minority taxpayers........................    35
Secret hit lists and actions against taxpayer representatives....    36
Abusive audits and lack of due process...........................    38
Penalty and interest abatements and reform.......................    38
Taxpayer education and the Internal Revenue Code.................    39
Prepared statement of Doris Martinez.............................    41
Antibrowsing bill................................................    45
Statement of Kenneth Tuchman, founder and president, TeleTech....    46
    Prepared statement...........................................    50
Possible pilot program...........................................    52
Statement of Hon. Charles O. Rossotti, Commissioner, Internal 
  Revenue Service................................................    55
    Prepared statement...........................................    60
Public service announcements.....................................    62
IRS outreach efforts.............................................    62
Innocent spouses.................................................    63
IRS penalties....................................................    64
Changing of seizure numbers......................................    65
Credit card payments.............................................    66
Use of private contractors.......................................    66
Automation at IRS................................................    67
Educating children on tax issues.................................    67
Burden of proof..................................................    68
Questions submitted by Senator Campbell..........................    70
Statement of Robert M. Tobias, president, National Treasury 
  Employees Union................................................    77
    Prepared statement...........................................    78
Accountability for IRS budget....................................    81
Prepared statement of Charles Pat Smith, State Adjutant, the 
  American Legion, Department of Colorado........................    83
  



                   INTERNAL REVENUE SERVICE'S METHODS

                              ----------                              


                        TUESDAY, APRIL 14, 1998

                           U.S. Senate,    
               Subcommittee on Treasury and
                                General Government,
                               Committee on Appropriations,
                                                        Denver, CO.
    The subcommittee met at 9 a.m., University of Denver, 
Denver, CO, Hon. Ben Nighthorse Campbell (chairman) presiding.
    Present: Senator Campbell.

                                Panel 1

                       NONDEPARTMENTAL WITNESSES

STATEMENTS OF:
        LINDA SANDERS, LITTLETON, CO
        DENNIS MARTY, GRAND JUNCTION, CO
        AMY POWERS, LITTLETON, CO
        KATHERINE MOREHEAD, AURORA, CO
        ALVIN STJERNHOLM, LAKEWOOD, CO
        ROBERT LESHER, LAKEWOOD, CO

                  Opening Remarks of Senator Campbell

    Senator Campbell. Good morning. The Treasury and General 
Government Subcommittee will be in session.
    First I want to thank the Center for Public Policy here at 
the university for offering their assistance in setting up this 
room and providing us a space to do this hearing.
    As you know, the Senate Appropriations Subcommittee on 
Treasury and General Government oversees the budget for the 
Internal Revenue Service. The IRS has become America's least 
loved agency, to put it mildly.
    Today we will be discussing the Internal Revenue Service's 
methods.
    Every Member of Congress, including me, has received 
constituent complaints about taxpayer abuse by the IRS. Our own 
files in our office are filled with so-called horror stories, 
and some we may hear this morning.
    A recent hearing by the Senate Finance Committee provided 
shocking information from IRS employees themselves about how 
taxpayers are mistreated. In the midst of all this debate, 
Congress is now trying to rein in some of those abuses and 
reform how the IRS is managed.
    The House of Representatives recently passed a bill to 
reform the IRS, and the Senate Finance Committee has just 
presented their version to the full Senate for consideration 
next month. So the testimony we will be taking today will 
become part of that public record on this issue.
    The IRS has a huge job. It is responsible for collecting 
over $1.5 trillion in taxes. Tax collection is a necessary 
function, and most Americans understand this. But it does not 
have to be a necessary evil.
    Over 80 percent of American taxpayers voluntarily comply 
with tax laws--a fact that many people do not realize. It is 
past time for the IRS to decide to work for the taxpayers, as 
private industry does.
    The IRS can learn a great deal from the private sector. As 
an example, in the private sector if someone has a problem with 
a credit card or other type of billed account, they can usually 
call, sometimes on a 24-hour-a-day basis, and talk to a human 
being, actually talk to someone who has the authority to try to 
fix it rather than some automated system with a recording.
    Taxpayers are also demanding that they can rely upon 
information provided by the IRS and not be punished with late 
fees and penalties if someone else at the IRS disagrees with 
the advice that they were first given.
    Taxpayers are tired of being notified years after they have 
filed that they have an additional tax obligation, which has by 
then grown to several times the initial debt because of 
interest and penalties. Many who would have paid the initial 
tax had they known are shocked to learn that they owe an 
enormous debt over and above the tax obligation. Sometimes they 
simply can't pay it.
    In short, taxpayers are demanding that they be treated 
fairly, and that is exactly what they have every right to 
expect.
    The IRS has a new Commissioner, Mr. Charles Rossotti, and I 
am pleased that Mr. Rossotti has accepted our invitation to be 
here with us today. Mr. Rossotti, would you stand just for a 
moment, over here on the right? Thank you very much for coming. 
[Applause.]
    Mr. Rossotti needs to hear first hand what some of our 
citizens have been facing in dealing with the representatives 
of his agency. He has come on board just recently and, in fact, 
during a very critical period for the IRS, and I certainly 
compliment you on your willingness to go around the United 
States and take on this job and listen to the citizens 
themselves.
    Unlike most previous IRS Commissioners, Mr. Rossotti is not 
a so-called policy wonk or a Washington bureaucrat. He was a 
successful businessman, and his management experience as the 
founder and chief executive of a computer consulting company 
gives him the skills and knowledge to make the necessary 
culture and technology changes so that the IRS can be effective 
in its interaction with taxpayers. He knows how to make a 
payroll. He knows what it is like to deal with myriads of 
Government mandates and paperwork in trying to comply with the 
taxes that he in turn had to pay as a private businessman.
    Today, on our first panel we will hear from Coloradans who 
have had problems with the IRS. With us today are individual 
taxpayers, business taxpayers, and innocent spouses.
    On the next panel, the second panel, we'll have two people 
with different perspectives on problems faced by the IRS and 
specific recommendations for solving those problems.
    Then we will have an opportunity to listen to the 
Commissioner himself, and I am sure we will all want to hear 
his plans to make the agency more responsive as well as his 
observations on some of the stories that he is going to hear.
    Our final witness will be Mr. Robert Tobias, the president 
of the National Treasury Employees Union, and Mr. Tobias 
represents the IRS employees themselves. So it will be 
interesting to get his perspective as well.
    Some people, of course, just want to eliminate the IRS 
altogether. We have heard that a number of times. We have 
received a lot of mail in our office saying that. I think we 
all recognize that there has to be some way of collecting taxes 
if you want good highways, if you want schools, if you want a 
national defense. We have to have a form of collecting taxes.
    Today I hope we can discuss the ways to make the IRS a more 
responsive agency to all of us. We will be hearing some very 
disheartening stories this morning, but I think if we give Mr. 
Rossotti the opportunity to try to fix the problems--although 
he is responsible for the agency now, I would hate to, as they 
say, shoot the messenger since he just recently came on board 
in the last half year.
    Our first panel this morning will consist of Ms. Linda 
Sanders of Littleton, Dennis Marty of Grand Junction, Amy 
Powers of Littleton, Katherine Morehead of Aurora, Dr. Alvin 
Stjernholm--I hope I have pronounced that right, Doctor--of 
Lakewood, and Mr. Robert Lesher, also of Lakewood. Thank you 
all for agreeing to share your concerns.
    When we first decided to do this hearing, we contacted a 
number of people, and, very frankly, some were very reluctant 
to testify. We had several say they would only testify if they 
could be behind a screen because they were very clearly worried 
about some retribution. But I want to give anybody here 
testifying today an absolute assurance of this committee--and I 
know I can speak for Mr. Rossotti, too--that that simply will 
not happen, and we will continue to monitor your activities.
    Also, we obviously have a little bit of a time constraint. 
We have 3 hours. We have tried to divide it up among the people 
testifying in time for some questions and some dialog, and so 
we will try and limit, I think, the first panel to about 10 
minutes each. So if you have a very long, involved testimony, 
be assured that all of it will be included in the record. You 
may wish to abbreviate your comments to about 10 minutes.
    With that, we will start in the order that I read your 
names, if Ms. Linda Sanders would go ahead. Why don't you pull 
the microphone over pretty close to you, so the people in the 
back of the room can hear. And thank you for agreeing to be 
here, Linda.

                       Statement of Linda Sanders

    Ms. Sanders. Thank you. I hope my voice isn't too squeaky. 
I am not enjoying being here.
    Senator Campbell. Closer.
    Ms. Sanders. My name is Linda Sanders. I have had an 
experience with the IRS which has demonstrated to me their 
brutal power. And I wish to ask the Commissioner if his agents 
should be able to commit perjury and falsify documents in order 
to collect tax. So far, the IRS has only justified what they 
did to me by saying, ``it is our mission to collect the proper 
amount of tax * * *.''
    Now, all of us understand that the IRS must collect tax, 
but the objection that I have and many Americans have is that 
the IRS breaks the law in meeting that goal. In my case, 
breaking the law resulted in my losing over $150,000 more than 
the tax that was owed, as well as my home, which took 20 years 
to save up for, as well as destroying my relationships with my 
family. It simply wasn't necessary, so why did they do it? And 
are there any circumstances under which they should be allowed 
to go unpunished and continue with these practices?
    My ex-husband and I owed the IRS $26,000 because of a 
capital gain tax imposed upon us because we sold our expensive 
home and we bought down to pay bills rather than declare 
bankruptcy. And I am so grateful that this horrible capital 
gain tax has since been changed.
    We couldn't pay the tax, and the IRS put a lien on the 
house to protect their interest in the property. After about 1 
year they began collection procedures and they seized the house 
with the intent to sell it to access the equity to pay the tax. 
However, I protested--and I hope I can use that word without 
being labeled an anti-Government terrorist. I protested to my 
Congressman and said that if IRS sold this house and forced us 
to buy down again, we would incur another capital gain tax and 
then we would have to lose the next house. And it seemed insane 
to me that I had to be homeless just because I made the choice 
first to be financially responsible and I lowered my standard 
of living by buying down instead of going bankrupt. So my 
protests to my Congressman resulted in the IRS releasing that 
seizure in 1993.
    I would like to show that because it is significant to the 
rest of what I have to say. If we could just cut the lights 
right in front of the screen?
    Senator Campbell. Maybe just right in front of the screen 
we can turn this down a little bit?
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T13AP14.003
    
    Ms. Sanders. If you can see this, it is a 1993 seizure on 
my property, but what happened is when I asked my Congressman 
to help me because of the catch-22 I found myself in, they 
released it, and here is the evidence: Disposition of Property. 
It was released prior to sale for an administrative decision. 
And it is important that you notice that this is the seizure 
that was released.
    A year later, the IRS began levying my ex-husband's 
paycheck because they had to collect the tax. Here is the levy 
on wages. It was for the year of the tax we are talking about, 
and it was against my husband, and the date was in February 
1994. So in 1994, they did begin collecting the tax.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T13AP14.004
    
    Ms. Sanders. Then, without any warning whatsoever, about 1 
month after the wage levy, the IRS put a for sale sign on my 
front door, and they advertised my house for sale with the date 
set for 2 weeks hence. Because I had worked with a tax attorney 
who specialized in taxpayer rights on levy and seizure, I knew 
the IRS was violating the law because they weren't giving me 
the warning notices I knew I was allowed before sale. The law 
provides, first, for a 10-day warning under section 6331, and 
then a second warning under section 6331(d). Section (a) is 10 
days, section (d) is 30 days, so altogether the taxpayer has 40 
days to get a loan or sell the house at a profit and pay the 
tax.
    Because they sold my house without complying with the law 
and because I knew it from working with a tax attorney, I 
refused to redeem from that sale. I refused because it would 
ratify what they had done and it would waive my right to object 
later. I wanted the sale voided, and I wanted the IRS to back 
up and follow the law. That way I wouldn't have to pay all the 
extra charges and penalties that they add on when they sell a 
tax lien, and in my case that came to an extra $6,000.
    So I waited for the inevitable court hearing which would 
come after the 6-month redemption period. And during those 6 
months, I prepared. I intended to show the court that the sale 
was void because the IRS hadn't given me time to get a loan, 
pursuant to the law that gives me the warning notices. My 
evidence here shows that the IRS released the 1993 seizure, and 
I rightfully expected that any subsequent seizure would have to 
be preceded with the 40-day noticing requirements again because 
the law states that subsequent seizures have to follow the same 
procedures--that is section 6331(c)--especially since my ex-
husband's wages were being levied for the tax. But instead, 
depriving me of time to get a loan deprived me of the chance to 
pay just the lien. And, instead, they got 20 years of my life 
savings, and they left me homeless, and I am still homeless 
today.
    So during the 6-month period after the sale, I acquired 
some of the sale records which the IRS is required to make 
under section 6340, and these records prove that the house was 
sold under a second seizure for which no seizure notice had 
been given. And while documents had been done under the new 
number, the IRS never gave me the 40-day notices. Instead, the 
IRS altered the old seizure documents, which were released, to 
make it appear as though all the steps had been followed for 
the second seizure.
    And let me show you that.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T13AP14.005
    
    [GRAPHIC] [TIFF OMITTED] T13AP14.006
    
    Ms. Sanders. Here you can see the new 1994 number written 
over the 1993 number. And here let me show you--here is the 
1993 seizure that was released, and it lines up just perfectly 
to show you what is written underneath the 1994 number.
    The IRS still does not deny that no notice was given for 
the new 1994 seizure. They simply say that no notice was needed 
because the second time it was just a very, very long seizure 
from the first 1993 one, and that they have to change numbers 
because IRS changes everyone's seizure numbers every October to 
match the fiscal year. And I would like to show you the sworn 
testimony of the agent explaining that they have to change 
seizure numbers every fiscal October on everybody.
    [The information follows:]

                         Testimony of IRS Agent

* * * at the time this was the number assigned to this seizure, 
for control purposes, for accounting.
    Question. So, why did the number change?
    Answer. After we went into 1994--I have explained that--its 
accounting purpose is so then we no longer can pay out seizure 
expenses out of 1993 budgets. So, we had to reissue a 1994 
number for it, because of a fiscal tax year.
    Question. When did the seizure happen that occurred?
    Answer. 1993.
    Question. All right. So, we have the date of this document 
as April 7, 1993?
* * * number. A seizure number is nothing other than a way that 
we internally track seizure expense so we can make sure that 
any advertisement, any expense that we have, if we have to 
change locks, if we do whatever we have to do in some certain 
situations we have to, if it's real property, we have to have 
grass mowed, whatever we have to do has to be paid out by our 
accounting department under that seizure number.
    So, the fact that there's a seizure number here, and then 
later there's another seizure number, this occurred because it 
went beyond our fiscal year, and this is a 1993 seizure expense 
number, when it went into 1994, fiscal year 1994, we had to 
renumber that.

    Ms. Sanders. Here the agent says, ``Let me explain a 
seizure number. A seizure number is nothing other than a way 
that we internally track seizure expense so we can make sure 
that any advertisement''--I am sorry. I am reading the--she did 
several pages, and I have brought * * * she is asked how come 
the number changed. She says, ``At the time this [was the] 
number assigned to this seizure, for control purposes [and it 
was] for accounting.''
    ``After we went into 1994--I have explained that--its 
accounting purpose so then we no longer can pay out seizure 
expenses out of 1993 budgets. So, we had to reissue a 1994 
number for it, because of a fiscal tax year.'' She is saying 
that right here.
    At the bottom, she says, ``So, the fact that there's a 
second seizure number here * * * because it went beyond the 
fiscal year, and [it] is a 1993 seizure expense number, when it 
went into 1994, fiscal year 1994, we had to renumber that.''
    Well, I called IRS data headquarters in Maryland to find 
out if this is true, if all the seizure numbers have to be 
changed every fiscal October. And I have a tape recording of 
that conversation if anyone would like to hear it. And, of 
course, the clerk laughed and said that would be a 
recordkeeping nightmare, there is no way they can change fiscal 
numbers to match the fiscal year. She said that once a seizure 
number is assigned, it stays there.
    But, additionally, I decided to find out from the 
Government Accounting Office whether or not the seizure budget 
for 1993 went dry and that perhaps they might have had to 
change the numbers, and the Government Accounting Office first 
told me that, no, the 1993 budget was to last all the way until 
1997, it did not run dry, and he said seizure budgets are not 
used for residential seizures. And as evidence of that, I went 
to the title company that prepared the title for my seizure, 
and it was paid by Visa.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T13AP14.007
    
    Ms. Sanders. So these lies caused the State court to uphold 
the sale as proper, and I was evicted from my home. The court 
determined that I must have gotten all the notices and that I 
must be the one lying. But all I got was the notice of sale the 
day that it went into the paper, and I couldn't possibly secure 
financing that quickly. It was a malicious act to punish me for 
daring to demand that the IRS follow the law.
    Unless and until the IRS Commissioner himself admits that 
the agency broke the law here and committed perjury, no court 
will contradict the IRS. Perhaps judges can't even survive 
audits. The IRS is a self-monitoring agency, like the police, 
and if their internal affairs department does not admit the 
problem, the taxpayer has no remedy. The IRS is so powerful 
that even the courts are intimidated by them and refuse to 
question their integrity.
    So if the Commissioner doesn't accept the integrity and 
admit this was perjury and document falsification, there is no 
remedy for American taxpayers like me.
    So, please, Mr. Commissioner, would you please give me the 
only remedy that will make me whole again and admit that the 
IRS does not change seizure numbers every October? And please 
be an example of the honesty and integrity that is necessary in 
our Government. Because even the President is now allowed to 
authorize perjury, so I don't see how any district director 
could do so.
    I hope that these hearings are not just a ``warm fuzzy'' 
for the public, and I hope something will be done about this.
    Thank you, Senator Campbell. [Applause.]

                           Prepared Statement

    Senator Campbell. Thank you, Ms. Sanders. We have your 
complete statement and it will be made part of the record.
    [The statement follows:]
                  Prepared Statement of Linda Sanders
    My name is now Linda Sanders--I have had an ``experience with the 
IRS'' which has demonstrated to me their brutal power. I wish to ask 
the Commissioner if his agents should commit perjury and falsify 
documents in order to collect tax from me. So far, they have justified 
what they did to me by saying, ``it is our mission to collect the 
proper amount of tax * * *''.
    Now, we all understand that the IRS must collect tax--but the 
objection that many Americans have--is that the IRS breaks the law in 
meeting that goal. In MY case--breaking the law resulted in my losing 
over $150,000 MORE than the tax owed--as well as my home which took 20 
years of life to save up for--as well as destroying my relationships 
with my family. IT SIMPLY WASN'T NECESSARY--SO WHY DID THEY DO IT? AND 
ARE THERE ANY CIRCUMSTANCES UNDER WHICH THEY SHOULD BE ALLOWED TO GO 
UNPUNISHED AND CONTINUE THESE PRACTICES?
    My ex-husband and I owed the IRS $26,000 because of a capital gain 
tax imposed upon us because we sold our expensive home and ``bought 
down''. (I am so grateful that this horrible capital gain tax has since 
been changed). We couldn't pay the tax--and the IRS put a lien on the 
property. After about a year they began collection procedures and 
seized the house with the intent to sell it to access the equity in it 
to pay the tax. However--I protested to my Congressman and said that if 
the IRS sold the house--and forced us to ``buy down'' again--we would 
incur ANOTHER capital gain tax and then lose the NEXT house. It seemed 
insane to me that I had to be homeless just because I made the choice 
to be financially responsible--and lower my standard of living by 
buying down instead of going bankrupt. My protests to my Congressman 
resulted in the IRS releasing the seizure in 1993.
    Then, a year later, the IRS began levying my ex-husband's paycheck 
for the outstanding tax.
    Then, WITHOUT ANY WARNING WHATSOEVER--a month later, the IRS put a 
``for sale'' sign on my door and advertised my house for sale with the 
date set for 2 weeks hence. Because I'd worked for a tax attorney who 
specialized in taxpayer rights on levy and seizure, I KNEW the IRS was 
violating the law that gives the taxpayer NOTICE that they are about to 
lost their home. The law provides for: (first) a 10 day warning under 
26 USC 6331(a) and then a second warning for 30 days under 26 USC 
6331(d). Altogether the taxpayer has 40 days to get a loan or sell the 
house and pay the tax--they only gave me 14 days--not enough time to 
secure financing. They wanted me homeless to punish me for the work I 
had done with the tax attorney--protecting taxpayer rights.
    Because they had sold my house without complying with the law--AND 
I KNEW IT BECAUSE OF WORKING WITH THE ATTORNEY--I refused to redeem 
from the sale--I refused because it would ratify what they had done--
and waive my right to object. I wanted the sale voided and I wanted the 
IRS to back up and follow the law. That way I wouldn't have to pay all 
the extra charges and penalties they add on when they sell tax liens, 
which, in my case came to about $6,000.
    I waited for the inevitable court hearing which would come after 
the 6 month redemption period. During those 6 months, I prepared. I 
intended to show the court that the sale was void because the IRS 
hadn't given me time to get a loan to pay the tax. My evidence here 
shows that the IRS released the 1993 seizure of the house and so I 
rightfully expected that any subsequent seizure would have to be 
preceded with the 40 day noticing requirements again under 26 USC 
6331(c). Especially since my ex-husband's wages were levied for the tax 
already. Depriving me of the time to get a loan deprived me of the 
chance to pay just the lien. Instead, they ALSO got 20 years of life 
savings and left me homeless.
    During the 6 month period after the sale, I acquired some of the 
sale records which the IRS made as required by 26 USC 6340. The record 
showed that the house was sold under a SECOND seizure for which no 
SECOND notice had been given. The new seizure had been done under 94-
0088D but I did not get any 40-day seizure notices. Instead, the IRS 
altered the old seizure document which were released to make it appear 
as if all the steps had been followed for the second seizure.
    The IRS still does not deny that no notice was given for the new 
1994 seizure number. They simply explain away the two seizure numbers 
(for which no notice was given for the second) by saying that IRS 
changes EVERYONE'S SEIZURE NUMBERS each October--to MATCH THE FISCAL 
YEAR. I spoke with data Headquarters and the clerk said this isn't 
true.
    Additionally, another IRS agent said that the IRS HAS to change all 
the numbers every fiscal October because the seizure ``budget'' runs 
dry and they have to pay bills out of a new budget.
    However, the bill for the Title Company work says it was paid by 
VISA, not a check from a budget.
    These lies caused the state court that evicted me from the home, to 
uphold the sale as ``proper.'' UNLESS and UNTIL the IRS Commissioner, 
himself, admits that the agency broke the law, no court will NOT 
contradict the IRS's word. The IRS is a self monitoring agency--like 
the police--and if their internal affairs department does not rectify 
the problem--the taxpayer has NO REMEDY.
    Mr. Commissioner--DO YOU CONDONE THESE LIES? Will you please give 
me the only remedy that can ``make me whole'' again, by admitting that 
the IRS does NOT change seizure numbers every fiscal October? Or please 
tell us under what circumstances you permit the IRS to lie and falsify 
documents in order to take property from American taxpayers?
    Thank you.

                           Remedy for Abuses

    Senator Campbell. Linda, there is a remedy, and you are 
part of it. That is why you are here. These abuses, some have 
gone on for years and years and years, and it is not the kind 
of thing that can get turned around overnight, but there are 
many people that are very concerned about you.
    I might also mention, too, that this isn't the U.S. Senate, 
but it is a Senate hearing, and in that respect, I would ask 
the audience if they would respect the decorum of the Senate. I 
don't mind, you know, a few light comments and so on, but we 
have done a few hearings in the last few weeks where we have 
had protesting in the committee room and, you know, screaming 
and singing of the national anthem and all these other things, 
and we want to avoid that. You have a first amendment right, 
obviously, as anybody does, but it could really be disruptive 
if it gets out of hand.
    With that, I would like Dennis Marty to go ahead, please. 
You might want to pull that microphone closer.

                       Statement of Dennis Marty

    Mr. Marty. Good morning. My name is Dennis Marty. My wife 
and I live in Grand Junction, CO, which is about 250 miles west 
of here. I am currently under a disability retirement from the 
U.S. Postal Service. I have worked as a teacher and coach, as a 
Colorado State highway patrolman, as a data analyst, and 
chemical sampling coordinator, and as a mail carrier. The 
chemical sampling coordinator position required that I have a Q 
level, or top secret, security clearance. My wife has taught 
elementary school in Grand Junction for the past 20 years. I 
have a bachelor's degree in physics and math, a master's degree 
in secondary education, and a Ph.D. in environmental 
engineering.
    I could spend all of my time talking about being disabled 
and my tax audit where the auditor extended my audit into 
multiple years. Instead, I will spend the majority of the time 
talking about two specific items involved in this audit.
    The sequence of events leading to our current predicament 
with the IRS started in February 1997. We received a letter 
from the Colorado Department of Revenue dated February 5, 
stating that based on information they received from the IRS, 
we had understated my unemployment benefits for 1994 and we 
owed additional tax, interest, and penalties. We paid the 
amount requested on March 17 because at that time we could not 
find the documents to prove that the claim was wrong. We 
returned the letter with the payment and apparently did not 
keep a copy of that letter.
    We received an audit notice from the IRS dated March 21. 
The audit was set for May 8. The documents requested were our 
tax returns for 1993, 1994, and 1995, income documentation, 
farm expenses, and my wife's miscellaneous employment expenses.
    During the audit meeting on May 8, one of the initial 
claims made by the auditor was that I had understated my 1994 
unemployment benefits from the State of Colorado in the amount 
of $522. Due to an injury suffered in a fall at work, I was 
unable to remain seated for the length of time required to 
complete the audit that day. This is how the auditor found out 
that I had become disabled and that I had been on leave without 
pay for the previous 8 months. The auditor said that he would 
complete the audit and contact us.
    Early on Saturday morning, May 10, the auditor contacted me 
by phone. During this phone call, he repeatedly accused me of 
understating unemployment benefits from 1994 and overstating 
mortgage interest in 1995 by $4,448. He informed me that 
because of these changes, he was expanding the audit to include 
the years 1990 through 1996. The auditor was belligerent during 
the phone call. It seemed to me that by making these 
accusations the auditor was implying that we were attempting to 
defraud the Government.
    The phone call was followed by a written information 
document request form detailing the additional material that 
the auditor wanted. On May 17, we supplied some of the 
additional documents he requested. We did not supply the tax 
returns for the years of 1990, 1991, and 1992. Later we found 
out that he could only go back 3 years, making those years off 
limits, anyway.
    The auditor's preliminary report had us owing in excess of 
$28,000 in additional taxes, interest, and penalties. This 
included the two errors that we were accused of making. The 
auditor also had disallowed every penny of our medical claims, 
as well as the majority of the rest of our itemized deductions.
    This appears to be an abuse of the burden-of-proof concept. 
The final report calls for $24,397.20, and both errors were 
excluded. But he still disallowed the majority of the itemized 
deductions.
    The facts of our case are as follows: The $522 understated 
unemployment benefits was actually a State tax refund. This 
amount was correctly claimed on line 10 of the 1994 tax return. 
The auditor did not include the 1099 miscellaneous that he 
claimed that he used to make his accusations when he supplied 
his notes to me under my Freedom of Information Act request. I 
sent a second request for these specific notes, and I have not 
received any additional documents.
    I have not shown the auditor this documentation that I had 
relating to this particular problem, but it was still removed 
from the final report. I was able to document the $4,448 
overstated mortgage interest with a form the auditor said he 
had not received. In 1995, we refinanced our property and 
received two 1098 forms reporting mortgage interest. The 
auditor did not have one of these two documents when he accused 
us of this error.
    The auditor claimed that the IRS does not give information 
to State revenue departments until after an audit is closed. 
This was in response to my request that he send a letter to the 
Colorado Department of Revenue stating that the information 
supplied to them was in error.
    Despite several requests under the Freedom of Information 
Act, the Colorado Department of Revenue has been unable to 
provide me with a copy of their letter dated February 5, 1997.
    In conclusion, I have several questions that I feel apply 
to our audit.
    No. 1, after watching the testimony given during the Senate 
Finance Committee's hearing on the IRS, I have to wonder if my 
disability and leave without pay status contributed to the 
vigor with which the auditor pursued this case.
    No. 2, why didn't the auditor have the second 1098 mortgage 
interest form? Was it the bank's error or an internal IRS 
error? Since the financial institution was not penalized, I can 
only assume that it was an IRS error.
    Where is the 1099 miscellaneous that the auditor claimed 
was for an additional $522 unemployment benefit? I contacted 
the Colorado Department of Labor and Employment and had them 
check their archives, and they sent me documentation that I had 
claimed the correct amount on my 1994 return. So there would be 
no 1099 miscellaneous anywhere.
    Why can't I get a copy of the February 1997 letter from the 
Colorado Department of Revenue which clearly stated their 
information came from the IRS?
    I have testified in court as an expert witness. If I were 
testifying as an expert witness and made mistakes similar to 
the two that this auditor made, the jury would probably be 
instructed to disregard my testimony.
    Why are the rules of evidence different for the IRS than 
for other law enforcement agencies? And why can the IRS expand 
an audit when that expansion has been initiated because of 
erroneous data?
    Finally, due to my disability, lengthy leave without pay 
status from the Postal Service, and my low rate of income from 
the Federal Employees Disability Retirement, we are not able to 
pay the $24,000 that the IRS says we still owe unless we sell 
our property. Even that might not be enough money to pay the 
IRS. Our audit is currently in the appeals process and is 
ongoing.
    I would like to thank you for the opportunity to present 
this testimony.
    Senator Campbell. Thank you.
    Before we go on to Ms. Powers, while it is fresh in my 
mind, just let me ask you a couple of questions. When you had 
your conversation with the auditor, was that taped by the 
auditor?
    Mr. Marty. He did not tell me that it was.
    Senator Campbell. Well, it would have been illegal if he 
hadn't, if he hadn't shown the tape recorder. But when you said 
he was abusive in nature, was that done in writing or just over 
the phone?
    Mr. Marty. This was over the phone on that Saturday 
morning.
    Senator Campbell. And under the Freedom of Information Act, 
you didn't ask for any documentation that he might have taped 
you or put something in writing that you didn't receive?
    Mr. Marty. What I requested was specifically his notes 
relating to how he made that claim of understating the 
unemployment benefit.
    Senator Campbell. And you never got that?
    Mr. Marty. He never sent it.
    Senator Campbell. Did you contact our office or Senator 
Allard's office to try to get it?
    Mr. Marty. I have not as of this time.
    Senator Campbell. Would you do that?
    Mr. Marty. OK.
    Senator Campbell. If you would talk to Ricardo afterward, 
or sometime when you can, we will try and expedite that if we 
can get it. Sometimes we can't, but hopefully we can.
    Mr. Marty. Right.
    Senator Campbell. With that we will go on to Ms. Powers, 
please?

                        Statement of Amy Powers

    Ms. Powers. Good morning. Thank you, Senator Campbell, for 
the opportunity to testify today as an innocent spouse, and 
thank you, Mr. Commissioner, for coming to Denver for this 
hearing. Also, I would like your personal assurance, Mr. 
Commissioner, that my participation today will in no way 
adversely affect my current negotiating situation with the 
Internal Revenue Service.
    Before I begin, Mr. Rossotti, I would like you to put aside 
your title of IRS Commissioner and, Senator, I would like you 
to put aside your title as well, and listen to this story 
simply as a taxpayer.
    Let's assume you, Mr. Rossotti, were married 12 years ago. 
You met your wife while still in college, and she had a highly 
successful job. You were just starting out in the business 
world. Unfortunately, you were divorced a year later and went 
your separate ways, but not before signing a joint tax return. 
The majority of income reported on that return was earned by 
your wife prior to your marriage. You worked part-time for 
minimum wage and had the necessary taxes deducted from your 
paycheck.
    You were only married for 5 months that year, and by August 
of the next year, your wife no longer wanted the responsibility 
of being married and asked to be separated. You relocated to 
Georgia in 1987. Five years ago, you were remarried, but 2 
weeks prior to your wedding day, you received a letter from the 
IRS stating that you owed in excess of $30,000 for that joint 
return signed in 1986.
    Mr. Rossotti, Senator Campbell, the only difference in this 
story and my own personal experience is I have turned the 
tables on you. This is my story, and as one taxpayer to 
another, there is something very wrong here.
    I am currently at the stage of an offer in compromise with 
the IRS. I have offered to pay the original assessed amount of 
$9,000, but that was flatly rejected. This process of offer in 
compromise has taken nearly 2 years to negotiate.
    At almost every turn, I have hit a wall in terms of 
requesting information or filing information. It appears to me 
that the right hand doesn't know what the left hand is doing. I 
have noticed that in requesting certain information, letters 
are signed by one person, but questions should be directed to 
another. This slows the process.
    An agent in Idaho returned my original offer in compromise 
because it was submitted on a photocopied form rather than a 
carbon-copy original. This slows the process.
    Agents have cited internal rules to be applied externally. 
Again, with respect to my offer in compromise, an agent 
recently stated, and I quote, ``Colorado statutes work to 
inhibit acceptance of offers from one party to a joint 
liability.'' In essence, the Colorado statute should not be 
binding on the IRS. However, the IRS district counsel's office 
has established an internal rule which requires collection 
officers to treat the statute as binding regardless of the 
State of residency of the spouse.
    Since when does a State law override a Federal law? And if 
that is the case, wouldn't Georgia law prevail and uphold my 
divorce decree, which is a legal and binding document stating 
that my ex-husband would be responsible for any and all debt, 
be it taxes or otherwise?
    Mr. Rossotti, the rules have been made up along the way, 
and the game continues to be played out at my expense. 
Meanwhile, interest and penalties continue to rise. Even today, 
as I testify before you, interest and penalties creep upward. 
Is this right, as one taxpayer to another? It would seem to me 
that since I have been forced into this situation by your 
agency, the least you could do is freeze interest and penalties 
while your agency takes its time--2 years--to evaluate my 
offer.
    I have received letters from your agency stating to pay up 
or we will garnish wages, take your 401(k) and profit sharing. 
Additionally, you believe my husband should be held liable and 
his income used to help satisfy the debt. As a lieutenant 
commander in the U.S. Naval Reserves, a Federal Government 
employee, this angers him more than anything.
    Recently in the news there have been countless stories 
shared by innocent spouses all over the country. Their stories 
are not much different than mine. And as I watched ``Dateline'' 
last night, I was sickened by the inefficiencies and lack of 
compassion displayed by your agency.
    There are two things that bother me about my situation and 
the other innocent spouses, and they should bother you, too: 
First, it is our right as citizens of this country to work, 
pursue education, and raise a family. Second, it is our right 
as citizens of this country to succeed in these things and 
pursue the American dream if we so choose. Excuse me.
    These are my rights, and I am being punished for 
succeeding.
    Your agency today demands $45,000 and believes that I 
should be able to pay it because I am young, have a college 
degree, and have a very successful career. I am proud of these 
things and never in a million years would have dreamed that 
they would be used against me. Furthermore, this situation has 
brought on numerous tax liens filed against me, while my ex-
husband deliberately moved from location to location. My 
employer was notified to garnish my wages. My credit is, as you 
can imagine, not good. This has prohibited me and my spouse 
from purchasing a home and forces my spouse to carry the burden 
of most of our debt.
    Additionally, as with many other spouses, I am sure, this 
situation has caused undue stress on my relationship with my 
husband and my family.
    As your agency pursues innocent spouses, you are 
simultaneously crippling families and family structures by 
forcing spouses to seek multiple jobs to pay off debt. You are 
affecting the care and education of our children by forcing us 
to seek other, less expensive day-care options or schools. And 
you are affecting our minds.
    We cannot simply shake off the IRS and just walk away. This 
is not the American dream. Doesn't this bother you, as one 
taxpayer to another?
    I have been specifically targeted, harassed, and threatened 
simply because I am an easy target. Since my divorce in 1988, I 
have dutifully filed returns in the States of Georgia and 
Colorado. Here is a question for you: If I am to be held 
jointly liable for the tax debt, why then had I never received 
a notice regarding the debt until nearly 6 years later? That 
letter, dated November 3, 1992, stated, and I quote, ``Our 
records show that we have previously sent you notices, but we 
have not yet received full payment. This is final notice.''
    Please, Mr. Commissioner, with all due respect, your agency 
owes me the common courtesy of sending me the same 
correspondence allegedly sent to my ex-husband. I have yet to 
receive anything.
    Instead, your agency waited almost until the statute of 
limitations was to expire, nearly 6 years, to contact me and 
inform me that I owed $34,869.35. The original assessed tax was 
only $9,000. Had I been informed of this delinquent debt, I 
would have made sure that it was taken care of at that time. 
There are two reasons why I never paid anything. First, I was 
unaware that the amount was outstanding. And, second, I was 
under the impression that my court-filed divorce decree was a 
legal and binding document created to protect me from this 
exact situation.
    Furthermore, my attorneys contacted my ex-husband directly 
in February 1993, and he agreed that it was his liability and 
not mine.
    Over the past 10 years, interest and penalties have soared 
to over $37,000. These moneys are inflated assessments of time 
wasted by your agency--time with which there was plenty of time 
to inform me and the thousands of other innocent spouses of 
these so-called debts. Instead, it appears your agency has 
allowed these debts to increase to such amounts that it makes 
it ridiculous and impossible for anyone to pay.
    Furthermore, we are presumed guilty immediately. It seems 
to me the burden of proof should lie with the Internal Revenue 
Service. We at least give that common courtesy of innocent 
until proven guilty to other taxpayers.
    In closing, I would like to add that your agency has 
contacted me on several occasions asking for my assistance in 
locating my ex-husband. I provided phone numbers and addresses 
of family, including his parents. This effort has been to no 
avail. Ironically, sometime in 1990 or 1991, my ex-husband was 
employed by the Government, having joined the U.S. Navy Seals. 
He was right in the palm of your hand and was apparently given 
special permission by the Government to waive payment of the 
tax debt until he was out of the service. According to his 
mother, the Navy was very interested in keeping him. He was 
bright and the perfect specimen for the Navy Seals. 
Subsequently, he left the Navy early. He quit.
    Furthermore, in a letter dated February 1993, an IRS agent 
stated that Mr. Hammond, my ex-husband, had contacted IRS Agent 
Mr. Gonzales to arrange a payment agreement and was advised by 
Mr. Gonzales that he lived in an area serviced by south Los 
Angeles office and that he would have to wait to be contacted 
by the south Los Angeles office before making payment 
arrangements.
    This is simply outrageous. Again, right within your grasp, 
but he was told to hold off making payment arrangements until 
another district agent contacted him.
    If the tables were turned, as in the story I mentioned 
earlier, Mr. Rossotti, you would be testifying today, 
struggling to protect your basic rights. So, instead, I testify 
before you and ask that you call off your agency. I would like 
my case dismissed. I would like to be absolved of any tax debt 
related to 1986, which is the year in question.
    Again, as I think back on the ``Dateline'' story last 
night, it is disgusting what is happening to innocent spouses 
across the country. The fact that your agency has the power to 
treat one person the way they did and are continuing to do is 
unforgivable and criminal.
    It is estimated that over 50,000 individuals have been 
forced into similar situations, and this is wrong. How many 
more people must testify before this problem is resolved? Isn't 
it already painfully obvious that the rules must be changed 
now?
    Mr. Rossotti, I respectfully ask your assistance in making 
some long overdue changes in your agency and ask for your 
support for the innocent spouses around the country, as well as 
the other taxpayers.
    Thank you.
    Senator Campbell. Ms. Powers, first, it is not his agency. 
It is our agency. That is why we are here, and that is why we 
are going to make some changes.
    Let me just ask, you are a schoolteacher, as I understand 
it?
    Ms. Powers. No; I am sorry. I am a recruiter for a 
consulting company.
    Senator Campbell. Your taxes went, because of the 7 percent 
compounded daily, from roughly $9,000 to four times that much 
now.
    Ms. Powers. To $45,000.
    Senator Campbell. And at your present salary, do you think 
you could ever get it paid off? Is it compounding faster than 
your ability to even pay it?
    Ms. Powers. Yes, sir.
    Senator Campbell. Well, I want you to know, you mentioned 
that if we Senators or he, the Commissioner, ever had 
experiences like that as private citizens, we would understand 
better. Believe me, I have. I wasn't born in the Senate. Let me 
tell you, I have. Years ago, about 1\1/2\ or 2 years after we 
were married in--oh, it must have been about 1966 or so, we had 
our taxes filled out by a professional tax person, and he made 
a terrible mistake. And about 1 year later, I got a bill from 
them for, as I remember, around $24,000, and I was broke, had 
no money, just trying to start a business, didn't have any 
money. And I was angry and disgusted. I just went down and told 
them, Put me in jail, I'm not going to pay a damn thing. And we 
negotiated some. He sputtered around, said, well, I don't want 
to put you in jail. So we ended up where I paid 20 cents on the 
dollar, or something to that effect. But, believe me, some of 
us have been in that position where we didn't know where to 
turn and we just kind of threw up our hands and gave up. Don't 
give up.
    Ms. Powers. Thank you.
    Senator Campbell. Thank you. We will now hear from Ms. 
Morehead.
    Oh, and, by the way, let me ask you, too. Have you been at 
all into work with our office on your problem or Senator 
Allard's or any of the Congress people?
    Ms. Powers. Yes; I have. I have written letters to Senator 
Allard and to you, and I have actually spoken with Ricardo on 
several occasions.
    Senator Campbell. All right. Thank you.
    Ms. Morehead.
    Ms. Morehead. Thank you. I hope----
    Senator Campbell. Oh, and I also want to remind you, we are 
told that our time is already going to cut into the people that 
want to testify a little later, so if we could try to keep it 
to about 10 minutes, we would certainly appreciate it.

                    Statement of Katherine Morehead

    Ms. Morehead. My hope is my testimony today will help those 
listening to better assess what works and what doesn't work 
from both the viewpoint of the taxpayer and the people working 
at the IRS. My experience has shown me our present U.S. tax 
laws do very little to empower taxpayers or IRS employees and 
even less to create expedient, synergistic, creative solutions 
to tax problems, especially tax problems resulting from 
divorce.
    The following timeline will demonstrate the frustration and 
sense of powerlessness I felt during the past 8 years of 
dealing with the IRS regarding my 1989 joint tax return filed 
following my divorce on April 9, 1990. In April 1987, while 
living in southern California, my husband and I separated after 
17 years of marriage. With two young children, 3 and 5, I moved 
to Denver in November of 1987. Although not legally separated, 
Gary Morehead, my ex-husband, and I lived as though we were 
divorced for the next 2\1/2\ years. My husband sent me money 
for living expenses which the judge in the 1990 divorce decree 
rules as alimony and child support.
    As a part of my divorce decree in April 1990, my husband 
agreed to pay the 1989 taxes, something which he had done for 
the previous 18 years of our marriage. Following the divorce, I 
discovered he had not filed a tax return and called our 
accountant in Las Vegas to find out what I needed to do. I was 
told by the certified public accountant that I could do nothing 
and would have to wait until he filed.
    Taking the accountant's advice, I waited and asked Gary to 
file the tax return, never dreaming by simply filing a return 
for 1989 married separately I could have avoided this entire 
situation.
    Gary did tell me he was filing, and although late, he would 
be paying the 1989 taxes. Thinking this had been resolved, I 
went about the job of being a single parent, raising two young 
children and putting my life back together.
    In the fall of 1993, I received a phone call from the IRS 
informing me the 1989 taxes had not been paid, and because I 
had signed the joint return, I was liable for the $24,000 debt 
my ex-husband had not paid. An IRS agent was sent to my work to 
evaluate whether I had extra money to begin payments on this 
debt. After looking at my financial picture, she told me she 
found I was not able to make payments. She had chosen to not 
freeze my checking account or garnish my wages and said she 
would never force the sale of my home where as a parent I was 
raising two dependent children.
    She reassured me the IRS in Las Vegas, where my ex-husband 
was living, had assessed him $654 a month payments toward this 
debt. However, I was told the IRS would put a lien on my house 
to secure the debt as my ex-husband showed no assets and I had 
an amount equivalent to the debt as equity in my home. 
Disturbed about the course of events, but assured by the IRS 
that his payments would pay off the lien and it would be 
removed, I moved on with my life.
    During the following years, I discovered that my ex-husband 
only made payments for a few months. He was out of work for a 
few months, and when he did return to work as a developer and 
consultant, the IRS apparently did not follow through to return 
him to his payment plan. I called the IRS and asked repeatedly 
for information, for help, and for solutions which would allow 
my children and me to remain in our home and not become 
homeless. I was told either I pay the now $40,000 debt with 
penalties and interest or hire an attorney to sue my ex-
husband.
    Making $20,000 per year teaching, I did not have the luxury 
of extra money for attorney's fees. Finally, in the summer of 
1996, I was told about a free tax clinic at Denver University, 
where law students would help me for free if they decided to 
take my case. The clinic reviewed my case and decided to help 
me. As they spoke to the IRS and pressed the IRS in Las Vegas 
and Phoenix for information regarding this case, we were told 
the IRS could not even find a file on Gary Morehead and that he 
had not been pursued because their workload was so heavy and 
they did not have the staff to work on a small case like mine.
    In August 1997, the DU tax clinic was discontinued. I 
continued to ask the IRS for information, talking with people 
in Seattle, Salt Lake City, Phoenix, Las Vegas, and Denver. In 
September 1997, I was informed by my ex-husband he had applied 
in that spring for bankruptcy and because the IRS had not 
pursued him in 3 years, according to the law, he would not be 
liable for the IRS debt, which was now almost $50,000 and that 
I would be totally liable.
    Communicating with the IRS and bankruptcy court in Las 
Vegas and Denver, I discovered what he told me was true. 
According to the IRS in Las Vegas, Phoenix, and Denver, my 
State divorce decree was not recognized by the IRS, and I was 
left accountable for an original debt of $24,000, which had now 
grown to over $47,000. Because the IRS had a lien on my home 
and had chosen not to pursue my ex-husband, who now was making 
over $165,000 a year, and because of the IRS and Federal 
bankruptcy laws, I was responsible for this debt and was 
expected to pay it when making less than $20,000 plus child 
support. Through the bankruptcy records, I also discovered my 
ex-husband had not paid taxes for several years following our 
divorce, while I had filed each year and all my refunds had 
gone toward the payment of this debt.
    In January, feeling powerless but hopeful I could refile as 
an innocent spouse, I hired an attorney and we went to the IRS 
with the attached compromise. I would pay taxes on the amount 
of money I received in 1989, based on the court decision for 
alimony and child support in April 1990 when my divorce decree 
was finalized. When we went to the IRS office, we were told the 
current IRS laws do not allow for this type of agreement. 
According to the local IRS office, my only options remain 
paying the $47,000 debt by selling my home, offer a compromise 
which could not be less than the equity in my house, which is 
about $45,000, file bankruptcy, or wait out the statute of 
limitations, which is another 5 years. None of these seemed to 
me to be fair or just.
    Through this experience, several things were obvious. 
First, the unfair expectation of a single mother to pay off 
debt which was greater than her income was unrealistic. Second, 
it became apparent the IRS, for whatever reason, was unwilling 
to pursue my ex-husband for the taxes owed. Because I had 
decided to invest my money in a home for myself and my 
children, the IRS used the lien on my home as an easy out 
rather than serving equitable justice. The IRS never attached 
wages on an individual--my ex-husband--who had a much higher 
income and who had access to the money which was originally 
taxed.
    Most importantly, the difficulty of obtaining timely 
information from the IRS was frustrating. When asking for IRS 
information which was pertinent to my case, I was told to call 
another office or flatout refused information as to whether the 
IRS was getting money from my ex-husband.
    A greatly simplified tax code could create a greater 
understanding for taxpayers and eliminate the need for a large, 
unwieldy, inflexible bureaucracy unable to negotiate fair and 
just settlements. Instead of relying on the advice of expensive 
accountants and attorneys, which the average taxpayer can ill 
afford, a simpler tax code could empower rather than defeat 
individuals like myself who are willing to pay our fair share 
of taxes. Hopefully, the new law severing joint liability will 
go a long way to helping individual taxpayers and IRS employees 
administer justice with our tax system, particularly in cases 
of divorce.
    I am grateful to the IRS Commissioner, to Senator Campbell, 
and all lawmakers who are courageous in their willingness to 
look at problems and listen to stories like mine in order to 
create crucial and needed changes in our tax code and the 
administering of it.

                           Prepared Statement

    Senator Campbell. Thank you, Ms. Morehead. We have your 
complete statement and it will be made part of the record.
    [The statement follows:]
                Prepared Statement of Katherine Morehead
    My hope is, my testimony today will help those listening to better 
assess what works and what doesn't work from both the viewpoint of the 
taxpayer and the people working at the IRS. My experience has shown me, 
our present U.S. tax laws, do very little to empower taxpayers or IRS 
employees and even less to create expedient, synergistic creative 
solutions to tax problems, especially tax problems resulting from 
divorce.
    The following time line will demonstrate the frustration and sense 
of powerlessness I felt during the past eight years of dealing with the 
IRS regarding my 1989 joint tax return filed following my divorce on 
April 9, 1990. In April of 1987 while living in southern California my 
husband and I separated after seventeen years of marriage. With two 
young children three and five, I moved to Denver in November of 1987. 
Although not legally separated, Gary Morehead, my ex-husband, and I 
lived as though we were divorced for the next two and half years. My 
husband sent me money for living expenses which the judge in the 1990 
divorce decree ruled as alimony and child support.
    As a part of my divorce decree in April 1990, my husband agreed to 
pay the 1989 taxes, something which he had done for the previous 18 
years of our marriage. Following the divorce, I discovered he had not 
filed a tax return and called our accountant in Las Vegas to find out 
what I needed to do. I was told by the CPA that I could do nothing and 
would have to wait until he filed.
    Taking the accountant's advice I waited and asked Gary to file the 
tax return, never dreaming by simply filing a return for 1989 married 
separately, I could have avoided this entire situation.
    Gary did tell me he was filing and although late he would be paying 
the 1989 taxes. Thinking this had been resolved, I went about the job 
of being a single parent, raising two young children, and putting my 
life back together.
    In the fall of 1993, I received a phone call from the IRS informing 
me the 1989 taxes had not been paid, and because I had signed the joint 
return, I was liable for the $24,000 debt my ex-husband had NOT paid. 
An IRS agent was sent to my work to evaluate whether I had extra money 
to begin payments on this debt. After looking at my financial picture 
she told me she found I was not able to make payments. She had chosen 
to not freeze my checking account, or garnish my wages and would never 
force the sale of my home where as a parent I was raising two dependent 
children.
    She reassured me the IRS in Las Vegas, where my ex-husband was 
living, had assessed him $654.00 a month payment toward this debt. 
However, I was told the IRS would put a lien on my house to secure the 
debt as Gary showed no assets and I had an amount equivalent to the 
debt as equity in my home. Disturbed about the course of events, but 
assured by the IRS that his payments would pay off the lien and it 
would be removed, I moved on with my life.
    During the following years, I discovered Gary only made payments 
for a few months. He was out of work for a few months and when he 
returned to work as a developer and consultant, the IRS apparently did 
not follow through to return him to his payment plan. I called the IRS 
and asked repeatedly for information, for help and for solutions which 
would allow my children and me to remain in our home and not become 
homeless. I was told either I pay the now $40,000 debt with penalties 
and interest or hire an attorney to sue my ex-husband.
    Making $20,000 per year, I did not have the luxury of extra money 
for attorney fees. Finally, in the summer of 1996, I was told about a 
free tax clinic at Denver University where law students would help me 
for free if they decided to take my case. The clinic reviewed my case 
and decided to help me. As they spoke to the IRS and pressed the IRS in 
Las Vegas and Phoenix for information regarding this case, we were told 
the IRS could not even find a file on Gary and he had not been pursued 
because their work load was so heavy and they did not have the staff to 
work on a small case like mine.
    In August of 1997, the DU tax clinic was discontinued. I continued 
to ask the IRS for information, talking with people in Seattle, Salt 
Lake City, Phoenix, Las Vegas and Denver. In September of 1997, I was 
informed by my ex-husband, he had applied in the spring of 1997 for 
bankruptcy and because the IRS had not pursued him in three years, he 
would not be liable for the IRS debt which was not almost $50,000 and I 
would be totally liable.
    Communicating with the IRS and bankruptcy court in Las Vegas and 
Denver, I discovered what he told me was true. According to the IRS in 
Las Vegas, Phoenix and Denver, my state divorce decree was not 
recognized by the IRS and I was left accountable for an original debt 
of $24,000, which had now grown to over $47,000. Because the IRS had a 
lien on my home and had chosen not to pursue my ex-husband who now was 
making over $165,000 per year, and because of the IRS and Federal 
bankruptcy laws, I was responsible for this debt and was expected to 
pay it, when making less than $20,000 plus child support. Through the 
bankruptcy records I also discovered my ex-husband had not paid taxes 
for several years following our divorce, while I had filed each year 
and all my refunds had gone towards the payment of this debt.
    In January, feeling powerless but hopeful I could refile as an 
innocent spouse, I hired an attorney and we went to the IRS with the 
attached compromise. I would pay taxes on the amount of money I had 
received in 1989, based on the court decision for alimony and child 
support in April 1990 when my divorce decree was finalized. When we 
went to the IRS office we were told the current IRS laws do not allow 
for this type of agreement. According to the local IRS office my only 
options remain paying the $47,000 debt by selling my home, offer a 
compromise which could not be less than the equity in my house (about 
$45,000), file bankruptcy or wait out the statute of limitations 
(another 5 years). None of these seemed to me to be fair or just.
    Through this experience several things were obvious. First, the 
unfair expectation of a single mother to pay off a debt which was much 
greater than her income was unrealistic. Secondly, it became apparent 
the IRS, for whatever reason was unwilling to pursue my ex-husband for 
the taxes owed. Because I had decided to invest my money in a home for 
myself and my children the IRS used the lien on my home as an easy out 
rather than serving equitable justice. The IRS never attached wages on 
an individual who had a much higher income and who had access to the 
money which was originally taxed.
    Most importantly, the difficulty of obtaining timely information 
from the IRS was frustrating. When asking for IRS information which was 
pertinent to my case I was told to call another office or flat out 
refused information as to whether the IRS was getting money from my ex-
husband.
    A greatly simplified tax code could create a greater understanding 
for taxpayers and eliminate the need for a large unwieldy, inflexible 
bureaucracy unable to negotiate fair and just settlements. Instead of 
relying on the advice of expensive accountants and attorneys, which the 
average taxpayer can ill afford, a simpler tax code could empower 
rather than defeat individuals like myself who are willing to pay our 
fair share of taxes. Hopefully, the new law severing joint liability 
will go a long way to helping individual taxpayers and IRS employees 
administer justice with our tax system, particularly in cases of 
divorce.

    [Clerk's note.--The compromise mentioned in Ms. Morehead's 
statement does not appear in the hearing record, but is available for 
review in the subcommittee's files.]

                   Senator's Examples of Other Cases

    Senator Campbell. About 1\1/2\ years ago, I got a call from 
a lady in Montana, whom I had known just slightly, had met, who 
had a story almost identical to yours--a single mom, several 
children--in fact, her oldest son just recently died in a rodeo 
accident--living in an 8-foot camper out in the woods, and went 
to a local store to make the call. That is how broke she was 
and how scared she was, too. She had a story almost identical 
to yours, and the next thing that really worried me is she just 
flat told me on the phone that she was going to kill herself, 
that she had no options, totally hopeless, didn't know who to 
turn to.
    I called the Billings agency of the IRS, and to their 
credit, they did go to work on it right away and helped 
straighten it out and it was all kind of taken care of. But I 
think that in some extreme cases that is not out of the realm 
of thinking, when people feel that they are set upon by the 
Government and they have nobody to turn to and nobody to talk 
to. That has entered the minds of a number of people when they 
have seen everything lost because of what they consider to be 
punitive actions by their own Government. There is something 
wrong in our Government when people do that.
    I had a guy in Steamboat Springs a few years ago, hiding 
behind bushes when I was doing a town meeting, who whispered at 
me when I came out of the town meeting and asked me if he could 
talk to me. And I said sure, and I went over and talked to him. 
He said he had been warned by IRS agents not to talk to his--I 
was in the Congress on the House side--not to talk to his 
Congressman. Boy, there is something wrong with Government when 
we have that kind of intimidation and fear. So thank you for 
testifying.
    Ms. Morehead. In all credit to the person who evaluated me 
initially, I mean, she did have that compassion to allow me to 
stay in my home, and I am grateful.
    Senator Campbell. Well, it does go to show there are some 
IRS people that really are trying, and I know in the case of 
this Montana woman, somebody up there really went to work and 
did fix it, fortunately for that lady and for the IRS, too, 
because I was certainly going to hold them responsible.
    Dr. Stjernholm.

                     Statement of Alvin Stjernholm

    Mr. Stjernholm. Thank you. I want to thank you, Senator 
Campbell, for the opportunity and the privilege to testify here 
this morning relative to the abuse by the IRS. I want to point 
out that the passage of the House of Representatives bill 
relating to the IRS is a nice gesture, but does nothing to 
compensate the hard-working citizens financially raped by the 
IRS.
    A letter dated October 15, 1997, from Donald M. Squires, 
Chief, Branch Disclosure Litigation, well documents the fact my 
attempt to get my records through the Freedom of Information 
Act from the IRS was stalled for 4 years as Mr. Squires' letter 
relates to my appeal dated December 10, 1993. As of this date, 
the documents requested in 1993 have not been furnished, and 
the reason that letter appeared was because of the Senate 
hearings before--the IRS before the Senate.
    My attorney stated to me personally that he does not know 
of other individuals financially raped by the IRS as bad as my 
wife and I. My wife and I donated a Mobile Educational Unit to 
the Colorado Chiropractic State Association, and I was allowed 
a writeoff approximately $58,000 over a 3-year period. 
Approximately 12 years later, IRS officials ignored the statute 
of limitations and the IRS code and denied my gift given 12 
years earlier and properly audited by the IRS examiners for 16 
consecutive years. The IRS officials then decided 3 of the 16 
years they had audited were wrong, and the IRS then demanded 
$230,000 in back taxes, liened our home, and destroyed our 
credit.
    I had made a deposit on a ranch in Wyoming and had 
approximately $216,000 in equipment and personal property in 
Wyoming. The IRS seized all of the equipment and personal 
property in Wyoming and held an auction. A Freightliner 
tractor, a La Crosse 24-ton low boy equipment trailer, and an 
International Track (250) caterpillar loader were all auctioned 
off miles from the auction site. Receipts for major repairs to 
document market value were ignored.
    Following the auction, the Stjernholms were allowed $25,000 
instead of $216,000 toward the $230,000 assessed by the IRS.
    For over 1 year, my attorney has attempted a cash 
settlement and an additional $226,000 was paid to the IRS in 
May 1997. During the past year of negotiations, additional 
amounts of $3,000 and $25,000 were demanded or all negotiations 
would be terminated and additional property would be seized and 
auctioned. In January 1998, an additional $73,000 was paid and 
liens were finally released.
    I am currently paying twice the interest rate of the going 
interest rate because no one will touch you because of your 
lien by the IRS. And my banker was threatened for helping me 
along the way before these liens were released.
    The IRS officials ignored the statutes, the statute of 
limitations, and the laws as they relate to the IRS codes and 
the audits they previously approved for 16 consecutive years.
    Senator, will you please introduce legislation or amend the 
current IRS bill in order to compensate a hard-working Korean 
vet and his wife in addition to other numerous people who have 
been financially raped by the IRS.
    At age 65, I am several hundred thousand dollars in debt 
because of the IRS financial rape job.
    Senator, the Tax Code is a real problem, but the arrogant 
IRS officials out of control, ignoring the codes and the 
statutes, is a more serious problem.
    I should bring to your attention the fact I have spent 
several hundreds of thousands of dollars on tax attorneys, but 
these tax attorneys are intimidated by the demands of the IRS 
officials. Even the tax judge reversed his position 1 year 
later, as well documented by a $1,000 transcript of a 1-day 
trial. And at the conclusion of that trial, I should add, the 
judge was so impressed with our testimony that he came down and 
literally shook hands with my wife and I and wished us well. 
But 1 year later, he handed down a decision, and it was 
negative to our trial.
    In closing, I should report the fact I was again audited in 
1991, as my herd of buffalo as a separate business was in 
question. The IRS examiner was pleasant and efficient and 
approved my return as 100 percent OK.
    Based on the testimony of the former employees and my 
personal experience with approximately 17 examiners, all but 
one of these examiners were pleasant, competent, and good, 
hard-working IRS employees. The real problem is with the IRS 
officials, starting with the past Commissioners of the IRS. I 
have a great deal of correspondence with those officials to 
document their abuse and financial rape.
    Again, Senator Campbell, I want to thank you for allowing 
me to present this testimony of financial abuse, and thank you, 
Mr. Rossotti, for your attendance and your interest here today.
    Thank you.

                           Prepared Statement

    Senator Campbell. Thank you, Dr. Stjernholm. We will insert 
your prepared statement in the record.
    [The statement follows:]
               Prepared Statement of Dr. Alvin Stjernholm
    The passage of the House of Representatives bill relating to the 
IRS is a nice gesture, but does nothing to compensate the hard working 
citizens FINANCIALLY RAPED BY THE IRS.
    A letter dated October 15, 1997, from Donald M. Squires (Chief, 
Branch Disclosure Litigation) well documents the fact my attempt to get 
my records through the Freedom of Information Act from the IRS was 
stalled for four years as Mr. Squires' letter relates to my appeal 
dated December 10, 1993. As of this date, the documents requested in 
1993 have not been furnished.
    My attorney stated to me personally that he does not know of other 
individuals financially raped by the IRS as bad as my wife and I. My 
wife and I donated a Mobile Educational Unit to the Colorado 
Chiropractic State Association and I was allowed a write-off of 
approximately $58,000 over a three year period. Approximately 12 years 
later, IRS officials ignored the Statute of Limitations and the IRS 
codes and denied my gift given 12 years earlier and properly audited by 
the IRS examiners for 16 consecutive years, the IRS officials then 
decided three of the sixteen years they had audited were wrong and the 
IRS then demanded $230,000 in back taxes, liened our home and destroyed 
our credit.
    I had made a deposit on a ranch in Wyoming and had approximately 
$216,000 in equipment and personal property in Wyoming. The IRS seized 
all of the equipment and personal property in Wyoming and held an 
auction. A Freightliner tractor, a La Crosse 24-ton low boy equipment 
trailer and an International Track (250) caterpillar loader were ALL 
AUCTIONED OFF MILES FROM THE AUCTION SITE. RECEIPTS FOR MAJOR REPAIRS 
TO DOCUMENT MARKET VALUE WERE IGNORED.
    Following the auction, the Stjernholms were allowed $25,000 instead 
of $216,000 toward the $230,000 assessed by the IRS.
    For over a year our attorney has attempted a cash settlement and an 
ADDITIONAL $226,000 WAS PAID TO THE IRS IN MAY 1997. During the past 
year of negotiations additional amounts of $3,000 and $25,000 were 
demanded or all negotiations would be terminated and additional 
property would be seized and auctioned. In January, 1998, an additional 
$73,000 was paid and liens were finally released.
    THE IRS OFFICIALS IGNORED THE STATUTES, THE STATUTE OF LIMITATIONS, 
AND THE LAWS AS THEY RELATED TO THE IRS CODES AND THE AUDITS THEY 
PREVIOUSLY APPROVED FOR 16 CONSECUTIVE YEARS.
    Senator, will you please introduce legislation or amend the current 
IRS House Bill in order to compensate a hard working Korean Veteran and 
his wife in addition to other numerous good people who have been 
financially raped by the IRS.
    At age 65, I am several hundred thousand dollars in debt because of 
the IRS financial rape job.
    Senator, the tax code is a real problem, but the arrogant IRS 
officials out of control, ignoring the codes and the statutes, is a 
more serious problem.
    I should bring to your attention the fact I have spent hundreds of 
thousands of dollars on tax attorneys, but these tax attorneys are 
intimidated by the demands of the IRS officials. Even the tax judge 
reversed his position a year later, as well documented by a $1,000 
transcript of a one-day trial.
    In closing, I should report the fact I was again audited in 1991, 
as my herd of buffalo as a separate business was in question. The IRS 
examiner was pleasant, efficient and approved my return as 100 percent 
okay.
    Based on the testimony of the former IRS employees and my personal 
experience with approximately 17 examiners, all but one of these 
examiners were pleasant, competent and good hard-working IRS employees. 
The real problem is with the IRS officials, starting with the past 
Commissioners of the IRS. I have a great deal of correspondence with 
those IRS officials to document their abuse and financial rape.
    Thank you for allowing me to present this testimony of financial 
abuse by the IRS.

                       Statement of Robert Lesher

    Senator Campbell. Mr. Lesher, if you would go ahead.
    Mr. Lesher. Thank you, Senator. I am Robert Lesher, a 
Denver resident for 40 years. Microphone coming through? OK. 
Former Air Force fighter pilot, and I have been a commercial 
real estate broker and investor for a long time here, or was 
until all this broke loose.
    By 1990, when this starts, my estate was composed mainly of 
general partnerships with other local investors in real estate, 
and it was a pretty good estate. By the end of 1991, I had no 
estate after the IRS did its initial----
    Senator Campbell. Mr. Lesher, I think you are beginning to 
fade out a little bit. You need to get closer to the 
microphone.
    Mr. Lesher. By 1991, the estate has ceased to exist after 
the IRS audit. I am going to speed this up because I know you 
are running late.
    In January 1990, an IRS auditor contacted me and wanted to 
go over the 1988 returns. He explained he as working for a 
special project out of the TEFRA office in Ogden, UT, the IRS 
Service Center. No partnership of mine had ever been a so-
called TEFRA partnership, tax shelter partnership. However, he 
had stumbled on a partnership we had put together in 1989 to 
buy a care home here in Denver up in the Highlands area caring 
for about 120 mentally handicapped people, people who could not 
function--they were not dangerous, but they couldn't function 
well in society on their own.
    The Federal funds earmarked for that population, however, 
were sidetracked by the Governor of Colorado into a new State 
bureaucracy, and the home failed. We lost our shirts, and the 
120 residents ended up on the street. More than a few of them 
died.
    After the auditor began working on our records, my wife 
suffered a stroke--not connected to the audit, I don't 
believe--and this was a bad one, and I asked for a little time 
to help care for her. The auditor was under a lot of pressure. 
He couldn't do much. He stayed on us. I asked for help from a 
problem resolution officer here in Denver by the name of Mr. 
Blighton. He was a very nice fellow, told me to file a form 911 
and he would try to help, but that, unfortunately, the Denver 
District was all out of form 911's, but he would be glad to 
send me one when they got some more in. Until then, he really 
couldn't do anything.
    Three months later, he did send me one. I filled it out the 
same day and returned it, and he wrote a letter saying, you 
took too long filling this out, I can't help you. End of that 
chapter.
    Mr. Virkler, the auditor, in continuing his work, stated he 
had audited the partnership returns before coming to me, which 
is required by IRS procedure--and common sense. It turned out 
he had not because he was under a lot of pressure to push 
through as many audits as he could. The project needed as many 
scalps as soon as possible to show the public that, in theory, 
they were beating up on the rich, and we were supposed to be 
one of the rich. We were out of business, but we were the rich.
    The auditor revised the K-1's in the partnership to show 
that we had a profit instead of having lost, and in violation--
and he told me this--of a tax code paragraph, 108(d)(7)(A), he 
flowed the so-called income that he created through our S Corp. 
partners to our personal returns and charged us with all sorts 
of unpaid taxes, penalties, interest, high crimes, and 
misdemeanors, like everybody else I have been listening to this 
morning.
    He was quite open about the whole thing, what he was doing 
that was right and what he was doing that was wrong. He even 
helped me write an appeal and pointed out all he had to do was 
file an amended return for the form 8082 that nobody had ever 
heard of--I finally found out what it was--and the whole matter 
would go away.
    As the months went by, the appeal went in, the months went 
by, nothing happened. I started looking for an appeals officer 
and I couldn't locate where the appeal was. And the next thing 
that actually did happen was an assessment signed by a local 
fellow. I don't know titles. Some of the IRS titles I found, I 
can't equate them to the private sector, so they don't make 
much sense to me. This was a fellow named Santambrogio who 
signed an assessment against us and another fellow signed a 
lean against us, the usual lien that you heard about this 
morning. There went the credit; there went being able to be a 
real estate broker; there went my estate, because, in general, 
in partnership organizations where you get together with a few 
people to invest in something, normally you have a clause in 
there that if you incur a tax lien, Federal, State, something 
like that, your partnership vanishes--for good reason. Nobody 
wants to wake up in the morning and find the IRS in bed with 
you as a partner, or the State revenue people. That is the 
protection. My partnership interests vanished at the stroke of 
a pen.
    An appeals officer finally did surface, a very nice lady--
most of these people were very nice--with the position that 
since we were already assessed, there was no point in 
considering our appeal. Appeal dismissed. She made one 
noteworthy statement: ``We have a `gotcha' for everything.'' I 
remember that one.
    The lien stopped my business. It didn't produce any income 
to the Government.
    I went to tax court to try to do something there and spent 
what little money I had left. We got ready to go to court, and 
one of the local IRS attorneys said, Oh, well, this case is not 
going to court because TEFRA cases don't have a right to go to 
tax court. They are streamlined into collection. I said, well, 
Bill, this is not a TEFRA case, as you well know. He said, No, 
but we are treating it as one. It started off as one, so we are 
treating it as one.
    I later learned that what he told me was not true. TEFRA is 
an acronym for the 1986 Tax Code which was designed to catch 
tax loopholes. That is where that term comes from.
    However, this same fellow, one of the attorneys, along with 
the auditor and another pro had suggested filing an amended 
return. We did. It vanished. We never found a sign of it. I did 
file a FOIA, Freedom of Information request. I had a little 
better luck than you did, I believe. I got partial things out. 
A lot of names were removed from memos, and I would get page 2 
of a five-page memo and things like that. I got a little 
information, and there was some reference to the amended tax 
return and a reference to finding ways to just not process it. 
And it was just not processed. I don't know where it is today. 
It probably just isn't.
    The next step, Denver District Counsel Neal Roberts, a very 
excellent fellow, suggested I contact a Dave Christiansen in 
the TEFRA office in Ogden, where this whole thing started. Mr. 
Christiansen pulled my file over there, looked at it, said this 
is ``off the wall,'' sent it back over here to Denver District 
and requested that they reaudit, do this over again. Denver 
District said no, we don't have time for that sort of thing. 
Mr. Christiansen did that round trip again with the file and 
back to Denver District, coming into a different person. Denver 
doesn't report to Ogden, so he can't order it. He can only 
suggest it. They both report, I think, to Dallas.
    Again, Denver District said no, we are not going to reaudit 
this.
    That avenue closed, I filed an offer in compromise, 
taxpayer not liable, using the exact code--well, the exact code 
I quoted from the original auditor. He said this is not valid 
because you cannot flow through because of--and I quoted the 
code book and page--you cannot flow--even if the partnership, 
which didn't have a profit, did have a profit, you can't flow 
the taxes through from an S corporation to the owners of the 
corporation.
    A pretty good argument. It was never answered. The letter 
that came back was from the same person who had signed the 
assessment a couple of years beforehand, and his denial was a 
one-page letter in which he stated the IRS had determined that 
our workers were, in fact, employees and, therefore, we owed 
the taxes.
    Hello? Workers? We never had any workers. That wasn't the 
subject. What is going on here? I assumed that he was mixing 
this up with another case. I wrote him back politely and said I 
think, you know, you have titled your letter to our case, but 
you are answering somebody else's offer in compromise. Mr. 
Santambrogio's letter came--a second letter came back, said no, 
we find your workers are employees, therefore, you have got to 
pay the tax.
    Senator Campbell. Mr. Lesher, I hate to hurry you, but we 
are going to have trouble fitting all of our panels in if we 
run on.
    Let me ask you, the letters you are talking about, did you 
submit copies of those letters to the committee, too?
    Mr. Lesher. No; but I can.
    Senator Campbell. Would you please do that?
    Mr. Lesher. Yes; everything I am saying here is--almost 
everything is in letter form.
    Senator Campbell. Anything you have a documentation of, we 
would like to have.
    Mr. Lesher. How about three large volumes?
    Senator Campbell. That is good. Everything.
    Mr. Lesher. That is pretty much the end of it. There are 
lots of other colorful things. It still sits in that position. 
I am doing other business now because I can't do what I was 
very good at, one of the leading brokers here in town. An ex-
IRS attorney summed it up pretty well and made me feel actually 
a little better about the whole thing, saying that there is 
really nobody in the IRS whose job it is to fix messes, clean 
up messes. And ours was obviously a mess. And anybody who stood 
up and said, hey, look, we really screwed up on this Lesher's 
return and audit and so on, let's get it fixed, would be a 
marked man, really, kind of like a whistleblower. There is just 
nobody that would dare do that. That makes sense.
    One of the comments from--coming out of the offer in 
compromise was that--and this was not given to me. This was a 
private note that I got from a FOIA, Freedom of Information, 
was that he thought that we had unreported income. A very bad 
thing. So a new audit this past year with the lady going around 
town to the Board of Realtors and places saying we are 
investigating Mr. Lesher for unreported income and tax fraud.
    Senator Campbell. Mr. Lesher, I have to remind you, we are 
going to have to move on. We have to take set-up time for the 
next panel.
    Mr. Lesher. I am through. That ended finding nothing, and 
that is where we stand at the moment. I tried to get them to 
say we found nothing, but they wouldn't do it.

                           Prepared Statement

    Senator Campbell. Mr. Lesher, we will insert your complete 
statement in the record.
    [The statement follows:]
                  Prepared Statement of Robert Lesher
    I am Robert Lesher, 65, Denver resident 40 years, former Air Force 
fighter pilot, long a real estate broker, investor in real estate 
partnerships. By 1990 my ``estate,'' as it were, was made up of 
interests in several investment property general partnerships with 
other local investors, and I continued as a Realtor and commercial 
broker.
    January 1990, IRS auditor Eric Virkler contacted me, wanting to 
audit my 1988 returns. He explained he was working an audit project for 
the TEFRA office of the IRS's service center in Ogden, Utah. TEFRA is 
an acronym referring generally to tax shelter partnerships, the so-
called tax-loopholes that Congress so loves to use to whip the public's 
emotions. No partnership of mine had ever been a TEFRA partnership. 
However, Mr. Virkler had blundered into a failed enterprise where we 
had bought and tried to operate a home for the mentally handicapped, 
here in Denver. The federal funds earmarked for that population were 
sidetracked by Colorado Governor Romer into a new State bureaucracy, 
the home failed, we lost out shirts, and the 119 mentally retarded 
residents ended up on the street. We had to return the property to the 
mortgage holder.
    When Auditor Virkler arrived on the scene, my wife Peggy suffered a 
severe stroke. However, Mr. Virkler was under some pressure to deliver 
scalps and, while I was trying to get help care for my wife, he made 
continuous demands, threats, phone calls, and such to get my immediate 
attention to his cause. My wife has since died.
    To get breathing room, I sought help from Problem Resolution 
Officer Phil Blighton. He seemed sympathetic, told me to file a form 
911 and he would try to help. Unfortunately, he said, the district was 
all out of form 911's, so until they got some in, there was nothing he 
could do--except mail me one when they arrived. Several months later 
one came in the mail, I completed it and returned it to Mr. Blighton 
the same day. He wrote that I had taken too much time completing the 
Form 911, and that my request for help was therefore denied.
    Mr. Virkler stated he had audited the partnership returns before 
coming to me, as required by law. It turned out he had not, though to 
speed things up he issued the partnership a no-action letter. The TEFRA 
audit project needed as many scalps as soon as possible to show the 
public that in theory they were beating up on the rich. We were 
supposed to be the rich.
    Mr. Virkler had revised partnership K-1's to show that my S 
corporation, the partner in the care home, had a profit as a result of 
the business failure, a not unusual IRS interpretation. In open 
violation of tax code paragraph 108d7A he flowed the so-called debt-
relief income through the S Corp to our personal returns, and charged 
us with all sorts of unpaid taxes, penalties, interest, high crimes and 
misdemeanors.
    In all this, Mr. Virkler was quite open about what he was doing in 
accordance with, and in violation of code and regulations, and provided 
me documentation on the side to support an appeal and wipe out this new 
tax debt. He even helped me write an appeal that made sense. Also, he 
pointed out, all we had to do was file an amended return employing a 
form 8082, and the whole matter would go away.
    As months went by, I heard nothing back from the appeal, and could 
not even learn who had it, or where the appeals office might be. Then I 
received notice that one Michael Santambrogio has filed an assessment 
against us, followed by a general lien against all our property real 
and personal. I tried to contact both these gentlemen by letter and 
phone. Neither would answer nor return calls.
    An appeals officer finally did surface, with the position that 
since we were already assessed, there was no point in considering our 
appeal. Appeal dismissed. She made one noteworthy statement regarding 
the whole process: ``We have a gotcha for everything--whatever we want 
to do, we can find a rule to support it.''
    The lien stopped my real estate brokerage business and wiped out my 
estate, as it were, though in so doing produced no income to the 
government. A standard condition of private partnerships is that if any 
partner incurs a tax lien, his interest in the partnership vanishes as 
though it never existed. No one wants to wake up in morning to find the 
IRS in his bed as a new business partner. The estate I had been 
building for 20 years in the profession was wiped out forever by the 
pen of one Phil Voss, who signed the lien.
    We went to tax court, and spent what little money we had left 
putting together our case for that in-house judiciary. Just before our 
court date, the IRS' attorney, Bill Davis, advised us that TEFRA 
matters had no right to go to tax court. But this is not a TEFRA case. 
That's all right, we're treating it as one. Later I learned that what 
Mr. Davis had told me was untrue, that in fact we could have proceeded 
with tax court.
    Mr. Davis, along with the auditor and another PRO had all suggested 
filing an amended return, which we did at the same time, well within 
the 3-year time limit. It vanished, and was never acted upon one way or 
another. I found mention of it in unsigned memoranda acquired through a 
Freedom of Information action, advocating finding some rule to disallow 
it.
    Denver District Counsel Neal Roberts suggested I contact one Dave 
Christiansen, in the TEFRA office in Ogden, where this whole thing had 
started. I did so. He called in the files, allowed that our case was, 
``off the wall,'' and sent the files back to Denver District with a 
request to reaudit. Denver District refused. Mr. Christiansen made the 
same round trip a second time, and a second time was told to forget it.
    That avenue closed, I filed an offer in compromise (taxpayer not 
liable), an appeal of sorts generally unknown to the public. Though I 
could have made a number of arguments, I made only one, what I 
considered the simplest and more irrefutable, that the flow-through of 
the bogus K-1 income was in violation of the tax code as sited. One 
paragraph, with documentation.
    The answer came back from, lo and behold, the same Michael 
Santambrogio who had filed the premature assessment. His denial was a 
one-page letter in which he stated that the IRS had determined our 
workers were in fact employees therefore we owed the taxes.
    Hello? Workers? What workers? I assumed the letter was mixed up 
with another case, returned it to him with a polite note to that 
effect. Not so. His second reply was the same as the first. Mr. 
Santambrogio could find no way to refute my claim, so he faked a 
different claim and ``answered'' that instead.
    I wrote him again. He wrote back that he has talked to the person I 
worked with in Ogden (Dave Christiansen), and their attorney in Denver 
(Bill Davis) and that both agreed we owed the money, period. That of 
course, did not answer the OIC, but was supposed to shut me up.
    I called Dave Christiansen, who denied in writing expressing any 
such opinion to any one, and denied ever talking with Mr. Santambrogio. 
I called Bill Davis several times. He would not return my calls.
    Dave Christiansen has since been reassigned by the IRS. I am unable 
to learn of his whereabouts.
    An admittedly fraudulent audit, an appeal and an amended return 
ignored, the right to court denied, and the OIC process brushed aside 
with lies.
    Many friends have helped me survive after being put out of business 
by the IRS process and my assets, my partnership interest, made 
worthless. Yet in no way was my loss the government's gain. They simply 
destroyed a productive, tax-paying businessman as a matter of their 
normal course of business, not with any particular malice.
    To close, an observation by an ex-IRS attorney summed it up pretty 
well, and made me feel that this on-going nightmare was not my own 
insanity. Sure our case is a mess, it is illegal, improper, and the IRS 
has done almost everything wrong. However, no one at any level in the 
IRS is going to stand up and say so unless he's ready to commit career 
suicide. It's the same as being a whistle blower. No one in the IRS 
would dare come out and say, ``Hey, we really screwed up on the 
Leshers, and we need to correct that mess and let them live their lives 
again.'' No one in the IRS would have the courage or the integrity to 
do a thing like that.
    With that reality check, nothing got fixed but I felt a lot better.

                         Need for Major Changes

    Senator Campbell. Well, I appreciate your testimony. I have 
to tell all of you that when I see grown men who have served in 
the military, in the Korean War, as I have, by the way, Doctor, 
and people who have seen their families come apart or lost 
their homes, when I see, very frankly--I have been taking 
notes, and I am sure the Commissioner has, too. But he is not 
looking in your faces. He is beside you. But when I see tears 
coming up in your eyes, I can understand the hopelessness that 
some of you feel in dealing with the IRS, and there is no 
question in my mind we have to make some major changes if we 
are ever going to have the American public's confidence 
restored in Government. It has to start with the agency that 
takes their money.
    I do appreciate you all being here, and with that, if you 
have any additional comments you would like to turn in over the 
next week or so, we will make sure they are included in the 
record, too.

                                Panel 2

STATEMENTS OF:
        DORIS MARTINEZ, FORMER IRS REVENUE AGENT, PRESIDENT, ASSOCIATED 
            TAX CENTRE, INC.
        KENNETH TUCHMAN, FOUNDER AND PRESIDENT, TELETECH

                       Introduction of Witnesses

    Senator Campbell. We will now go to panel 2, and that will 
take about 5 minutes to set up: Dr. Doris Martinez and Mr. Ken 
Tuchman, I believe it is pronounced. If you would come up and 
get your equipment set up, we will just take about a 5-minute 
break while we are doing that.
    [A brief recess was taken.]
    Senator Campbell. On this panel, there are only two people 
testifying on this panel, so we will be able to go a few 
minutes longer than the former panel. So we will start with Ms. 
Martinez, if you would like to go ahead, and then we will 
proceed with Ken Tuchman after Ms. Martinez.
    Bring that microphone over directly from you.

                      Statement of Doris Martinez

    Ms. Martinez. Senator, I would like to remind you that I am 
hearing impaired, I am profoundly deaf, that and the fact that 
I can't hear the words now. So today I have asked for some help 
today with notetaking.
    Senator Campbell. Sure. For the audience, Ms. Martinez said 
she is hearing impaired, and she will need a little help, and 
that is why other people are here with her. But you still need 
to speak directly into that thing.
    Ms. Martinez. OK. This is Frankie Bowie and Gary Gurhle and 
Darla Espinosa will be joining us to help us with the 
notetaking in just a few minutes. Here she is. OK.
    With that, on behalf of Denver District taxpayers, I would 
like to commend you, Senator Campbell, and the Treasury and 
General Government Subcommittee for holding this most important 
IRS field hearing, the purpose of which is to discuss----
    Senator Campbell. Doris, you are still too far away from 
the microphone.
    Ms. Martinez [continuing]. The purpose of which is to 
discuss ongoing restructuring issues and potential remedies. 
With congressional action pending on H.R. 2676, we believe the 
input offered today may be vital in considering certain 
provisions. For those issues not yet on the table, perhaps 
future legislation and changes to IRS procedure and policies 
can provide much needed taxpayer protection and relief.
    My name is Doris Martinez, and I am a former IRS agent, 
Denver District, from 1977 to 1984. I have been in private 
practice since 1987, and I am president of Associated Tax 
Centre, a firm which specializes in handling IRS problem 
situations. I have been profiled in articles by the Denver 
Post, the Denver Business Journal, Accounting Today, and, along 
with my partners, cohosted a radio talk show during the filing 
season in 1996. Our topics focused on IRS tactics, abuses, 
taxpayer rights, and responsibilities. I am an enrolled agent 
and a member of the National Society of Accountants and 
National Society of Enrolled Agents.
    The testimony offered today is based on my experience and 
knowledge gained as an IRS employee, taxpayer representative, 
and humble taxpayer.
    The issues brought to your attention are wide and varying, 
but with a common theme: the need for equitable tax procedures 
and laws, and equitable treatment of all taxpayers by an IRS 
held accountable for its actions.

            Taxpayer Advocate and Problem Resolution Program

    Commissioner Rossotti has requested a $10 million increase 
for the Taxpayer Advocate's Office and Problem Resolution 
Program. Until the Office of the Taxpayer Advocate becomes 
independent in all aspects, I believe Congress should 
reconsider the request, deny it, or consider reduction or 
elimination of the program altogether. The basis for taking 
position is my experience in dealing repeatedly with the Denver 
District Problem Resolution Office with consistently 
unproductive results and information secured from the Tax 
Analyst, a nonprofit watchdog organization.
    According to documentation provided by the taxpayer 
advocate and subsequently reported by the Tax Analyst, during a 
recent 3-year period district problem resolution offices 
handled over 121,000 requests for assistance. Only 82 taxpayers 
received orders for relief. This is inefficiency at its worse. 
At the district level, problem resolution officers have no 
authority to compel action or provide relief. Their purpose is 
to gather information and submit reports. When a taxpayer 
submits a request for assistance, the problem resolution office 
refers the case to the appropriate division and PRP caseworkers 
work the case. In reality, these are IRS collection and 
examination division personnel assigned to the PRP program. 
These employees have the same attitudes and objectives as their 
nonproblem resolution counterparts. The perspective that each 
district has a taxpayer advocate field office is nothing more 
than an illusion, a $34 million illusion.
    Solution: H.R. 2676 does not go far enough in providing 
taxpayers with an independent program with which to resolve 
hardship cases or previously unresolved issues. An objective 
problem resolution program is critical to effective taxpayer 
relief. There is only one taxpayer advocate, and that position 
is not autonomous. That is not enough.
    Utilization of outside contractors using existing budgets 
at the district level, specifically enrolled agents, CPA's, or 
tax attorneys experienced in IRS matters, is a possible 
solution. If we accept the premise that both IRS employees and 
enrolled practitioners outside of the Service are following the 
same Internal Revenue Code and operational directives contained 
in the Internal Revenue Manual, then the issue of adversarial 
relationships between an independent problem resolution office 
and the IRS is nonexistent. Ultimately, we all answer to the 
Secretary, Department of the Treasury.

               Disparate Treatment of Minority Taxpayers

    Our observation is that all taxpayers are not being treated 
equally. African-American taxpayers are treated the worst, with 
Hispanics running a close second. Examples of abuses are:
    Insisting minority taxpayers liquidate their retirement 
funds or sell their homes in predominately white, upscale 
neighborhoods, when their nonminority counterparts are granted 
generous installment agreements, leaving their assets intact.
    Two, refusing to accept that Hispanic males are responsible 
enough to secure custody of their children and support them, 
thereby denying the earned income credit when it is rightfully 
due. Statements made by Service Center employees include, ``We 
know how you people cover up for each other.'' ``You people.'' 
In this situation, documents were requested from a single 
Hispanic father and timely submitted. The affidavit was 
provided by another Hispanic surnamed individual, the baby-
sitter. It was not good enough for the line employee. It took a 
complaint to the manager to get the information accepted and 
the earned income credit released.
    In yet another instance, a revenue officer demanded a 
family of five children, living at below poverty level, be 
paraded in front of her and taken back to her work area so she 
could question them without their father present. They were 5 
to 15 years old. The revenue officer asked them who took care 
of them, who cooked for them, where was their mother. Their 
mother had left them, and the littlest one, the 5-year-old, 
sleepy-eyed and somewhat disheveled, answered: ``My mommy 
doesn't live with us anymore. She doesn't love us. My daddy and 
my brother take care of me.'' I was there with them. These 
children were forced to relive a traumatic and heart-breaking 
event in their life in front of two strangers, the revenue 
officer and me. All this, to put a taxpayer in currently not 
collectible status. I don't see these types of demands put upon 
nonminority taxpayers.
    In May 1996, I received a call from a retired IRS tax 
auditor from Fresno, CA. He wanted to know if I had noticed 
that minority taxpayers were audited more frequently and 
treated more harshly. This was his experience. He was concerned 
and he was angry. Based on that call, my own experiences, and 
recent findings by the GAO regarding earned income credit 
issues and higher audits rates in States which have high 
minority populations, it appears this is a national issue.
    Solution: When a representative from the IRS discriminates 
against a taxpayer, he or she not only insults the taxpayer, 
but insults, me, you, the district director, the Commissioner, 
and all Americans. The Service has EEO programs and rules which 
are supposed to be enforced internally. Yet these very issues 
still exist when dealing with the taxpayers, and they have no 
place to go. I know of few alternatives when dealing with 
racism. Zero tolerance for disparate treatment of taxpayers 
under threat of discipline or loss of position should be a 
Servicewide mandate. Other than that, there is only one way to 
deal with racism and that is to confront it, confront it one 
employee, one situation at a time. Responsive IRS management 
which takes swift action to correct the taxpayer's problem and 
discipline or fire the offending employee will result in a more 
effective IRS. The solution does not come so much in the form 
of a request, but it is rather a demand.

     Secret Hit Lists and Actions Against Taxpayer Representatives

    While a representative in the Denver District, I saw ``Hit 
Lists of Problem Preparers.'' In October 1996, my partner and I 
were advised by current and former IRS personnel that my firm 
and I were on that list. In September 1997, a Denver District 
branch chief, examination, denied I was on the list, but 
verbally confirmed that the district passes a list around, and 
during tax season solicits information from revenue agents to 
find out who's giving them a bad time so they can put them on 
the list and conduct surprise field compliance visits. This is 
a document and a practice that, if an outsider asks, IRS 
management will summarily deny exists. It is one of their dirty 
little secrets. Use of this tactic is used to harass taxpayer 
representatives and discourage representation.
    I know of another taxpayer representative, also on this 
dubious list, who has been pursued to the point of total 
disruption of her business and family life. She is a meticulous 
practitioner, but wound up on somebody's bad side at the IRS 
while representing an audit or collection issue. Both she and 
her clients have been put through grueling audits, most of 
which have been largely unproductive.
    I have mentioned my partner several times. His name was 
Rudy Maestas. He is not here today because he died 18 months 
ago. The Denver District had been pursuing us for several years 
in a relentless and obsessive effort to disbar me or otherwise 
put us out of business. There were times when we felt like the 
wrath of 800 IRS employees was upon us and it was frightening 
to the point where we feared for our lives. The reason for 
pursuit? ``She has influence over taxpayers, she has influence 
over further compliance, she is high profile and former IRS. 
She doesn't meet the criteria for these actions, but pursue 
her, anyway. Treat her like a tax protester.''
    These statements, made by IRS officials, were found in 
documents secured via the Freedom of Information Act. The FOIA 
provided evidence of illegal snooping, forgery, falsified and 
fabricated documents, and repeated districtwide disclosure 
violations, among other things. The Denver District has 
expended at least $500,000 and 4 years pursuing us, a pursuit 
which is not yet over.
    In the middle of all this, my partner Rudy became so upset, 
so distraught, that he told me, his family, and friends that if 
anything happened to him to look to the Denver District IRS as 
the cause of his death, no matter what the circumstances. And 
so today, Commissioner Rossotti and District Director Hutton, I 
hold this district responsible for whatever you took off my 
partner's life. Because I am profoundly deaf, I know what real 
silence is like. And there is no sound which screams as loudly 
in my ears as the silence of my partner no longer here. Rudy 
was my partner and my best friend. In contributing to Rudy's 
death, this district may have silenced his laughter, but you 
have not silenced his voice, for today I speak for us both. His 
death has broken my heart, but not my spirit.
    Nevertheless, the question still remains: Despite repeated 
complaints up to the regional level, why hasn't IRS management 
asked to see my full documentation and pursued the issues? I 
have offered the documentation more than once. Why haven't you 
taken action against the guilty Service employees within this 
district?
    Solution: There are already laws, including the new illegal 
snooping law, existing disclosure laws which hold IRS employees 
accountable, the Privacy Act of 1974, and the Freedom of 
Information Act, all meant to protect the taxpayer, not the 
perpetuators at the IRS. Yet these laws remain largely 
ineffective without an independent outside board with full 
authority to investigate and take action. It is clear that the 
IRS on its own is not capable of conducting full and objective 
investigations, nor are they taking appropriate corrective 
action.
    Hit lists on problem preparers/practitioners are 
unconstitutional, un-American, and in violation of the Privacy 
Act. IRS employees who engage in this practice, encourage it, 
perpetuate it, or stand by and do nothing should all be held 
accountable and disciplined or fired.
    The practitioners on these lists are entitled to know that 
their rights have been violated, be given an opportunity to 
file formal complaints, and provisions made for damages or 
compensation to be paid without litigation. Use of mediators 
would expedite the process and keep expenditures for all 
parties to a minimum.
    I am mindful of the concerns by Service employees that they 
may be disciplined or fired without due process. While that is 
not the suggestion, the current concerns of 58,000 IRS 
employees should not supersede the concerns and welfare of 200 
million American taxpayers and their representatives.

                 Abusive Audits and Lack of Due Process

    There seems to be a growing pattern in which tax auditors 
and revenue agents conduct audits which are malicious, 
intrusive, and largely unproductive. Most of these audits could 
be handled via correspondence using the computer matching 
program. Many times audits shouldn't take place at all or are 
concluded with grossly erroneous results. Examples:
    A recent office audit was conducted on a Form 1040EZ with a 
potentially omitted W-2 in the amount of $200. The tax auditor 
attempted to do a lifestyle audit and demanded the taxpayer 
provide copies of his parents' tax returns and Social Security 
numbers. The audit was ultimately a no-change.
    A 500-hour field audit, which included a national search 
for assets, when, in fact, the audit could have been 
accomplished via correspondence using the computer matching 
program. Cost of the field audit exceeded $25,000. A 
correspondence audit would have taken $2.50, postage included.
    The continued practice of denying taxpayers the right to 
protest unagreed issues, even when a taxpayer has specifically 
stated he or she wants to protest, remains a problem. Every 
time Service personnel deny someone the right to protest or 
appeal, they contribute to the ever increasing problem of 
taxpayer noncompliance. The hardest thing to do as a 
representative is to convince a wronged taxpayer that the 
system will work next time.
    Solution: We should eliminate the majority of tax auditor 
and revenue agent positions. These people clearly do not have 
enough to do. Office and field audit procedures remain largely 
archaic and are increasingly intrusive. The purpose of an audit 
is to ensure that a return is substantially correct as filed, 
nothing else. With computerization and the expansion of 
information returns, most office and field audits are 
unnecessary. Lifestyle audits must be limited to those 
circumstances which are clearly developed after the initial 
interview and basic audit procedures have been concluded. An 
outside citizens oversight board should be responsible for 
handling complaints, monitoring abusive practices, and holding 
management and line employees accountable.

               Penalty and Interest Abatements and Reform

    All penalties contain provisions for abatement or refund if 
there is reasonable cause. In short, the Internal Revenue Code 
provides for our humanity. In reality, there is no parity as to 
who receives abatements. It is easier to get a $100,000 penalty 
abated for a corporation than it is to get a $200 penalty 
removed for an individual. The smaller the taxpayer, the more 
personal it gets, all the way down to whether or not that 
taxpayer has ever sinned before.
    Today we live in a more complex society in which divorce, 
frequent moves, violent deaths, and all manners of bizarre 
circumstances descend upon a person's life. Abatement 
procedures and reasonable cause must be updated and expanded to 
reflect our society. Frequently, taxpayers are erroneously told 
they cannot request abatements until the full tax has been 
paid. The current move to make notices more readable is to be 
commended. We must go one step further and include with every 
written notice of assessment and demand for payment a simple 
instruction which allows the taxpayer to request abatement of 
refunded penalties. The assessment or demand letter should 
include space for the taxpayer's explanation of circumstances 
and instructions to attach any relevant documentation they 
would like considered.
    H.R. 2676 contains a provision to suspend failure-to-pay 
penalties so long as the taxpayer is making payments, but there 
is no provision to suspend interest. Ongoing discussions 
regarding the cost of abating penalties along with expanded 
innocent-spouse provisions estimate the cost to be at more than 
$5 billion. The cost of tax-related bankruptcies, which account 
for up to one-third of all bankruptcies, and repeated 
noncompliance could be avoided and would greatly reduce the $5 
billion loss of revenue. Most taxpayers want to pay their 
taxes. It is the penalties and interest which frustrate and 
discourage them the most.
    Solution: More realistic policy and abatement guidelines 
which rely less on the whim of Service employees and are more 
consistently applied are badly needed. Regardless as to whether 
it is applied to tax or penalty, taxpayers can only pay so 
much. Legislation providing for suspension of interest so long 
as payments are being made should be considered.
    Today the overall rate of noncompliance is 20 percent, up 
from 5 percent in 1960. If we can reverse that trend by 1 
percent by avoiding bankruptcies and encouraging taxpayer 
compliance, at the current rate of payments processed by the 
Internal Revenue Service in the amount of $1.7 trillion per 
year, an additional $17 billion per year will be collected, 
voluntarily. This will more than offset any losses due to 
penalty, interest, or innocent-spouse reform.

            Taxpayer Education and the Internal Revenue Code

    The original Internal Revenue Code was 16 pages long. 
Today's code contained over 500,000 words and is still growing. 
The Taxpayer Relief Act of 1997 alone contains 800 amendments 
and 300 new provisions. Was America sleeping when we let this 
get by? To Congress, I say, What happened? And I would like to 
show you the Internal Revenue Code, two volumes. The 1997 
Taxpayer Relief Act, this is it by itself.
    Senator Campbell. Do you have that memorized yet? 
[Laughter.]
    Ms. Martinez. I had to buy bifocals just to read this. To 
Congress, I say, What happened? What happened?
    Americans are obsessed with taxes, yet they don't 
understand them. If you ask a junior-high student what the term 
``under the table'' means, they can tell you. If you ask a 
senior in high school what the term ``voluntary compliance'' 
means, they don't know. Tax education of the American public 
stops with the Boston Tea Party. Yet every year we have new 
taxpayers joining the system via the millions of teenagers who 
enter the job market. I challenge the IRS to appropriate a 
portion of their budget to truly educate the public and provide 
a badly needed sense of history which is currently lacking in 
the American taxpayer.
    To Congress, I ask for a national taxpayer education 
initiative. A child in the sixth grade is old enough to earn an 
allowance. Start there. Send representatives, perhaps tax 
auditors and revenue agents, to speak in our schools, from 
elementary school up through high school. As a Nation, we must 
start teaching taxation in history, math, and business courses. 
But we must teach it. We are currently failing to educate our 
young people about their rights and responsibilities.
    Most Americans don't even know which President gave us the 
prototype for the current IRS organization and our system of 
taxation, nor do they know that the entire system was 
completely dismantled not once but twice due to corruption. By 
the way, the President who gave us the IRS was Abraham Lincoln 
when he created the Bureau of Internal Revenue in 1862, which 
was completely dismantled in 1872 and later resurrected in 
1913. Prior to that, in 1801, Thomas Jefferson dismantled a 
widely corrupt Federalist system of Internal Revenue, which had 
been in place less than 10 years, and our country was funded 
exclusively by the collection of customs duties until the Civil 
War.
    We send police officers, firemen, and other professionals 
into our schools to give talks in classes and schoolwide 
assemblies. Why not representatives from the Internal Revenue 
Service? It is the one thing I would like to see in my 
lifetime. This is how you avoid the necessity for audits and 
installment agreements. You start at the beginning.
    In summary, IRS, you are the trustees, the guardians of the 
Internal Revenue Code. It is incumbent upon both management and 
line employees at the IRS to treat all taxpayers with dignity 
and parity, for you are the trustees, the guardians of the 
Internal Revenue Code.
    IRS. You must put integrity back into the ``I,'' for 
corruption has many faces: lying, racism, retaliation, illegal 
snooping, unnecessary intrusiveness, excessive collection 
actions, hit lists, behaving like a secret society. Taxpayers 
view all of these acts as corrupt.
    I often hear people say with great hostility, ``How can you 
work with the IRS? They are a bunch of lying crooks.''
    As a former revenue agent, it hurts to hear that. Yet sad 
to say, I have no quick rebuttal. Integrity throughout the 
agency must be restored without delay.
    IRS. The IRS must put respect back into the ``R,'' respect 
for the taxpayer, respect for their rights and the system as it 
was meant to be. Our taxation system contains a steady balance 
between taxpayer rights and the authority granted to Service 
employees. It is lack of respect for the taxpayers which is 
giving rise to additional legislation as we speak. Respect is 
one of those things which if you give it, it will be returned 
to you as well.
    IRS. The ``S'' must stand for solutions. Solutions for the 
taxpayer which educate, encourage cooperation, and promote an 
atmosphere which fosters voluntary compliance mean solutions 
for everyone.
    To Congress, we look forward to a continued commitment to 
restructure the IRS and enact whatever legislation is necessary 
to protect and further the interests of the taxpayer. To the 
Internal Revenue Service, we welcome a newly invigorated 
management which will hopefully inspire and guide the employees 
who have been entrusted as stewards of the Internal Revenue 
Code. And we look to the American people who, as taxpayers, 
must continue their efforts with honesty, responsibility, and, 
as always, in the spirit of voluntary compliance.

                           Prepared Statement

    Senator Campbell. Thank you, Ms. Martinez. We have your 
complete statement and it will be made part of the record.
    [The statement follows:]
                  Prepared Statement of Doris Martinez
    On behalf of Denver District Taxpayers, I would like to commend 
Senator Nighthorse Campbell and the Postal/Treasury Subcommittee for 
holding this most important IRS Field Hearing, the purpose of which is 
to discuss on-going restructuring issues and potential remedies. With 
Congressional action still pending on H.R. 2676 we believe the input 
offered today may be vital in considering certain provisions. For those 
issues not yet on the table, perhaps future legislation and changes to 
IRS procedure and policies can provide taxpayer protection and relief.
    My name is Doris Martinez and I'm a former IRS revenue agent, 
Denver District, from 1977 to 1984. I've been in private practice since 
1987 and am president of Associated Tax Centre, Inc., specializing in 
handling IRS problem situations. I have been profiled in articles by 
the Denver Post, The Denver Business Journal, Accounting Today and also 
co-hosted a radio talk show during the filing season us 1996. Our 
topics focused on IRS tactics, abuses, taxpayer rights and 
responsibilities. I'm an enrolled agent and a member of the National 
Society of Accountants and National Society of Enrolled Agents.
    The testimony offered today is based on my experience and knowledge 
gained as an IRS employee, taxpayer representative and humble taxpayer.
    The issues brought to your attention are wide and varying, but with 
a common theme--the need for equitable tax procedures and laws; and 
equitable treatment of all taxpayers by an IRS held accountable for its 
actions.
    I. Taxpayer Advocate and Problem Resolution Program.--Commissioner 
Rossotti has requested $10 million to the PRO budget. Until the Office 
of the Taxpayer Advocate becomes independent in all aspects I believe 
Congress should deny the request and consider reduction or elimination 
of the program altogether. The basis for taking this position is my 
experience in dealing repeatedly with the Denver District Problem 
Resolution Office with consistently unproductive results and 
information secured from the Tax Analyst, a non-profit watch dog 
organization. According to documentation provided by the Taxpayer 
Advocate and subsequently reported by the Tax Analyst, during a recent 
three year period, District Problem Resolution Offices handled over 
121,000 requests for assistance. Only 82 taxpayers received orders for 
relief. This is inefficiency at its worse. At the District level, 
Problem Resolution Officers have no authority to compel action or 
provide relief. Their purpose is to gather information and submit 
reports. When a taxpayer submits a request for assistance, the Problem 
Resolution office refers the case to the appropriate Division and 
Problem Resolution Program ``caseworkers'' work the case. In reality 
these are IRS collection or examination division personnel, assigned to 
the Problem Resolution Program. These employees have the same attitudes 
and objectives as their non-Problem Resolution counterparts. Thus, the 
perspective that each District has a Taxpayer Advocate field office is 
nothing more than an illusion, a $40,000,000 illusion.
    Solution: H.R. 2676 does not go far enough in providing taxpayers 
with an independent program with which to resolve hardship cases or 
previously unresolved issues. An objective Problem Resolution Program 
is critical to effective taxpayer relief. There is only one Taxpayer 
Advocate and that position is not autonomous. That is not enough. 
Utilization of outside contractors using existing budgets at the 
District level, specifically enrolled agents, CPA's or tax attorneys 
experienced in IRS matters is a possible solution. If we accept the 
premise that both IRS employees and enrolled practitioners outside of 
the Service are following the same Internal Revenue Code and 
operational directives contained in the Internal Revenue Manual, then 
the issue of adversarial relationships between an independent Problem 
Resolution Office and the IRS is non-existent. Ultimately we all answer 
to the Secretary, Department of Treasury.
    II. Disparate Treatment of Minority Taxpayers.--Our observation is 
that all taxpayers are not being treated equally. African-American 
taxpayers are treated the worst with Hispanics running a close second. 
Examples of abuses are:
    (1) Insisting minority taxpayers liquidate their retirement funds 
or sell their homes in predominately white, upscale neighborhoods when 
their non-minority counter-parts are granted generous installment 
agreements, leaving their assets intact.
    (2) Refusing to accept that Hispanic males are responsible enough 
to secure custody of their children and support them, thereby denying 
the Earned Income Credit when it is rightfully due. Statements made by 
Service Center employees include ``we know how you people cover up for 
each other.'' In this situation documentation was requested from a 
single Hispanic father and timely submitted. The affidavit was provided 
by another Hispanic surnamed individual, the baby sitter. It was not 
good enough for the line employee. It took a complaint to the manager 
to get the information accepted and the Earned Income Credit released.
    (3) In yet another instance a revenue officer demanded a family of 
five children, living at below poverty level, be paraded in front of 
her and taken back to her work area so she could question them without 
their father present. They were five to fifteen years old. The revenue 
officer asked them who took care of them, who cooked for them, where 
was their mother? Their mother had left them and the littlest one, the 
five year old, sleepy eyed and somewhat disheveled answered ``my mommy 
doesn't live with us anymore, she doesn't love us. My daddy and my 
brother take care of me.'' I was there with them. These children were 
forced to relive a traumatic and heart breaking event in their life in 
front of two strangers, the revenue officer and me. All this, to put a 
taxpayer in currently not collectible status. I don't see these types 
of demands put upon non-minority taxpayers.
    In May 1996 I received a call from a retired IRS tax auditor from 
Fresno, California. He wanted to know if I had noticed that minority 
taxpayers were audited more frequently and treated more harshly. This 
was his experience. He was concerned and angry. Based on that call, my 
own experiences and recent findings by the GAO regarding Earned Income 
Credit Issues it appears this is a national issue.
    Solution: When a representative from the IRS discriminates against 
a taxpayer he/she not only insults the taxpayer, but insults me, you, 
the District Director, the Commissioner and all Americans. The Service 
has EEO programs and rules which are supposed to be enforced 
internally. Yet these very issues still exist when dealing with 
taxpayers, and they have no place to go. I know of few alternatives 
when dealing with racism. Zero tolerance for disparate treatment of 
taxpayers under threat of discipline or loss of position should be a 
Service wide mandate. Other than that there is only one way to deal 
with racism and that is one employee, one situation at a time. 
Responsive IRS management which takes swift action to correct the 
taxpayer's problem and counsel, discipline or fire the offending 
employee will result in a more effective IRS. This solution does not 
come so much in the form of a request but rather a demand.
    III. Secret Hit Lists and Actions Against Taxpayer 
Representatives.--While a representative in the Denver District, I saw 
``Hit Lists of Problem Preparers.'' In October 1996 my partner and I 
were advised by current and former IRS personnel that my firm and I 
were on that list. In September 1997 a Denver District Branch Chief, 
Examination, verbally confirmed that the District ``passes lists 
around, and during tax season solicits information from revenue agents 
to find out who's giving them problems so they can put them on the list 
and conduct surprise field compliance visits.'' This list is a document 
and practice that if an outsider asks IRS management will summarily 
deny exists. It is one of their dirty little secrets. Use of this 
tactic is used to harass taxpayer representatives and discourage 
representation.
    I know of another taxpayer representative, also on this dubious 
list, who has been pursued to the point of total disruption of her 
business and family life. She is a meticulous practitioner, but wound 
up on someone's bad side at the IRS while representing an audit or 
collection issue. Both she and her clients have been put through 
grueling lifestyle audits, all of which have been largely unproductive.
    I've mentioned my partner several times. His name was Rudy Maestas. 
He's not here today because he died in October 1996. The Denver 
District had been pursuing us for several years in a relentless and 
obsessive effort to disbar me or otherwise put us out of business. 
There were times when we felt like the wrath of 800 IRS employees was 
upon us and it was frightening to the point where my family feared for 
my life. The reason for pursuit? ``She has influence over taxpayers, 
she's high profile and former IRS.'' These statements made by IRS 
officials, were found in documents secured via the Freedom of 
Information Act. The FOIA (Freedom of Information Act) documents 
provided evidence of illegal snooping, forgery, falsified and 
fabricated documents and repeated District wide disclosure violations, 
among other things. The Denver District has expended at least $500,000 
and four years pursuing us, a pursuit which is not yet over.
    In the middle of all of this, Rudy became so upset, so distraught 
that he told me, his family and friends, that if anything happened to 
him to look to the Denver District IRS as the cause of his death. He 
dropped dead from a heart attack a month later. He was 47 years old. 
And so, today Commissioner Rossotti and District Director Hutton, I 
hold this District responsible for whatever you took off my partner's 
life. Because I'm profoundly deaf, I know what real silence is like. 
And there is no sound which roars as loudly as the silence of my 
partner no longer here. Rudy was my partner and best friend. In 
contributing to Rudy's death this District may have silenced his 
laughter, but you have not silenced his voice, for today I speak for us 
both. His death has broken my heart, but not my spirit.
    The question still remains though, despite repeated complaints up 
to the Regional level, why hasn't IRS management asked to see my full 
documentation? It has been offered more than once. Why haven't you 
taken action against the guilty parties?
    Solution: There are already laws, including the new illegal 
snooping law, existing disclosure laws which hold IRS employees 
accountable, the Privacy Act of 1974 and the Freedom of Information 
Act, all meant to protect the taxpayer, not the perpetuators at the 
IRS. Yet these laws remain largely ineffective without an independent 
outside board with full authority to investigate and take action. It is 
clear the IRS on its own, is not capable of conducting full and 
objective investigations nor are they taking appropriate corrective 
action.
    ``Hit lists'' on problem preparers/practitioners are 
unconstitutional and in violation of the Privacy Act. IRS employees who 
engage in this practice, encourage it, perpetuate it or stand by and do 
nothing should all be held accountable and be disciplined or fired.
    The practitioners on these lists are entitled to know that their 
rights have been violated, be given an opportunity to file formal 
complaints and provisions made for damages or compensation to be paid 
without litigation. Use of mediators would expedite the process and 
keep expenditures for all parties at a minimum.
    I am mindful of the concerns by Service employees that they may be 
disciplined or fired without due process. While that is not the 
suggestion, it does not seem reasonable that the concerns of 58,000 IRS 
employees should not supersede the concerns and welfare of 200,000 
million American taxpayers and their representatives.
    IV. Abusive Audits and Lack of Due Process.--There seems to be a 
growing pattern in which tax auditors and revenue agents conduct audits 
which are malicious, intrusive and largely unproductive. Most of these 
audits could be handled via correspondence utilizing the computer 
matching program. Many times audits shouldn't take place at all or are 
concluded with grossly erroneous results. Examples:
    (1) A recent office audit was conducted on a Form 1040EZ with a 
potentially omitted W-2 in the amount of $200. The tax auditor 
attempted to do a lifestyle audit and demanded the taxpayer provide 
copies of his parents tax returns and social security numbers. The case 
was a no change.
    (2) A 500 hour field audit which included a national search for 
assets when in fact the audit could have been accomplished via 
correspondence using the computer matching program. Cost of the field 
audit exceeded $25,000. A correspondence audit would have taken $2.50, 
postage included.
    (3) The continued practice of denying taxpayers the right to 
protest unagreed issues, even when a taxpayer has specifically stated 
he/she wants to protest, remains a problem. Every time Service 
personnel deny someone the right to protest or appeal, they contribute 
to the ever increasing problem of taxpayer non-compliance. The hardest 
thing to do as a representative is to convince a wronged taxpayer that 
the system will work the next time.
    Solution: We should eliminate the majority of tax auditor and 
revenue agent positions. These folks clearly do not have enough to do. 
Office and Field audit procedures remain largely archaic and are 
increasingly intrusive. The purpose of an audit is to ensure that a 
return is substantially correct as filed. With computerization and the 
expansion of information returns, most office and field audits are 
unnecessary. Lifestyle audits must be limited to those circumstances 
which clearly develop after the initial interview and basic audit 
procedures have been concluded. An outside citizens oversight board 
should be responsible for handling complaints, monitoring abusive 
practices and holding management and line employees accountable.
    V. Penalty and Interest Abatements/Reform.--All penalties contain 
provisions for abatement or refund if there is reasonable cause. In 
short, the Internal Revenue Code provides for our humanity. In reality 
there is no parity as to who receives abatements. It's easier to get a 
$100,000 penalty abated for a corporation than it is to get a $200 
penalty removed for an individual. The smaller the taxpayer the more 
personal it gets, down to whether or not that taxpayer has ever sinned 
before.
    Today we live in a more complex society in which divorce, frequent 
moves, violent deaths and all manners of bizarre circumstance descend 
upon a person's life. Abatement procedures and reasonable cause must be 
updated and expanded to reflect our society. Frequently taxpayers are 
erroneously told they cannot request abatements until after the full 
tax has been paid. The current move to make notices more readable is to 
be commended. We must go one step further and include with every 
written notice of assessment and demand for payment a simple 
instruction for requesting abatements of penalties with space for the 
taxpayer's explanation of circumstances and instructions to attach any 
relevant documentation they would like considered.
    H.R. 2676 contains a provision to suspend failure to pay penalties 
so long as the taxpayer is making payments, but there is no provision 
to suspend interest. On going discussions regarding the cost of abating 
penalties along with expanded innocent spouse provisions, estimate the 
cost to be at more than $5 billion. The cost of tax related 
bankruptcies, which account for up to a third of all bankruptcies, and 
repeated non-compliance could be avoided and would greatly reduce the 
$5 billion loss of revenues. Most taxpayers want to pay their taxes. It 
is the penalties and interest which frustrate and discourage them the 
most.
    Solution: More realistic policy and abatement guidelines which rely 
less on the whim of Service employees and are applied consistently, in 
addition to reform of innocent spouse laws are badly needed. Regardless 
as to whether it's applied to tax or penalty, taxpayers can pay only so 
much. Legislation providing for suspension of interest so long as 
payments are being made should also be considered.
    VI. Taxpayer Education and the Internal Revenue Code.--The original 
Internal Revenue Code was 16 pages long. Today's Code contains over 
500,000 words and is still growing. The Taxpayer Relief Act of 1997 
alone contains 800 amendments and 300 new provisions. Was America 
sleeping when we let this get by? To Congress I say what happened?
    Americans are obsessed with taxes, yet they don't understand them. 
If you ask a junior high student what the term ``under the table'' 
means, they can tell you. If you ask a senior in high school what the 
term ``voluntary compliance'' means, they don't know. Tax education of 
the American public stops with the Boston Tea Party. Yet every year we 
have new taxpayers joining the system via the millions of teenagers who 
enter the job market. I challenge the IRS to appropriate a portion of 
their budget to truly educate the public and provide a badly needed 
sense of history which is currently lacking in the American taxpayer. 
To Congress I ask for a National Taxpayer Education Initiative. A child 
in the 6th grade is old enough to earn an allowance. Start there. Send 
representatives, perhaps tax auditors and revenue agents, to speak in 
our schools, from elementary school up through high school. As a nation 
we must start teaching taxation in history, in math or business 
courses--but we must teach it. We are currently failing to educate our 
young people about their rights and responsibilities.
    Most Americans don't know which President gave us the prototype for 
the current IRS organization, and our system of taxation, nor do they 
know that the entire system was completely dismantled not once but 
twice due to corruption. By the way, the President who gave us the IRS 
was Abraham Lincoln when he created the Bureau of Internal Revenue in 
1862, which was completely dismantled in 1872 and later resurrected in 
1913. Prior to that, in 1801 Thomas Jefferson dismantled a widely 
corrupt Federalist system of Internal Revenue, which had been in place 
less than 10 years, and our country was funded exclusively by the 
collection of Customs Duties until the Civil War.
    We send police officers, firemen and other professionals into our 
schools to give talks in classes and in school wide assemblies. Why not 
representatives from the IRS? It is the one thing I would like to see 
in my lifetime. This is how you avoid the necessity for audits and 
installment agreements. You start at the beginning.
    VII. Summary--IRS, you are the trustees, the guardians of the 
Internal Revenue Code.--It is incumbent upon both management and line 
employees at the IRS to treat all taxpayers with dignity and parity, 
for you are the trustees, the guardians of the Internal Revenue Code. 
IRS. You must put integrity back Into the ``I,'' for Corruption has 
many faces; lying, racism retaliation, illegal snooping, unnecessary 
intrusiveness, excessive collection actions, hit lists, behaving like a 
secret society. Taxpayers view all of these acts as corrupt. I often 
hear people say with great hostility, ``How can you work with the IRS, 
they are a bunch of lying crooks.'' As a former revenue agent, it hurts 
to hear that, yet sad to say I here no quick rebuttal. Integrity 
throughout the agency must be restored without delay. IRS. The IRS must 
put respect back into the ``R'', respect for the taxpayer, respect for 
their rights and the system as it was meant to be. Our taxation system 
contains a steady balance between taxpayer rights and the authority 
granted to Service employees. It is lack of respect for the taxpayers 
which is giving rise to additional legislation as we speak. Respect is 
one of those things which if you give, it will returned to you as well. 
IRS. The ``S'' must stand for Solutions. Solutions for the taxpayer 
which educate, encourage cooperation and promote an atmosphere which 
fosters voluntary compliance mean solutions for everyone.
    To Congress, we look forward to a continued commitment to enact 
whatever legislation is necessary to protect and further the interests 
of the taxpayer. To the IRS we welcome a newly invigorated management 
which will hopefully inspire and guide the employees who have been 
entrusted as stewards of the Internal Revenue Code. And we look to the 
American people who as taxpayers must continue our efforts with 
honesty, responsibility and as always in the spirit of voluntary 
compliance.

                           Antibrowsing Bill

    Senator Campbell. That was a very detailed and well-spoken 
testimony. Bashing the IRS has become almost a national 
pastime, as you probably know, and I was particularly 
interested in your testimony because you offered a number of 
suggestions and solutions.
    Let me get a couple of things first, though. You mentioned 
one audit, and as I did some quick arithmetic up here--Ricardo 
did it for me--you were saying basically that one audit cost 
500 hours in time and $25,000 to collect $200. Is that correct?
    Ms. Martinez. The audit is currently under progress. I 
computed that 500 hours--does anybody have a calculator here? I 
believe I used a $50-per-hour rate on that.
    Senator Campbell. I see. OK.
    Ms. Martinez. Man-hours. So that is 500 hours. Totally 
unnecessary. They could have done it via the computer matching 
program. I guess my question is: What are we doing with the 
computerization program? What is the purpose of all these 
1099's?
    Senator Campbell. Well, we ask the Commissioner.
    Ms. Martinez. They are designed to save money. We are not 
doing it.
    Senator Campbell. You also alluded to what you called the 
snooping bill. We call it the browsing bill, the antibrowsing 
bill. In fact, it was my bill that was passed last year when a 
number of IRS people were caught browsing with no probable 
cause through the tax returns of sometimes family, sometimes 
famous movie stars or athletes, sometimes just their enemies.
    Before we passed that bill, it was already illegal to use 
that information, but it wasn't illegal just to do the 
snooping. That is now. Unfortunately, it is only a misdemeanor, 
but at least it is illegal.
    You also spoke about a number of documents. If you have 
those on file--I noticed your testimony was very complete. If 
you would give the committee a copy of all that documentation 
that you accumulated, I would like to include that in the 
record, too.
    And I was particularly interested in your comments about 
educating people about taxes, how it came about, that we have 
to accept this responsibility. That is all great. But you spoke 
mostly about the schools and youngsters, but they are not the 
ones who pay their taxes. It is their parents.
    How would you suggest we educate the adults, the ones that 
are actually paying the taxes?
    Ms. Martinez. I believe the media can be a big help in that 
regard. We see all kinds of television spots and commercials on 
don't do drugs, antiviolence. Television, radios, and newspaper 
public service announcements can help the rest of us get caught 
up and help us to become better taxpayers and make compliance 
just a little easier.
    Senator Campbell. OK. I thank you very much for your 
testimony.
    Now we will go to Kenneth Tuchman, and I apologize not 
recognizing you at first, but I remember now meeting you 
several times in Washington. Thank you for appearing today. If 
you would like to go ahead and proceed?

                      Statement of Kenneth Tuchman

    Mr. Tuchman. Good morning, Mr. Chairman. My name is Kenneth 
Tuchman. I am the founder and president of TeleTech Holdings, 
the Nation's leading provider of outsourced customer care 
management services. I would like to thank you and the 
committee for providing me with the opportunity to testify here 
today.
    While I can't offer solutions to all of the serious 
problems so well expressed by the last panel, I hope that I can 
shed some light on some exciting opportunities the IRS might 
pursue to enhance your customer care capabilities.
    To do so, I would like to outline TeleTech's partnership 
with the U.S. Postal Service and describe the benefits that we 
believe our public-private partnership has brought to this 
public institution. In addition, I would like to explain why 
private sector companies such as TeleTech can bring new 
technology and innovative solutions to other Government 
entities, including the Internal Revenue Service.
    Americans, regardless of their perspective on the scope of 
Government, expect public agencies to serve the citizens of our 
country as effectively as possible. Without a doubt, this is 
the goal of our Nation's dedicated public work force as well. 
We believe that the experience and core competencies of 
TeleTech and other similar firms in servicing customers in the 
private sector is applicable to servicing public sector 
customers as well.
    First, I would like to provide some background on TeleTech 
to give our partnership with the Postal Service some 
perspective. I founded TeleTech in 1982 with one goal: To 
provide outsourced customer care solutions to corporations and 
corporation-like entities.
    What is driving the need for business today? Well, to begin 
with, customers are less loyal, more demanding, than ever 
before. They measure service excellence in ways dramatically 
different than they did just a few years ago. They point and 
click to find information, shop freely at 4 a.m., and expect 
instantaneous responses to even the most complex questions. 
Today, the information age is affecting every aspect of a 
company's ability to acquire, keep, and manage customers.
    TeleTech serves the customer care management needs of large 
global companies such as GTE, Microscoft, AT&T, United Parcel 
Service, to name a few. All of our clients have one thing in 
common: They have a strategic and competitive need for customer 
service excellence. Yet because creating a best-in-class 
customer care operation requires vast capital resources, ever-
changing technology, and a whole new infrastructure, they 
choose to outsource the function to companies like TeleTech.
    Clients create and implement customized strategies that 
combine the best of our abilities with theirs. While strategies 
for each client differ significantly, one goal is always the 
same: Customer satisfaction that translates into long-term 
customer relationships. Our clients know that over the long 
run, satisfied customers mean greater competitive strength, 
increased efficiency, and certainly reduced overall costs.
    It is our view that this approach translates well into the 
public sector. Ideally, public sector institutions would focus 
on long-term relationships with their citizen-customers based 
on satisfaction and responsiveness, which can only come from 
single interaction resolutions to even complex inquiries. Over 
the long run, this would not only improve their cost structure 
and revenue collection capabilities due to efficiencies gained, 
it would also enhance their image. Perhaps most importantly, it 
would enable them to deliver what citizens are entitled to 
expect: Expeditious, responsive, and effective interactions 
with Government entities that serve them.
    As you will see, this approach is enhancing the Postal 
Service's ability to deliver just that to its customers.
    The most relevant example of benefits of a partnership 
between the public and private sectors can be found in our 
Denver National Service Center where 600 TeleTech employees 
manage 65,000 customer inquiries for the U.S. Postal Service 
every day.
    In 1996, TeleTech responded to a Postal Service request for 
proposal. After a rigorous competitive bidding process, we were 
awarded the contract in September of that year to establish the 
first of six national service centers. Prior to the 
establishment of this network of national service centers, 
whenever the American public called the U.S. Postal Service, 
calls were directed to their local post office. Often this 
meant that calls were simply unanswered as local staff were 
busy at the counter or simply did not have the tools or 
information to be able to answer specific inquiries. This 
reflected poorly on the Postal Service's commitment to 
universal service for all.
    TeleTech began handling calls for the USPS Pacific and 
Colorado region on November 28, 1996. We have managed this 
program during regular seasons and throughout the peak-season 
volumes experienced during Christmas as well as during tax 
seasons. We have established a separate subsidiary with 
dedicated management and staff whose only duty and 
responsibility is serving the U.S. Postal Service and its 
customers.
    This has been a successful partnership which has married 
the best of the private and public sectors. Together, we have 
established what is in my opinion one of the world's finest 
examples of best-in-class customer care. TeleTech could not 
have achieved this result on its own, and neither, I would 
suggest, could the U.S. Postal Service. This level of 
performance, in such a short timeframe, is achieved only 
through an open, honest partnership.
    Upon this bedrock, TeleTech and the Postal Service have 
built solutions to deliver across-the-board service level 
improvements, ensuring that the American public's calls are 
answered accurately every day of the week, 24 hours a day. We 
work together to constantly improve the quality of our work, 
meeting frequently not only with our corporate counterparts at 
the USPS but also with local post office staff, to ensure that 
our definition of quality is one and the same. This attention 
to detail will lead to overall improvement in customer service 
ratings for the entire organization.
    Because TeleTech provides the people, processes, 
management, and undiluted focus on delivering world-class 
customer care, while the Postal Service provides the 
infrastructure and capital, our partnership allows the Postal 
Service to focus on doing what it does best: Delivering the 
mail. Simultaneously, the Postal Service is able to greatly 
improve both the service levels and accessibility Americans 
experience in interacting with this Government institution. In 
many ways, our partnership is helping to break down the 
invisible barriers that many Americans perceive stand between 
themselves and the public organizations that serve them.
    I believe that there are many areas of emulation in our 
successful public-private partnership with USPS that might be 
applicable to new approaches for the IRS.
    We all recognize the challenges faced by the IRS and 
applaud the commitment of its dedicated employees to deliver 
quality service. Sometimes, however, it is simply not enough to 
strive for excellence when the tools provided obstruct your 
ability to deliver accurate information to average taxpayers. 
It has been well documented that the current IRS computer and 
information delivery systems are the source of many service 
failures. In short, although IRS employees work long hours and 
are both dedicated and professional, structural and 
technological deficiencies hinder their efforts, resulting in 
inconsistent service quality and frustration for millions of 
taxpayers across our Nation.
    I know that the IRS is taking steps to address this 
technology deficiency with their current tender for a prime 
contract and the announced short list of Lockheed Martin and 
Computer Sciences Corp., both excellent companies. The enormity 
of this project is mind-boggling. I wish Mr. Rossotti and his 
team the very best and welcome the agency's renewed commitment 
to providing employees with the tools they need to deliver the 
kind of service we taxpayers demand.
    However, when reviewing large-scale technology projects of 
this nature, I immediately think of the individuals who answer 
the phone--the people who are providing the human face of the 
agency. Technology is never a magic bullet. The human interface 
is clearly a crucial element in reinventing the IRS.
    In the headlong rush to provide innovative technology, the 
customer service agent is often the last to be considered, and 
in many cases, this results in alienation and distrust on the 
front lines. And despite all technology improvements and money, 
the implementation fails to meet its objectives.
    But it need not be so.
    The typical customer service agent answers up to 25 calls 
per hour 8 hours a day. This is a tough job. To enact change in 
this environment without impacting morale is not easy, and 
waiting 3 to 4 years for the technology fix to arrive is 
clearly not an option.
    The impact of technology in a customer service environment 
can be dramatic, but it is also possible to make dramatic 
changes to current processes--to apply short-term fixes, if you 
will, which can provide immediate service improvements. We 
would propose such a solution for the IRS, one that 
incorporates the people side of the equation.
    My suggestion is to blend the best of the private and 
public sector, establishing a private sector test-bed 
communication center, which would serve as a laboratory for 
innovative process change. Let new ideas and processes be first 
tested in an environment which embraces change. Once these 
innovations have been demonstrated to work and are successful, 
export them to every IRS communication center and quickly 
improve the effectiveness of the entire enterprise. Because the 
changes tested here will affect them the most, it may make 
sense that current IRS employees actually staff this center.
    In one sense, the establishment of such a center is 
business consulting in its purest form. Because your private 
sector partner would be in the trenches with your staff, 
suggestions for improvement can immediately be tested, proven, 
and implemented. Let the private sector see and feel some of 
the burden carried out by the frontline staff of the IRS.
    The goals of this type of outsourcing partnership are 
similar to those you are undertaking now: Rapid improvement 
without losing the knowledge and commitment of current staff.
    Finally, I submit that this private sector communication 
center could also serve as the test bed for the new technology 
systems that are to be delivered under the current IRS prime 
contract for technology. It would be important to separate this 
initiative from the larger technology development effort, using 
it exclusively as an independent testing center.
    Although the private sector is different from the public 
sector, one basic principle remains the same: Our client's core 
competency is not customer service. When a large institution's 
core competency is not customer service but desires for such 
competency exists, such as with the IRS, it only makes sense 
that that institution seek the assistance of a company whose 
only focus is customer service. In such instances, public-
private partnerships are ideal.
    Customer service companies such as TeleTech have succeeded 
with such arrangements for a wide range of companies. For 
example, TeleTech provides Microscoft with technical support, 
product support, and registration of all of its products. We 
also provide the United Parcel Service with tracing and 
tracking of virtually all of their packages. We also provide 
GTE with service on local, long-distance, Internet, and 
wireless service, just to name a few examples. In addition to 
the IRS, we believe that similar services can be provided to 
other Government bureaucracies as well. Solutions are inherent 
in partnerships.
    TeleTech is proud of its partnership with the Postal 
Service and is excited about innovation at the IRS. We hope our 
fully customer-centric approach, technology- and people-based 
solutions can be of help to this committee as you explore 
changes at the IRS. Together, we believe there is a real 
reinvention potential.
    I want to reiterate my personal commitment to make myself 
or my employees available to help your efforts in any way. 
Thank you, Mr. Chairman, for inviting me to be a part of this 
important process.

                           Prepared Statement

    Senator Campbell. Thank you, Mr. Tuchman. We have your 
complete statement and it will be made part of the record.
    [The statement follows:]
                 Prepared Statement of Kenneth Tuchman
                              introduction
    Mr. Chairman, I am Kenneth Tuchman, founder and President of 
TeleTech Holdings Incorporated, the nation's leading provider of 
outsourced customer care management services. I would like to thank you 
and the Committee for providing me the opportunity to testify here 
today.
    I hope I can shed some light on some exciting solutions and 
opportunities the IRS might pursue to enhance your customer care 
capabilities. To do so, I'd like to outline TeleTech's partnership with 
the United States Postal Service and describe the benefits that we 
believe our public-private partnership has brought to this venerable 
public institution. In addition, I would like to explain why a private 
sector company such as TeleTech can bring new technology and innovative 
solutions to other well-established government entities, including the 
Internal Revenue Service.
    Americans, regardless of their perspective on the scope of 
government, expect public agencies to serve the citizens of our country 
as effectively as possible. Without a doubt this is the goal of our 
nation's dedicated public work force as well. We believe that the 
experience and core competencies of TeleTech and other similar firms 
serving customers in the private sector is applicable to servicing 
public sector customers as well.
                         teletech's background
    First, I'd like to provide some background on TeleTech to give our 
partnership with the Postal Service some perspective. I founded 
TeleTech in 1982 with one goal: to provide outsourced customer care 
solutions to corporations and corporate-like entities. Today, TeleTech 
serves the customer care management needs of large global companies 
such as GTE, Microsoft, AT&T, and UPS. All of our clients have one 
thing in common; they have a strategic and competitive need for 
customer service excellence. Yet because creating a best-in-class 
customer care operation requires vast capital resources, ever-changing 
technology and whole new infrastructures, they choose to outsource the 
function to companies like TeleTech.
    In essence, we help our clients acquire, serve and retain their 
customers by managing inbound telephone, Internet and PC-based video 
inquiries on their behalf.
    More specifically, TeleTech has 18 customer communication centers 
located throughout the United States, United Kingdom, Australia, New 
Zealand, Mexico and Canada. These centers have over 7,100 state-of-the-
art computer workstations, which are used by greater than 9,000 highly 
trained customer care professionals in managing millions of customer 
inquiries even week.
    We invest a great deal in our front line employees, who represent a 
wide range of experience and talents, from entry level customer service 
personnel to senior technical support specialists and registered 
nurses. We empower our employees with cutting-edge training and the 
latest desktop tools for delivering world-class customer care.
    Every industry is different, and therefore, customer service firms 
like TeleTech perform unique services for every company we serve. In 
each instance, we help our clients create and implement customized 
strategies that combine the best of our abilities with theirs. While 
strategies for each client differ significantly, one goal is always the 
same: customer satisfaction that translates into long-term customer 
relationships. Our clients know that over the long run, satisfied 
customers mean greater competitive strength, increased efficiency and 
certainly reduced costs.
    It is our view that this approach translates well into the public 
sector. Ideally, public sector institutions would focus on long-term 
relationships with their citizen-customers based on satisfaction and 
responsiveness. Over the long run, this would not only improve their 
cost structure because they become more efficient, it would also 
enhance their image. Perhaps most importantly, it would enable them to 
deliver what citizens are entitled to expect: expeditious, responsive 
and effective interactions with the government entities that serve 
them.
    As you'll see, this approach is enhancing the Postal Service's 
ability to deliver just that to its customers.
         teletech's partnership with the united postal service
    The most relevant example of the benefits of a partnership between 
the public and private sector can be found in out Denver East facility, 
where 600 TeleTech employees manage customer inquiries for the United 
States Postal Service every day.
    In 1996, TeleTech responded to a Postal Service Request for 
Proposal. After a rigorous competitive bidding process, we were awarded 
the contract in September of that year to establish the first of six 
National Service Centers. Prior to the establishment of this network of 
National Service Centers, whenever the American Public called the USPS 
their calls were directed to their local post office. Often this meant 
that calls were simply unanswered as the local staff were busy at the 
counter, or simply did not have the tools or information to be able to 
answer specific inquiries. This reflected poorly on the USPS's 
commitment to universal service for all.
    TeleTech began handling calls for the USPS Pacific and Colorado 
region on November 28, 1996, including the peak volumes experienced at 
Christmas and during tax season. We have established a separate 
subsidiary with dedicated management and staff whose only duty and 
responsibility is serving the USPS and its customers.
    This has been a successful partnership which has married the best 
of the private and public sectors. Together, we have established what 
is in my opinion one of the finest examples of a best-in-class customer 
communication center in the world. TeleTech could not have achieved 
this result on its own and neither, I would suggest, could the U.S. 
Postal Service. This level of performance, in such a short time frame, 
is achieved only through an open, honest partnership.
    Upon this bedrock, TeleTech and the USPS have built solutions to 
deliver across-the-board service level improvements, ensuring that the 
American public's calls are answered accurately every day of the week, 
24 hours a day. We work together constantly to improve the quality of 
our work, meeting frequently not only with our corporate counterparts 
at the USPS but also with local post office staff, to ensure that our 
definition of quality is one and the same. This attention to detail 
will lead to an overall improvement in customer service rates for the 
whole organization.
    Because TeleTech provides the people, processes, infrastructure, 
technology management and undiluted focus on delivering world class 
customer care, our partnership allows the Postal Service to focus on 
doing what it does best: delivery the mail. Simultaneously, the Postal 
Service is able to greatly improve both the service levels and 
accessibility Americans experience in interacting with this government 
institution. In many ways, our partnership is helping to break down the 
invisible barriers that many Americans perceive stand between 
themselves and the public organizations that serve them.
    I believe there are many areas of emulation in our successful 
public-private partnership with the USPS that might be applicable to a 
new approach for the IRS.
                             irs challenges
    We all recognize the challenges faced by the IRS and applaud the 
commitment of its dedicated employees to deliver quality service. 
Sometimes, however, it is simply not enough to strive for excellence 
when the tools provided obstruct your ability to deliver accurate 
information to the average taxpayer. It has been well documented that 
the current IRS computer and information delivery systems are the 
source of many service failures. In short, although IRS employees work 
long hours and are both dedicated and professional, structural and 
technological deficiencies hinder their efforts, resulting in 
inconsistent service quality and frustration for millions of taxpayers 
across our nation.
    I know that the IRS is taking steps to address this technology 
deficiency with their current tender for a Prime Contract, and the 
announced short-list of Lockheed Martin and Computer Sciences 
Corporation, both excellent companies. The enormity of this project is 
mind boggling. I wish Mr. Rossotti and his team the very best, and 
welcome the agency's renewed commitment to providing employees with the 
tools they need to deliver the kind of service we taxpayers demand.
    However, when reviewing large scale technology projects of this 
nature, I immediately think of the individuals who answer the phone--
the people providing the human face of the agency. Technology is never 
a magic bullet. The human interface is clearly a crucial element 
reinventing the IRS.
    In the headlong rush to provide innovative technology, the Customer 
Service Agent is often the last to be considered. In many cases this 
results in alienation and distrust on the front-lines, and despite all 
technology improvements and money, the implementation fails to meet its 
objectives.
    But it need not be so.
    The typical customer service agents answer up to 25 calls per hour 
eight hours a day--this is a tough job. To enact change in this 
environment without impacting morale is not easy and waiting three to 
four years for the technology fix to arrive is not an option.
    The impact of technology in a customer service environment can be 
dramatic, but it is also possible to make dramatic changes to current 
processes--to apply short-term fixes if you will--which can provide 
immediate service improvements. We would propose such a solution for 
the IRS, one that incorporates the people side of the equation.
    My suggestion is to blend the best of the private and public sector 
establishing a private sector test-bed taxpayer communication center, 
which would serve as the laboratory for innovative process changes. Let 
new ideas and processes be first tested in an environment which 
embraces change. Once these innovations have been demonstrated to work 
and are successful, export them to every IRS call center and quickly 
improve the effectiveness of the entire enterprise. Because the changes 
tested here will affect them the most, it may make sense that current 
IRS employees staff this center.
    In one sense, the establishment of such a center is business 
consulting in its purest form. Because your private sector partner 
would be in the trenches with your staff, suggestions for improvement 
can be immediately tested, proven and implemented. Let the private 
sector see and feel some of the burden carried by the front-line staff 
of the IRS.
    The goals of this type of outsourcing partnership are similar to 
those you are undertaking now: rapid improvement without losing the 
knowledge and commitment of current staff.
    Finally, I submit that this private sector call center could also 
serve as the test bed for the new technology systems that are to be 
delivered under the current IRS Prime Contract for technology. It would 
be important to separate this initiative from the larger technology 
development effort, using it exclusively as an independent testing 
center.
                               conclusion
    Although the private sector is different from the public sector, 
one basic principle remains the same: our client's core competency is 
not customer service. When a large institution's core competency is not 
customer service but the desire for such competency exists, such as 
with the IRS, it only makes sense for that institution to seek the 
assistance of a company whose only focus is customer service. In such 
instances, public-private partnerships are ideal.
    Customer service companies such as TeleTech have succeeded with 
such arrangements for a wide range of companies. For example, TeleTech 
helps Microsoft register services for software seminars. For UPS, we 
track and trace parcel packages. For GTE we provide a massive customer 
service effort that combines the selling and servicing of a variety of 
their products under one customer service umbrella. In addition to the 
IRS, we believe that similar services can be provided to other 
government bureaucracies as well. Solutions are inherent in 
partnership.
    TeleTech is proud of its partnership with the Postal Service and is 
excited about innovation at the IRS. We hope our fully customer-centric 
approach, technology and people-based solutions can be of help to this 
committee as you explore change at the IRS. Together, we believe there 
is real re-invention potential.

                         Possible Pilot Program

    Senator Campbell. Ms. Martinez, I might tell you that I am 
going to ask staff to look into the possibility of doing a 
pilot program that you suggest that would be administered by 
the IRS. Last year--as you might know, this committee deals 
with the budgets of a number of agencies, and one of them 
happens to be the Bureau of Alcohol, Tobacco and Firearms 
[ATF], and the drug czar's budget, too. And last year we put 
quite a bit of money into a national program to try to educate 
youngsters about the dangers of drugs that seems to be going 
very well. We also, obviously, try to do this with a revenue-
neutral budget so that we don't have to raise taxes to do it, 
and sometimes that is difficult because we have to try to find 
other money in the discretionary part of our whole budget. But 
I think it is worth exploring.
    I just want you to know that we are going to at least look 
into the possibility of doing that.
    Ms. Martinez. I appreciate that. Thank you.
    Senator Campbell. Ken, let me ask you just a couple of 
questions. Basically, what you are suggesting is that the IRS 
enter into a public-private partnership, as the Postal Service 
has. Is that right?
    Mr. Tuchman. That is correct.
    Senator Campbell. I would guess that, considering we are 
really dealing with a problem now of up-to-date IRS technology, 
we do not have that in the private industry because they would 
go broke if they don't keep up to date. They can't compete. And 
if they can't compete, they lose market share and all the rest 
of it happens, unlike the Federal Government that doesn't have 
to compete. So it might be a good idea.
    Has it been mutually beneficial for both the Postal Service 
and for you as a company?
    Mr. Tuchman. It has been extremely beneficial.
    Senator Campbell. We haven't heard anything from the Postal 
Service one way or the other, frankly.
    Mr. Tuchman. From the Postal Service's perspective, they 
have dramatically increased service that was not previously 
available. People were forced to wait in line 25, 30 minutes to 
have simple questions answered. Now, simply through the 
telephone or through the Internet, they are getting their 
answers, which are being responded to within seconds. And the 
program is now being rolled out all across the Nation.
    Senator Campbell. Well, I notice in your written testimony, 
you have 18 customer communication around--everywhere, the 
United States, United Kingdom. It lists a number of computer 
workstations and so on.
    What areas in the United States are your company?
    Mr. Tuchman. Today, TeleTech has 13 facilities in the 
United States, and then 5----
    Senator Campbell. In 13 cities you have these things set 
up?
    Mr. Tuchman. Right. We are in locations like South 
Carolina, West Virginia, New York, Pennsylvania. We are right 
here in Colorado--we are one of the larger employers in 
Colorado--California, et cetera. We are also in five countries 
outside the United States.
    Senator Campbell. Have you made any proposals to the IRS or 
any other agency besides the Postal Service?
    Mr. Tuchman. No; we have not. We have had some preliminary 
meetings with the IRS just to let them know that our services, 
in fact, exist.
    Senator Campbell. As I understand it, the IRS--I might be 
corrected on this, but as I understand it, they have, you know, 
waves. They are very busy in the spring and less busy in the 
fall.
    Mr. Tuchman. Correct.
    Senator Campbell. Do you think private industry can deal 
with that easier?
    Mr. Tuchman. Well, I think when you look at--if you just 
take the United Parcel Service or the Postal Service as an 
example, they have identical waves.
    Senator Campbell. That is right. Christmas and----
    Mr. Tuchman. Christmastime and tax season are their two 
busiest times.
    I think it is also important to note that these 
organizations that have chosen this public-private--that have 
chosen to do outsourcing, in many cases the savings are in the 
hundreds of millions on an annualized basis.
    The other thing is that we are finding that the employee 
turnover is dramatically reduced because the employees are less 
frustrated because they actually have proper systems to do 
their job and do their job properly.
    So what we are proposing here is really a test bed, a 
laboratory that the IRS would be able to actually sample a 
relationship between public and private sectors.
    Senator Campbell. I suppose there are some problems when 
you talk about replacing some of the people in the Federal work 
force. You can't just fire them. Unfortunately, sometimes you 
can't. You have to move them around and find other places for 
them under Federal law.
    Mr. Tuchman. Well, our goal actually would not be to 
replace the existing workers. We believe that they actually 
have a lot of value that they can provide. Our goal would 
actually be a partner in managing and providing technology and 
facilities, et cetera, to be able to off-load these existing 
employees, and then potentially create new position 
opportunities available where there is more of the repetitive-
type transactions that people are having to sometimes wait 
quite a bit of time just to get answers on some of the simpler 
questions that they ask.
    Senator Campbell. OK. I thank you both for your testimony 
and appreciate you being here.
    Mr. Tuchman. Thank you.
                       DEPARTMENT OF THE TREASURY

                        Internal Revenue Service

STATEMENT BY HON. CHARLES O. ROSSOTTI, COMMISSIONER

                        Introduction of Witness

    Senator Campbell. And now we will go to the gentleman that 
I am sure many of us have been waiting to hear, the 
Commissioner himself, Mr. Charles Rossotti.
    Well, Commissioner, you have heard some interesting 
suggestions, bordering on go jump in the lake to some very 
positive ones, too. I noticed your staff person was over there 
taking notes. I hope it has given you some ideas, as well as 
the ideas you have gained from the other hearings you have done 
around the country or you have been at around the country. And 
I certainly want to thank you for being here.
    Why don't you go ahead with your testimony? I would like to 
ask you a few questions on behalf of some of the people who 
have testified.

                   Commissioner Rossotti's Statement

    Mr. Rossotti. I will try to be brief and just hit the high 
points, Mr. Chairman, and provide time for questions. But, 
first, I just want to thank you for inviting me to be here and 
allowing me to participate and listen to the problems that many 
of your constituents here in Colorado obviously have. As you 
know, I have only been Commissioner for a relatively few 
months, and one of the reasons I took the job, having come from 
the private sector myself, is that I certainly was aware from 
personal experience, as well as the experience of many 
colleagues and friends, of some of the problems that people 
have in dealing with the IRS. And so I felt that since we do 
need, as you observed, some form of an agency to collect taxes, 
if we were going to have such an agency, we ought to do a 
better job than we were doing in serving the taxpayers who are 
paying the taxes. So that is the reason I took the job.
    As I think you know from some of my previous testimony, the 
basic thing that I said right at the beginning that I thought 
we needed to do was to simply change the whole focus of the 
agency. I think the agency has done a good job of operating an 
enormous operation and processing an enormous amount of data, 
certainly collecting 95 percent of the Government's revenues. 
But it has not always done that in a way that has been 
responsive to the needs of the taxpayers. And if we are going 
to do that, we have to turn the whole thing around and try to 
look at things through the eyes of the taxpayers. That is why I 
have been traveling around for the last several months to talk 
to people who are having problems as well as making suggestions 
for the agency. And this is, as we certainly heard today, not 
always a pleasant picture, and some of the things that we hear 
certainly are very difficult problems that will not be solved 
easily. But we have to listen to these kinds of problems if we 
are going to effect real change at the IRS, which is actually 
what I hope we will do.
    Let me just make a couple of comments about some of the 
things that came out in your panels, and then I would like to 
just talk a little bit more broadly about some of the ways that 
we are going to try over time to deal with some of these 
issues.
    First of all, I just want to reiterate what you said, Mr. 
Chairman, that any witness who came here today or, in fact, to 
any congressional committee need not fear retaliation. As long 
as I am Commissioner, I will personally provide that assurance 
that anybody who wants to give us this kind of input, 
regardless of how critical it might be, is certainly welcome to 
do it and will not suffer anything as a result of that.
    Second, just with respect to the cases and some of the 
issues, the specific issues that were raised today, I have 
certainly listened carefully to these, and as you have noted, 
we did have some IRS people here taking notes so we can follow 
up. And I think there are three things that we will 
specifically do. One is that the District Director, Mr. Hutton, 
is here and I am going to ask him to give me a special report 
on all the matters that came up today that are within this 
district. I think most of them are within this district.
    More particularly, though, those taxpayers that have open 
cases and issues that are still unresolved, we are going to ask 
a person from the Taxpayer Advocate's Office to take a special 
interest in each of those cases and follow them through to the 
point where they can be resolved, or at least explained as 
clearly as possible to the people involved. And, third, there 
were a couple of matters that were quite serious allegations, 
if I heard them correctly, and we will, independently of the 
district, have some investigations done of those matters to see 
what we can learn, because we do want to follow up on any of 
these things that may have been really improper. So we will 
take those particular actions on the specific things that were 
discussed today in the hearing.
    I also want to make a special comment about the innocent-
spouse problem. I only began to learn about this a few months 
ago, and I have to say that I think that this innocent-spouse 
problem is one of the more disturbing things that I have 
learned about since I have gotten here. It really is quite 
unfair. There is just no doubt about that. And I wish that we 
had it within our power within the IRS to provide a complete 
solution to this. As I have learned, we do have the ability to 
take some action to do better than we have done so far, but we 
don't have full authority; and that is why in the law that is 
currently being considered there are additional provisions in 
there that I think will correct the problem. We will certainly 
work with the committees to make that happen.
    In the meantime, some of the things that we are doing on 
this innocent-spouse problem are first of all, basically to 
simply make sure that the authority that we do have to provide 
relief to innocent spouses is actually made available to those 
people who qualify. Frankly, it had not been a good process and 
sometimes people who had the right to receive certain relief 
were not getting it. So we are at least taking action on that 
score. We have set out a new specific form that just went out 
on our website. It is being printed right now on paper. So that 
will be out there, and we have set up a special group in 
Cincinnati to process these forms to make sure that the 
particular kinds of things that have to be considered in these 
cases will be taken care of.
    We are also trying to do some broad training of our 
employees to recognize these kinds of innocent-spouse cases, 
even if the taxpayers themselves are not aware of it. So we are 
doing some special training in that regard, and we hope that 
very soon some of the operators on our 800 number will be aware 
of this.
    We are also working with some local organizations in 
different parts of the country that work with spouses that may 
be abused to make sure that their network is aware of some of 
these procedures. So this is what we are doing, and I don't 
believe that it is in any way sufficient, but it is certainly 
better than what we had before. And I think with the help of 
the new legislation, Mr. Chairman, that you alluded to, we can 
solve this problem really once and for all.
    Let me also now mention a couple of things, and I won't go 
through a long laundry list because I know you want to have 
time for questions and some other comments, but there are some 
things that we are attempting to do in the very near term to 
provide better service to taxpayers and to deal with some of 
these more difficult kinds of situations that come up.
    One of the most basic ones, as the gentleman who just 
testified mentioned, is phone service. It is important that 
people be able to get through on the phone. In many of our 
cases, people are not just getting through on the phone to ask 
a simple question. They are getting through because they may 
have gotten a notice or a deficiency statement that they have a 
question about or where they are being asked to pay money and 
they have a question about that. It is certainly vital that 
people be able to get through to somebody when they have that 
kind of situation, as well as to just ask normal questions 
about the tax law.
    When I looked at the data, Mr. Chairman, 2 years ago the 
situation was such that people were getting notices saying you 
may owe money or they may have had a question, and the chances 
of getting through on the phone to the IRS were very, very 
minimal. They were really very, very low. This, of course, is 
an extraordinarily frustrating and unacceptable situation.
    In this filing season that we are just completing, there 
was a considerable effort that was underway partially before I 
got there, to at least improve it, not to the level that the 
private sector delivers but certainly dramatically improve it. 
And so far this season, if you look at it the way the private 
sector measures it, we are answering about 75 percent of the 
calls, which is still not good enough, but it is a whole lot 
better than way down there where it was. That means there are 
about 14 million fewer busy signals that people are getting 
this season.
    Second, on the more difficult kinds of cases that some of 
your constituents describe today where they have gone on for a 
long period of time and haven't been resolved, we have had a 
number of open houses that we call problem-solving days around 
the country. We are having them in various cities. The first 
one here in Denver, I think, was on the 15th of November, and 
then there have been ones in other cities around the country 
and in Colorado as well. I think there is another coming up in 
May. And these have actually been reasonably successful, I 
would say quite successful, in fact, for those taxpayers who 
have come in with a particular problem. They have been able to 
meet face to face with a person. We have had everybody there, 
and I think we have gotten about 90 percent of these cases 
cleared away and have gotten very good ratings from our 
customers that have come in.
    That is another thing that we have started new. We have 
started actually asking customers, taxpayers, what they 
actually think of the service. We started it with these 
problem-solving days, and we are now launching a process to 
eventually ask every taxpayer who interacts with us, even in an 
examination or a collection action, to actually rate the 
service that they got. Eventually we will use this as part of 
our way of measuring performance in the agency. This is, again, 
going to take some time, but we are started on it.
    On the matter of these collection situations, and 
particularly when very sensitive situations arise, such as 
seizing someone's home, which is probably the most sensitive 
thing that you could possibly do, one of the first things that 
I did when I started to hear about these things is to at least 
put in place some more rigorous procedures to ensure that there 
is management review of things like seizures of homes and 
personal property. We have also given some additional authority 
to the taxpayer advocate to deal with these kinds of 
situations.
    Finally, let me just mention something that has been 
covered in the press. It wasn't mentioned here very much today, 
but certainly an important issue is how the performance of 
individual employees and managers in the IRS had been measured, 
particularly those in the compliance functions. We have taken 
steps to eliminate the use of certain kinds of statistics, such 
as how much money was collected per person. We want to 
completely eliminate that from the way that performance is 
measured in the IRS. That has been done, and it is, I hope, a 
thing of the past.
    We are working on some new ways to measure performance that 
we think will balance the interest of taxpayers as well as the 
need to collect taxes. Again, this is not something that we 
were able to do very quickly--eliminate the unfortunate kinds 
of statistics. Putting in place the right kind of measures that 
really measure what we need will take a little longer.
    Now, those are just some near-term things, and we will 
continue to work on those. Let me just finish up by saying that 
even if we do all those things and we do more of them, I don't 
think we are still going to produce the IRS that the public 
expects and deserves. I think if we were to define what it is 
that the public expects, as I would understand it, we have to 
meet two standards:
    One is that for each and every taxpayer that we interact 
with in any way, shape, or form, whether it is the simplest 
thing like providing a form or something as difficult as 
collecting money when there's a real problem, every single one 
of those cases should be measured and should be done in such a 
way that it provides the taxpayer the most helpful possible 
service that they can get from us during each one of those 
interactions.
    The second thing I think we need to accomplish is an 
overall fairness in the way compliance is done so that anybody 
who is willingly complying, which, of course, as many of your 
panelists mentioned, is the majority of people, each of those 
people will not feel that somehow there is someone else over 
there who is a neighbor or a business competitor who is not 
complying and putting an unfair burden on them. So we have to 
look at this whole thing as a fair form of compliance.
    Those are really the standards that I think we need to 
measure ourselves against, and we need to go a long way and 
make a lot of changes to reach them at the level that we hope. 
But as you know, in some of my testimony before your committee 
earlier, Mr. Chairman, just to briefly summarize, I think in 
the long run there are five big things that we have to do.
    One is we have to turn the whole thing around to be much 
more focused on preventing problems early in the cycle, solving 
problems with taxpayers early rather than later on getting into 
as many enforcement actions as we do. And I think the 
suggestion about more taxpayer education is certainly a good 
one in that regard.
    The second thing is that we need to really organize the IRS 
in a way that it is focused externally more on helping 
taxpayers, and there is a large number of diverse taxpayers in 
this country, from college students who just have a very simple 
form to file through a phone call, to more complex businesses. 
I have proposed reorganizing the entire IRS to be focused on 
different operating units where each would be responsible for 
each one of these groups. The small business people, for 
example, would have a group that would just work to help them 
and work with them throughout the whole cycle of complying with 
the tax law.
    I think the third one, which is very much related to that, 
is that we do need to streamline internally the way that 
management roles are defined so that we have a clearer set of 
responsibility and accountability. Right now the IRS is quite 
fragmented, as some of your panelists have noted, and that is 
because it has really evolved over 45 years in a certain way, 
and I think it is time to rethink that.
    I think the fourth one I have mentioned. We need to measure 
the performance of our employees the right way so that it 
encourages the right kind of behavior.
    And, finally, of course, the big one is we do have to 
replace the really old technology that we have, and you know, 
Mr. Chairman, we have come before your committee to ask your 
help in that. It is a big job, but we will never reach the goal 
of having the right kind of service or the right kind of 
fairness with taxpayers with the 30-year-old computer systems 
that we have in the IRS.
    So those are some of the things that I think we need to do 
long term, and they are not going to be easy to do and they are 
not going to be quick to do, but I think with your help and the 
help of others in Congress and, in particular, the bills that 
are currently going through, I do think we can make progress in 
this direction.
    Thank you for giving me the opportunity to testify, Mr. 
Chairman.

                           Prepared Statement

    Senator Campbell. Thank you. And I also thank you for 
assuring the people that were here on the panel that there 
would be nothing in the way of retaliation in any way, shape, 
or form from the IRS and giving that same kind of commitment. 
We have your prepared statement and it will be made part of the 
record.
    [The statement follows:]
               Prepared Statement of Charles O. Rossotti
    Mr. Chairman, I want to thank you for the opportunity to appear at 
this field hearing. I am also very pleased that so many of our 
customers--the taxpayers in the Denver region--will be expressing their 
views too, as well as NTEU President Robert Tobias.
    As you know, I became IRS Commissioner in November, and one of the 
first things I set out to accomplish was to change the focus of the 
IRS. If we are to provide top-quality service to our customers, we must 
see the agency through the eyes of taxpayers. Sometimes, it may be 
different, but if we are to effect real change at the IRS--as I am 
attempting to do--it is a critical first step. So once again, thank you 
for allowing me to testify today and for the chance to hear what's on 
our customers' minds.
    This morning, I would like to discuss what I am trying to do in 
both the short-and the long-term to modernize the IRS and provide 
first-quality service to our customers. But before I begin that 
discussion, I want to speak to the innocent spouse issues that have 
been raised today.
    We are trying to do all we can to help innocent spouses. This is a 
very troubling situation, and I wish I could provide a complete and 
immediate solution. The law limits what I and our employees can do in 
this area, but we are doing much more to solve this problem.
    The Treasury Department announced on February 9 a set of 
administrative changes to expand innocent spouse relief. We are already 
beginning to implement these actions. Less than two weeks ago, we put 
up on our website a new application for an individual seeking innocent 
spouse relief. New Form 8857 can be found at www.irs.ustreas.gov. We 
have also expedited printing of the paper version of the form, and it 
should be available to taxpayers in a matter of days. These forms 
requesting innocent spouse relief will be sent to Cincinnati, Ohio and 
processed at that central location by examiners with expertise in 
innocent spouse cases.
    We are also training our employees to better recognize a potential 
innocent spouse situation, even if the taxpayer is unaware of the 
potential relief. Special training courses will be developed for our 
collection and examination personnel. And telephone operators with 
special training in innocent spouse provisions will be available on our 
toll-free number: 1-800-TAX-1040.
    In addition, we want to reach out to national and local 
organizations, like those here in Denver, that help abused and battered 
spouses. They are excellent partners in helping to get out the word 
about innocent spouse relief. They are also in an excellent position to 
alert individuals who might qualify for relief to consider the innocent 
spouse provisions.
    I recognize that these measures go only so far, and are far short 
of what I would like to see. With the help of the new legislation now 
going through Congress, we will be able to do much more.
    One of the IRS' most important responsibilities is to manage a 
successful filing season, and we are doing so again this year, both 
nationwide and in Colorado. This season, while total return receipts 
are about even, our e-file and TeleFile alternative means of filing are 
up 25 and 26 percent respectively over the same time period last year. 
Colorado closely tracks these national usage figures. E-file is up 23 
percent and TeleFile is up 29 percent in the State; paper returns are 
down five percent. Colorado's refunds are up six percent and the 
average refund is $1,369, up from $1,274 last year.
    As of April 3, 1998, over five million individuals have filed by 
phone. This spring, small businesses nationwide were also able to file 
Form 941, Employer's Quarterly Federal Tax Return, over the telephone. 
This year, we expect over 1.2 million returns to be filed using this 
option.
    Beginning in January 1998, the IRS also expanded telephone service 
to 16 hours-a-day (7:00 am to 11:00 pm), Monday through Saturday. And 
starting today, we will be on the phones 24-hours-a-day until midnight 
the 15th. Next year, during the busiest time of the tax season, there 
will be phone service 24-hours-a-day, seven days-a-week. And for those 
procrastinators who have not even started the process, we will have IRS 
personnel at the main Post Office tomorrow to help prepare returns. 
Next year, I would hope they would consider the ease of e-file and 
TeleFile.
    So far this filing season, we have answered nearly 30 million phone 
calls; including more than 700 thousand in the Rocky Mountain District. 
Our nationwide overall phone access, as defined by GAO, to telephone 
assistance has increased from 30 percent in fiscal year 1996 to about 
91 percent this season. The Rocky Mountain District, which includes 
Colorado, also came in at 91 percent. Nationwide that means there have 
been 14.4 million fewer busy signals experienced by taxpayers.
    The IRS also expanded walk-in service hours. During the last six 
Saturdays of the filing season, over 150 selected IRS walk-in offices 
were open from 9:00 am to 3:00 pm. On Saturday, March 28 we held EITC 
Awareness Day across the country, and the last two Saturdays of the 
filing season were Problem Prevention Days. In the Rocky Mountain 
District, Problem Prevention Days were held in Denver, Colorado 
Springs, Cheyenne, Casper, Boise, Billings, Missoula and Salt Lake 
City.
    We also had a number of Problem Solving Days in the Rocky Mountain 
District that met with great success. On November 15th, we conducted a 
Problem Solving Day in Denver. Of the 370 total cases presented by 
taxpayers, 352 have been closed. That's a 95 percent closure rate and 
we are still working to finish the remaining 18. Our customers were 
also extremely satisfied with the service they received. In an on-site 
survey of customers receiving service, we received an average 6.8 
rating out of a possible seven. The next Problem Solving Day will be 
held on May 16 in Denver.
    A growing number of taxpayers are also getting the tax information 
they need from our Internet site, IRS CD-ROM's and our fax system. So 
far this fiscal year, our Internet site had over 300 million hits. That 
is about triple over the same period last year. Our fax system traffic 
is about 70 percent higher than last year. Over 625,000 successful 
transmissions of tax forms and information have been made by fax.
    The IRS, in conjunction with its private sector partners, has also 
made significant progress toward enhancing electronic payment methods. 
I was very pleased that our Electronic Federal Tax Payment System made 
such substantial progress with existing business users that it will not 
be necessary to impose a penalty on July 1, 1998, as was previously 
planned. The penalty waiver from July 1, 1998 through December 31, 
1998, will extend to those employers first required to use EFTPS on or 
after July 1, 1997, and that make timely deposits by paper coupons. We 
think that's good news to many of your small business constituents.
    In fiscal year 1997, more than $655 billion in tax payments was 
deposited electronically through EFTP, a significant increase over the 
$416 billion deposited in fiscal year 1996. As of April 4, 1998, 
deposits in fiscal year 1998 are already over $620 billion. Enrollment 
continues to grow with over 1.8 million taxpayers currently enrolled in 
the system, of which over 500,000 are volunteers who are not required 
to use the system. This success is the reason that we have been able to 
defer the penalty.
    For the coming fiscal year, we will pursue a highly-focused 
initiative to improve taxpayer service through improved clarity of 
notices, forms and publications, better telephone service, more walk-in 
service, expanded electronic filing, improved training of customer 
service representatives, strengthened support for small businesses, 
increased staffing for the Taxpayer Advocate's office, and the creation 
of Citizen Advocacy Panels.
    As the Chairman is aware, I have also proposed a sweeping 
modernization of the Internal Revenue Service. Despite the short-term 
progress we are making, we will only reach our goal of first-quality 
service to each and every taxpayer through changes in five key areas, 
each complementing the other.
    First, we must implement revamped IRS business practices that will 
focus on understanding, solving and preventing taxpayer problems. 
Instead of the historic one-size-fits all agency, we should tailor 
efforts to taxpayer groups with common needs. College students and 
retired seniors are but two examples.
    Second, we need an organizational structure that serves a segment 
of taxpayers with similar needs. One potential way to organize the IRS 
is to divide it into four units, each charged with top-to-bottom 
responsibility for serving a segment of customers, such as small 
businesses.
    Third, the IRS needs fewer layers of management and the creation of 
management roles with clear responsibility and accountability.
    Fourth, we must measure organizational performance by balancing 
customer satisfaction, business results, employee satisfaction and 
productivity. It is important to create a system that positively 
influences employee behavior.
    Fifth, we must take advantage of new technology. IRS' current 
computer systems cannot support the agency's mission and goals. We 
desperately need to upgrade our 1960's technology. But building new 
computer systems to support old business practices and a complex 
organizational structure will not work. The recently-issued technology 
modernization blueprint and the new Chief Information Officer 
organization provide an excellent basis for managing our new 
technology.
    The consulting firm of Booz, Allen & Hamilton will validate the 
concept for modernization in terms of risk, cost and impact on 
customers, both external and internal.
    In conclusion, I believe we can transform the IRS into an agency 
dedicated to customer service and working for the taxpayer. We can make 
it an organization that helps taxpayers meet the obligations imposed by 
the tax laws while ensuring that compliance is fair. We can do all of 
this while increasing productivity and shrinking the size of the IRS in 
relation to the economy. This will take time and investments to 
modernize technology, business practices and organization. But, with 
the support of the Congress, I am optimistic that we will succeed.

                      Public Service Announcements

    Senator Campbell. Let me ask you a few questions. I was 
really interested in Ms. Martinez's idea about public service 
announcements, if we could find the money. I think our 
authority is about $25 billion, and about one-half of that is 
discretionary. And under, you know, the theory that we are 
going to have revenue-neutral expenses, we have to find some 
money somewhere else. But does the IRS do anything along that 
line now of public service announcements? Not to extol the 
virtues of the IRS, but to try to tell people the solutions or 
how they----
    Mr. Rossotti. It is very limited, very limited. I think we 
did a limited amount of that with respect to encouraging people 
to use electronic filing, which is something that solves 
everybody's problem because you get more accurate stuff in and 
that was successful. But I don't think that we have done as 
much as we could with the whole opportunity to focus earlier in 
the cycle to educate people. I actually agree with I think it 
was Ms. Martinez who said that ultimately moving everything up 
and getting the problems prevented in the first place is the 
right way to do it. But, no, I don't think we have done much 
with public service announcements.
    Senator Campbell. But if we could do something along that 
line, you would support that?
    Mr. Rossotti. I would support anything that we can do to 
educate people about how to get their returns filed right in 
the first place, absolutely.

                          IRS Outreach Efforts

    Senator Campbell. I also want to apologize that we couldn't 
get some of the written testimony to you before. The fact is we 
didn't have some of it until the last minute. But I appreciate 
you trying to kind of ad-lib some of the answers and deal with 
them as well as you can.
    The IRS has been conducting problem resolution days which 
provide taxpayers an opportunity to meet the IRS. We have heard 
of that. You have spoken of that a little bit. But what steps 
is the IRS taking to reach the people that may not or cannot 
make it to the problem resolution sites?
    Mr. Rossotti. Well, actually, of course, what we really 
want--it is almost a slogan--is that every day be a problem-
solving day. I think that the improved phone service and the 
increased walk-in service during filing season are the two most 
specific things that give you an answer. We have increased the 
phone service to 16 hours a day, 6 days a week, and the 
accessibility is up, and the last 2 days of the season, we are 
actually open 24 hours. Plus the last 6 Saturdays of the filing 
season, we have had open houses or problem-solving days where 
people could come in on Saturday mornings, for example, in 
shopping malls and other places and get service.
    So we are trying to reach out where people need the service 
and give it to them. I think there has been a lot of progress 
this season, although I would certainly not claim we are 
anywhere close to where we should be, ultimately.
    Senator Campbell. You heard both Ms. Powers and Ms. 
Morehead. They are classic examples that are faced by the 
innocent spouse. It is just unbelievable to me that a woman 
could lose her home because of something her husband did not do 
or did do. What protections are there currently available?

                            Innocent Spouses

    Mr. Rossotti. Mr. Chairman, I have to say that when I first 
learned about this problem, I looked into it and I was rather 
shocked myself, not having come from the tax law business, to 
find out that there are really only very, very limited 
protections. I will say the IRS has not done as good a job even 
of extending those to people, which is what we are trying to 
fix. But basically it is only in the case of where there is an 
assessment that has been made after the return is filed and 
where it can be shown that the innocent spouse did not really 
have responsibility for that and there are some other 
restrictions on it. So it is really quite limited in terms of 
what the law permits today.
    In other words, when the tax return goes in, under the 
current law, and both spouses sign it, they have that joint and 
several liability, and that is in the law. And I think we all 
understand that in some cases that is not right, and that is 
why we need to change that.
    Senator Campbell. Well, under Senator Roth's bill in the 
Senate Finance Committee, he is trying to fix that, as you 
probably know.
    Mr. Rossotti. I am confident that it will be fixed. There 
are various nuances of different provisions as to how it would 
be fixed, but it will certainly give substantially more 
protection to innocent spouses.
    Senator Campbell. It will give spouses relief and allow 
them to only pay their own taxes. The problem is they are not 
retroactive. So that means those people who are already caught 
in this bind, we need to try and work with the people that have 
already been caught in this spousal problem.
    Mr. Rossotti. Yes; we will. As I told you in the testimony, 
we are doing a lot more to at least reach out and use the 
authority that we do have. And there are other things that are 
tangentially related. I think one of the taxpayers mentioned 
offers in compromise. We do have authority under offers in 
compromise. We are trying to look at ways of making that more 
available or at least more--not so much more available, but to 
have the timeframe that it takes to do these things be shorter 
and make it a more practical option for more taxpayers.
    Senator Campbell. Well, that section of Senator Roth's bill 
actually is a good section. I think it is going to be very 
popular and widely supported. But it won't come online until 
the 1999 filing deadline, I guess. So I would just hope that 
you would try to implement that as fast as you can, should it 
become law, which I assume it will be.
    Mr. Rossotti. Yes, sir.

                             IRS Penalties

    Senator Campbell. One of the biggest frustrations certainly 
that taxpayers pay are the penalties. We have heard about that. 
The penalties go up. Even if they pay off what they owe, the 
penalties are so much more sometimes they can't even catch up 
with it. And the documentation to show that they are doing what 
the IRS has told them to do is sometimes very conflicting. 
Could you maybe elaborate on that a little bit about the 
penalties, how you are going to address that?
    Mr. Rossotti. Well, again, interestingly enough, Mr. 
Chairman, one of the things I did before my confirmation 
hearings was consult with several of the former Commissioners, 
because they have interesting things to tell you. And to a 
person, every one of them said that the place you ought to 
really work on is those penalties; those are not right.
    Unfortunately, they have also been studying them for years 
and have not completely solved the problem because it gets to 
be complicated. But I think that in the bill, again, that will 
be before the Senate soon, there are some particular things 
that I think are going to ameliorate that. One in particular 
has to do with the failure-to-pay penalty, which occurs when 
someone has an installment agreement. It would reduce the 
amount of penalties that would be related to that situation, 
which is one of the most common ones that causes this buildup 
of problems that occurs. And right now that is a penalty in a 
statute, so it is not really up to the IRS to handle that in 
most cases.
    But I think with the new bill, it would deal with that one 
particular case that is probably for individual taxpayers one 
of the most onerous and probably the most unfair.
    Senator Campbell. One of the most famous cases was that of 
former boxing champion Joe Louis in the 1950's. He got so far 
behind in his tax--perhaps you remember that--that he couldn't 
begin to even pay the penalties, and finally, in fact, Congress 
passed a special relief bill because he was just getting 
further and further in debt. But it is unlikely that Congress 
would pass a relief bill for every single person where the 
penalties have kind of overburdened them. So we need to do that 
somewhere in the agency; we need to help that.
    Also, according to the information provided by Ms. Powers, 
she received notification of a tax obligation 5 years after she 
filed that showed a $13,000 tax balance owed, and in that 5 
years it became $35,000. She didn't even know the original 
amount was owed. How could something like that happen?
    Mr. Rossotti. Mr. Chairman, I just don't know. I really 
don't----
    Senator Campbell. I know you weren't there, and I am 
certainly not blaming you for it, because----
    Mr. Rossotti. I know. There are these situations. I really 
don't know. I mean, we will look into that situation.
    Senator Campbell. Well, I would hope you would take some 
steps that people are notified before the interest starts 
accumulating, because that is just almost unimaginable how it 
could be 5 years later and get this terrific bill that they had 
no idea was coming.
    Mr. Rossotti. As a matter of fact, in general, that is one 
of the biggest systematic problems, not necessarily 5 years, 
but as a general rule, one of the things I have learned that is 
a very systematic problem at the IRS--and this has much to do 
with the computer systems as well as other things--is that we 
are much too slow, much too late, in getting to things such 
as----
    Senator Campbell. Well, one of the sections of Senator 
Roth's bill, in fact, requires the IRS to notify within 1 year, 
and I would think that you would support that. But I obviously 
know, too, that part of this, when you are dealing with 200 
million taxpayers, you have got to have the kind of technology 
that allows you to get ahead of the curve.
    Mr. Rossotti. Eventually, we should be much faster in all 
these things, but in this area, I think the technology is a 
major constraint, unfortunately, right now.
    Senator Campbell. Ms. Sanders, as I understand it, lost her 
home in this tug of war with the IRS. From her testimony, it 
appears that the IRS took steps to seize her home even though 
her ex-husband's wages had been levied to pay the capital gains 
tax. If his wages had already been levied to pay the tax, what 
would the need be to seize her home?
    Mr. Rossotti. Mr. Chairman, I don't--I can't----
    Senator Campbell. I don't mean to put you on the spot.
    Mr. Rossotti. We are going to look into it. As I told you, 
we are going to look into all those cases and try to find out 
more about what happened.

                      Changing of Seizure Numbers

    Senator Campbell. Well, then, let me ask you because I know 
you have only been on board one-half of a year or so, and I 
know these may be a little bit unfair to ask you. But you might 
know this: Does the IRS change everybody's seizure number every 
October?
    Mr. Rossotti. Mr. Chairman, I don't know, but we will find 
out.
    Senator Campbell. OK. You are not sure. Could you find that 
out and submit it to the committee for the record, too?
    Mr. Rossotti. Yes.
    Senator Campbell. It might be something we want to offer as 
an amendment to Senator Roth's bill.
    Mr. Rossotti. Yes; we will find that out.
    [The information follows:]

    The serial numbers initially assigned to a seizure do not 
change with each new fiscal year.

    Senator Campbell. What is the policy with regard to 
changing seizure numbers? Is there any kind of a policy at all 
in place?
    Mr. Rossotti. I honestly don't know, Mr. Chairman. We will 
find that out and get back to you.
    [The information follows:]

    After a seizure is made, the revenue officer obtains a 
serial number and annotates that number onto the seizure 
documents. The serial number is assigned by an automated system 
for the purpose of establishing an accounting control of seized 
property, tracking the age of the seizure, totaling expenses of 
the seizure, identifying the disposition of the assets, and 
closing out the seizure file. Seizure serial numbers initially 
assigned to the case file continue to be the same number until 
there is a final disposition of that seizure.

                          Credit Card Payments

    Senator Campbell. Does the IRS make payments by credit 
card? I heard that, too.
    Mr. Rossotti. That is another one that I don't know. I 
mean, I suppose it is possible because I think there are some 
minor purchases that can be made by credit card, but I don't 
know. We will find that out for you.
    [The information follows:]

    The IRS purchases goods and services with the government 
credit card. The credit card is used by the IRS as a 
streamlined purchasing method for making micro-purchases 
($2,500 or less) and for ordering from existing government 
contracts, such as those on General Services Administration 
(GSA) schedules and indefinite delivery/indefinite quantity 
contracts negotiated and administered by the IRS. In these 
cases, the credit card serves as the vehicle for both procuring 
and paying for the goods or services. We anticipate that, in 
the future, the government credit card will be used by the IRS 
to make payments for deliveries, even in cases where a standard 
contract document is the required purchasing method.

                       Use of Private Contractors

    Senator Campbell. We heard from Mr. Tuchman and also Ms. 
Martinez that they suggested basically that we use some outside 
contractors to do some of the work of the IRS. What would you 
think of that idea? Coming from the private industry yourself, 
I am sure you know, as I do, that they are much more efficient 
than Government agencies.
    Mr. Rossotti. There are certainly some things. Most 
important is the new technology, which, of course, we are 
planning to do almost entirely with prime contractors. I think 
as you get into things like specific taxpayers' tax accounts, 
it gets to be a little bit more difficult to manage.
    Senator Campbell. Dealing with Ms. Martinez's comments, 
too, have you ever heard of a hit list that she suggested or 
alluded to?
    Mr. Rossotti. I have not.
    Senator Campbell. But I am sure, being a Federal agency, 
there is zero tolerance for any racial discrimination, I would 
guess.
    Mr. Rossotti. Yes, sir; there certainly is, in both the 
official policies and, I have to tell you, from my own personal 
commitment. I have a very, very strong personal belief in the 
need to be inclusive and to be nondiscriminatory and to take 
advantage of everybody's talents in the appropriate way. And I 
certainly would not tolerate in any way that I would have any 
influence, any form of discrimination either internally or with 
taxpayers.

                           Automation at IRS

    Senator Campbell. Ms. Martinez also believed that a 
majority of tax auditor and revenue agent positions could be 
eliminated because, in her words, most audits could be 
conducted by correspondence using computer technology. And I 
know we are moving into the time when computers talk to 
computers an awful lot, but----
    Mr. Rossotti. Well, actually, a rather large fraction of 
the audits on individual taxpayers are already done through 
service centers and correspondence and so forth, and the 
percentage of audits being done by face-to-face auditors in the 
office is actually declining and is relatively small compared 
to what it used to be. But I think that there are always going 
to be some cases where there is just a need to bring 
documentation in and sit down face to face.
    Senator Campbell. In fact, that does fly in the face a 
little bit of some of the comments we have got, that, my gosh, 
they make a telephone call, and they get a recording.
    Mr. Rossotti. Right.
    Senator Campbell. They don't want a machine, talking to a 
machine. They want to talk to a live human being, as you can 
understand.
    Mr. Rossotti. I think that that is exactly what I was going 
to say, that what we really need to do, really what the private 
sector does, is to provide the appropriate form of service to 
each customer based on what their particular needs are. So some 
people just as a matter of personal preference like to deal in 
person, and others--you know, I always like to talk about when 
my kids were in college. I don't think they knew what a stamp 
is. They just used the phone. And so you have to accommodate 
different needs of different kinds of people.

                    Educating Children on Tax Issues

    Senator Campbell. I might comment for your reading, if you 
haven't already, this recent Washington Post article, ``A Tax-
Time Bonus for Your Children.'' It was a little bit along the 
lines of what Ms. Martinez said. It talked about how to educate 
youngsters in dealing with tax problems, and if you haven't 
read that, it might be interesting reading for you.
    Mr. Rossotti. Thank you.
    [The information follows:]
                   A Tax-Time Bonus for Your Children

  (By Suzanne Sutton, Special to the Washington Post, April 10, 1998)

    ``Mom, I think it's better if I itemize,'' 10-year-old Jason says 
as he looks up from his stack of tax forms.
    ``Go for it,'' says his mother, without looking up from hers.
    ``But don't forget, you can only take medical expenses over 7.5 
percent of your adjusted gross,'' his 12-year-old sister, Kim, calls 
from the kitchen. ``Unless you have a high mortgage deduction, it won't 
make sense. By the way, can I use one of your Schedule E's? I forgot 
about the roof repair on one of my apartment houses.''
    Some strange sort of upscale family bonding? Or gruesome child 
labor? A CPA head-start program? None of the above. It's April!
    Think about it. The hard part about tax-time isn't the tax forms 
themselves. It's that the tax forms count, the numbers have to be true, 
our records precise, and at the end, we have to part with our money. 
Remove all that and what do you have? A devil of a good math problem 
for kids, tailor-made for almost any age. And free at any post office 
or public library.
    True, there are lots of big words, and lots of fine print, much of 
which we don't even understand. True, the rules are rigorous, the 
penalties ominous, and the tax code oppressively complex, but no 
matter. We're not filing these forms.
    When you get down to it, tax forms use math no more complicated 
than simple arithmetic: lots of addition, a bit of subtraction (never 
quite enough), and occasionally a little multiplication or division to 
offer some spice. If you choose your forms well, you might even get a 
chance to do some percent problems, but that's pretty much it. So you 
see, even your little ones can have a go at this.
    And they will want to. Children want to be grown up and there is 
nothing juvenile about the 1040 or this year's Schedule D. Bring home 
their very own tax forms, and you're likely to be greeted with a big 
smile and a ``for me?!''
    After you get the forms home your next step is to set the framework 
to get him started. This is a project that can suit a wide range of 
ages and abilities, so try to remove any anxiety that you, as a wise 
and reflective adult, associate with the forms. No one will care if 
your child's advertising expenses exceed his gross profits, if he takes 
depletion allowance when you don't even know what it is, or if he 
chooses to take the ``audit-risky'' home office deduction. Adjust 
suggestions to suit those of your child. The steps are simple.
    Explain the basics.--What may seem obvious to us, does not seem 
obvious to them. Explain to your child the idea of income tax, that 
it's a way for the country to get the funds it needs for all it does, 
that the forms are filled out by anyone who earns income and are used 
to figure out how much each person must pay.
    Give him a persona.--Why be a struggling student, when can be a 
wealthy landlord? Why be a government executive, when he can be a 
staging artist? Three ex-wives could be interesting, with all that 
alimony, and farming might be fun. Get extra forms.
    Or, adopt a persona.--Calculate the tax forms for someone famous. 
Imagine a rock star's Schedule C: Travel, Meals and Entertainment. How 
about Ebenezer Scrooge's Itemized Deductions? Michael Jordan's 1040, 
line 7. A Congressman from your home state?
    Guide him through the forms he'll use.--To the uninitiated, the 
forms look like a bunch of rows and columns and fine print. (Of course 
they also look that way to the initiated.) You may want to highlight 
the lines that make sense to use. Or not. It's perfectly okay to have 
nonsensical entries. For young children, just filling in columns, 
adding, and subtracting will be enough. Older children may enjoy coming 
up with complex scenarios.
    Let him follow some steps.--Believe it or not, the tax forms really 
do tell us what to do. They tell us which columns to add, what to 
subtract, and what percentages to take. They refer us to other lines on 
other forms and then back again. This may be tedious when me do it, but 
it is excellent practice for kids, not to mention potentially quite 
fun--much like a maze.
    Calculators?--As someone who works every day with high school 
students who are unable to do arithmetic without one, I encourage kids 
to try it without, until I'm sure their skips are solid. For young 
students, or students struggling to learn the basics, this can be a 
great ``by hand'' exercise. But calculators can be useful for complex 
situations, ``what if?'' questions, and certainly for speed. You can do 
it both ways. This is fun, remember?
    Show the connections.--All roads lead back to the 1040. Help them 
see how all the supporting forms lead back here, and how to compute the 
final tally using the table in the IRS booklet.
    Don't forget to sign.--You'd be surprised how exciting that can be 
for kids, to sign their own tax form. They even can write a fictitious 
check if tax is owed. They'll derive far more pleasure from the act 
than we do, to be sure.
    Ignore the deadline!--If you're too frantic filing your own forms 
before the 15th, don't worry. Save your extra forms or collect some of 
the surplus and give them to your children after April 15. No penalties 
here.

                            Burden of Proof

    Senator Campbell. You know, most people, I think most 
constituents--and me, too, to a certain degree--believe that 
the IRS assumes you are guilty right from the get-go and it is 
up to you to prove you are not. In other words, the burden of 
proof is on the taxpayer, which, you know, in most other areas 
of our society you are innocent until proven guilty. And we 
hear this all the time, and this is the law, this is our basic 
fundamental right as Americans, we are innocent until proven 
guilty. But with the IRS, you are guilty until proven innocent.
    I understand that because, believe me, as an elected 
official here, guilty until proven innocent, too, of darn near 
everything, so I understand the process.
    But would you comment on that? I know you have been trying 
to make some fundamental change in that attitude.
    Mr. Rossotti. Yes; well, I think when people say that, my 
interpretation is there are sort of two levels of meaning 
there. One level is sort of in the technical legal sense of, 
you know, what is the burden of proof and so forth, and there 
are some changes that will be in the bill coming up that will 
adjust that for taxpayers that go to court. And I think 
certainly my view is that it is appropriate that, if everything 
is equal, the taxpayer ought to get the benefit of the doubt.
    But I think actually, in my discussions, that many 
taxpayers, not so much the tax lawyers but the broader group of 
taxpayers, sort of look at it in--they are not so much focusing 
on the technical legal interpretation of what happens when you 
go to tax court and how did the judge make a decision. I think 
they are really looking at it more as an attitude and what is 
the point of view of the IRS. I mean, is the IRS basically 
taking the point of view that you are wrong until you can prove 
me right as opposed to the technical side. And I think on that, 
you know, that is a broader kind of--that is really the shift I 
said. That is really the shift that we need to make, a basic 
shift. We need to look at ourselves more as problem solvers 
with taxpayers and take the point of view, OK, this taxpayer 
has a problem; even if they do owe more tax, let's try to 
figure out through offers in compromise or installment 
agreements or some way to get this taxpayer current, in 
compliance, and then move on from there so that they can get on 
with their life and we can get on to the next thing.
    I think that is a different point of view perhaps than--not 
perhaps, it is a different point of view than has been the 
focus in the past.
    You know, I really want to say that I don't think that we 
can really criticize the IRS employees for that at all, because 
I think that really my perception is that everybody that was 
involved--and probably this would have to include the Congress 
as well as the various administrations on both sides--took the 
point of view that, you know, as long as the money was flowing 
in and things were running right, you know, that was the most 
important thing. And I have certainly heard it from many people 
that are former IRS employees and former executives who are not 
even there anymore, who said, look, the way that you would get 
in trouble in the IRS--and it was from the management at the 
top--is if you, quote, gave away the Government's money and 
didn't collect every cent in every circumstance. You know, that 
was the way you would get in trouble. You would never get any 
benefit for trying to really solve a problem for a taxpayer, 
particularly.
    That is really an obsolete point of view, and I think it 
needs to be changed, and I think it is going to certainly 
require the continued support of the Congress to make that 
happen.
    Senator Campbell. Well, the public momentum is there now.
    Mr. Rossotti. Yes.
    Senator Campbell. I have cosponsored I think every Taxpayer 
Bill of Rights since I have been there 10 years, including the 
first one 10 years ago that put restrictions on IRS employees 
getting bonuses for money collected. It put the burden of proof 
on the IRS so they would have to prove you wrong rather than 
you prove yourself innocent. I still remember that bill 10 
years ago. It would have required the IRS to pay interest if it 
was their mistake, just like the individual has to pay interest 
if it is their mistake. We never could get that passed, but 
just at that time the support for it in the administration, the 
support for it among some of our colleagues, and the support 
for it by the public just did not have the momentum it does 
now, and I think that the hearings they have done on the House 
side recently, hearings that you are aware of, and the support 
from this administration to make some changes, and certainly 
the momentum has developed at the grassroots level is going to 
put some of those things in place, or at least peripherally, 
that we have been talking about for years.
    Mr. Rossotti. Yes, sir.
    Senator Campbell. Let's see. I think that perhaps--I had a 
number of other questions, but in the interest of time, I think 
I will go ahead and ask you to submit the answers to those in 
writing, if you would.
    Mr. Rossotti. Sure.

                          Submitted Questions

    Senator Campbell. I certainly appreciate you being here. I 
know you have a busy schedule. You are going to a lot of 
places, but thank you very much. I have about five or six more 
questions that I think are important for this committee to 
know, and that will give you more lead time than you had today, 
by the way. I would hope that you would stay here at least for 
our last panelist, who is Mr. Robert Tobias, with the National 
Treasury Employees Union, if you have the time.
    Mr. Rossotti. I will.
    Senator Campbell. And thank you again for being here, Mr. 
Commissioner.
    [The following questions were not asked at the hearing, but 
were submitted to the agency for response subsequent to the 
hearing:]
                Questions Submitted by Senator Campbell
                     denver, colorado field hearing
    Question. There appears to be some conflicting information about 
seizure numbers. Does the IRS change seizure numbers each October at 
the beginning of a new fiscal year?
    Answer. No, the serial numbers initially assigned to a seizure do 
not change with each new fiscal year.
    Question. Exactly what is the IRS policy with regard to changing 
seizure numbers during such proceedings?
    Answer. After a seizure is made, the revenue officer obtains a 
serial number and annotates that number onto the seizure documents. The 
serial number is assigned by an automated system for the purpose of 
establishing an accounting control of seized property, tracking the age 
of the seizure, totaling expenses of the seizure, identifying the 
disposition of the assets, and closing out the seizure file. Seizure 
serial numbers initially assigned to the case file continue to be the 
same number until there is a final disposition of that seizure.
    Question. Just a curiosity question--Does the IRS make payments by 
credit card?
    Answer. The IRS purchases goods and services with the government 
credit card. The credit card is used by the IRS as a streamlined 
purchasing method for making micro-purchases ($2,500 or less) and for 
ordering from existing government contracts, such as those on General 
Services Administration (GSA) schedules and indefinite delivery/
indefinite quantity contracts negotiated and administered by the IRS. 
In these cases, the credit card serves as the vehicle for both 
procuring and paying for the goods or services. We anticipate that, in 
the future, the government credit card will be used by the IRS to make 
payments for deliveries, even in cases where a standard contract 
document is the required purchasing method.
    Question. Dennis Marty outlined some of the problems he had with 
confusion over unemployment benefits and mortgage interest payments. 
Generally speaking, if a bank made a mistake on a 1098 mortgage 
interest form, who is held responsible--the bank or the taxpayer?
    Answer. The filer of an information return is subject to penalties 
under I.R.C. Sections 6721-6722 for providing incorrect information on 
an information return filed with the Service and for any incorrect 
information on the payee statement provided to the taxpayer. The 
penalty is $50 per information return up to a limit of $250,000, and 
$50 per payee statement up to a limit of $100,000. If the filer of the 
incorrect information return and payee statement catches the error and 
files a corrected information return and sends a corrected payee 
statement, the taxpayer is responsible for filing an amended tax return 
and paying any additional tax owed. In normal circumstances, the 
taxpayer would not be liable for penalties in such cases.
    Question. Are the rules of evidence that are applicable to the IRS 
different from those that apply to other federal agencies?
    Answer. Rules of evidence are set by formal rules of the various 
courts and do not differ between parties (whether the government or 
not) or between agencies including the Internal Revenue Service. In 
federal courts, the ``Federal Rules of Evidence'' are used. By statute, 
I.R.C. section 7453, the Tax Court also uses the same rules of 
evidence. An exception exists for cases where the taxpayer elects to 
use the small case procedures of the Tax Court. I.R.C. section 7463. In 
such cases, which are informal proceedings, any evidence deemed to have 
value can be considered without regard to the formal rules of evidence. 
Tax Court Rule 177(b). This rule permits taxpayers to present their own 
cases, usually unassisted by representatives who would be versed in the 
evidentiary rules.
    [Additional Note.--Although this question was framed in terms of 
rules of evidence, it is possible that it meant to refer to burden of 
proof. A burden of proof is not strictly a rule of evidence but rather 
determines how issues are to be decided based upon the evidence 
produced. Burdens of proof are set by issue specific or generic 
statutes, formal rules of court, and discretionary judgments of courts 
based upon common law principles. When made by statute, they are 
usually made with reference to the legal issues involved and the social 
and legal policies inherent in those issues, so no real comparison can 
be made between agencies which deal with different laws and issues.]
    Question. What are the IRS guidelines for expanding an audit? Can 
it be done simply because the auditor wants to do so?
    Answer. In office examination, group manager approval is required 
to expand the examination beyond the issues that were pre-classified. 
In field examination, expanding the issues is primarily a revenue agent 
decision that would require group manager approval in limited 
situations.
    In all cases where an examiner requests another return (prior year, 
subsequent year or related), group manager approval is necessary.
    The examiner (revenue agent or tax auditor) is required to use 
professional judgment in determining scope and depth of the 
examination. Some preliminary issues may be pre-identified on the 
return; however, it is the responsibility of the examiner to expand or 
limit the examination based on further review and analysis of the 
return, taxpayer records and statements and any other available related 
information. An examiner may decide to expand the examination to 
include additional issues, prior and/or subsequent year returns or 
related returns. Related returns are any other return that have a 
direct relationship to the return under examination, such as financial 
transactions that directly affect both returns.
    Question. Both Amy Powers and Katherine Morehead are classic 
examples of problems faced by an innocent spouse. What protections are 
currently available for innocent spouses in these types of situations? 
What more can be done?
    Answer. Under existing law, when a married couple files a joint tax 
return, each spouse is liable for the full amount of income tax for 
that year. Under certain circumstances which are enumerated in Internal 
Revenue Code section 6013, one spouse may qualify as an ``innocent 
spouse'' and be relieved of joint liability. In February 1998, the IRS 
announced a number of administrative actions to ensure that spouses who 
may qualify for such relief can apply for it. These actions were:
    1. Issuance of special form--Form 8857, Request for Innocent Spouse 
Relief--which was available on the Internet on March 31 whereby spouses 
can file a claim for innocent spouse relief;
    2. Centralization of innocent spouse claims (Forms 8857) in one 
service center;
    3. Training to ensure the proper recognition and routing procedures 
for the mail opening operation in all ten service centers to review and 
recognize cases for appropriate routing;
    4. Establishment of procedures to ensure that taxpayers calling the 
toll-free telephone service with questions about innocent spouse will 
be directed to a specialist trained in the innocent spouse provisions 
of the tax law;
    5. Initiation of a program of focused outreach on both the national 
and local levels to community organizations that serve abused or 
battered spouses to identify those who might qualify for relief under 
the innocent spouse provisions;
    6. Mandatory discussions with taxpayers of innocent spouse 
provisions at the conclusion of the audit, where such provisions could 
be applicable.
    The current House Bill and Senate Bill on Restructuring the IRS 
contain provisions on innocent spouse relief which will result in more 
spouses qualifying for such relief than under the existing law.
    Question. As you know, the Senate Finance Committee recently 
approved an IRS reform package which will soon be considered by the 
Senate. One of the provisions of Senator Roth's bill would change the 
innocent spouse relief requirements to allow them to pay taxes on their 
own incomes only. That provision would become effective in time for the 
1999 filing season. That seems a long time to wait for relief. Can't 
this change be implemented any faster?
    Answer. As passed by the Senate, this provision currently is 
effective for tax liabilities arising after the date of enactment and 
any liability arising on or before such date, but remaining unpaid as 
of such date. I took a careful look at the provisions in the Senate 
Restructuring bill in light of our century date change and 1999 filing 
season efforts and requested later effective dates for some provisions. 
The innocent spouse provision is very complex and cannot effectively be 
administered on a manual basis; an automated system must be developed 
and implemented to reduce the likelihood of error. In the near term, 
the IRS must manage a large number of complex tasks, each of which must 
be completed on time to avoid failure of the tax administration system. 
Thus, even if these provisions are feasible individually, the 
cumulative impact of a group of proposals can seriously imperil our 
ability to successfully conduct the 1999 filing season as well as 
implement our century date change program.
    Question. According to the information provided by Ms. Powers, she 
received notification of a tax obligation five years after she filed 
which showed that a $13,000 tax balance owed had miraculously become 
almost $35,000. And, she didn't even know that the original amount was 
owed. How does this happen? What steps, if any, do you plan to take to 
make sure that taxpayers are notified of a tax obligation BEFORE any 
interest and/or penalties begin to accrue?
    Answer. The IRS sends notices, including notice and demand for 
payment, to the last known address of the taxpayer. In the case of 
divorced or separated spouses, one spouse may receive these notices and 
may not inform the other spouse. Under existing law, many penalties and 
interest begin to accrue on the tax obligation from the due date of the 
tax return. Penalties and interest can only be abated under certain 
circumstances provided by law and failure to receive notification of a 
tax obligation is not one of these circumstances. The Senate 
Restructuring Bill expands relief for innocent spouses and will provide 
additional relief for divorced or separated taxpayers.
    Question. Dr. Alvin Stjernholm was on the receiving end of tax 
audits for 16 consecutive years. Is that some sort of a record, or is 
that common? What is the statute of limitations on tax liability?
    Answer. Records are not maintained on the frequency of audits of an 
individual taxpayer. However, 16 consecutive audits would not be 
common.
    There is no limitation on the frequency with which a taxpayer may 
be selected for examination. However, if the examination results in a 
no change or minimal changes to the tax liability, the taxpayer is 
entitled to relief from any examination involving the same issues for 
the two years following the year of the no change or minimal change.
    IRC 6501(a) and 6501(b)(1) provide that the statute of limitations 
for assessment is generally three years after the return is filed or 
due (without regard to extensions), whichever is later. The IRC 
provides for several exceptions to the general rule--fraud and 
substantial understatement of income are two examples. A taxpayer may 
be asked to extend the statute of limitations when a taxpayer is under 
examination and the statute of limitations may expire before the 
examination can be completed.
    Question. What is the process for auctioning a taxpayer's assets to 
settle a tax debt? How often are items auctioned off for significantly 
less than what they are worth? Is the debt actually settled after the 
auction?
    Answer. The process of auctioning a taxpayer's assets begins with 
seizing the asset and establishing a fair market value for the 
property. Some methods used to establish the fair market value are 
comparable sales, and in the case of specialized property, appraisal of 
the asset, which the Service may provide. A minimum bid price, as 
required the Internal Revenue Code Section 6335, is established. The 
purpose of the minimum bid is to conserve the taxpayer's equity by 
setting a price that is generally above eighty percent (80 percent) of 
the forced sale value of the taxpayer's interest in the asset, less 
encumbrances having priority over the Federal Tax Lien. Internal 
Revenue Service Policy Statement P-5-35 limits establishing the minimum 
bid above the amount of tax, additions to the tax, and the expenses of 
the sale; however, it does not limit the amount prospective buyers can 
bid. The taxpayer is provided with documentation that informs him or 
her of the minimum bid amount, an explanation of how the bid was 
determined, and instructions for the taxpayer on how to appeal the 
Service's determination of value and computation of the minimum bid.
    The property may be offered for sale at a public auction sale or 
under sealed bid. A public auction may be conducted by a revenue 
officer or by a professional auctioneer. The objective of the sale 
process is to maximize the amount realized at the sale that can be 
applied to the taxpayer's account. Marketing and advertising the 
assets, or using an auctioneer are strategies used to maximize bids. 
The assets are sold as-is, where-is, and without recourse to the 
government.
    We have no data at the National level to show how often assets were 
sold for significantly less than their value or to identify if the tax 
debt was settled after the auction. However, many taxpayers do not have 
sufficient equity in assets to settle their entire tax debt. For 
example, in fiscal year 1997, 27.5 percent of the seized cases were 
sold netting $159,960,760. The average balance due per seized case was 
$179,546 and the average net yield per seizure was $16,429. Indeed, the 
seizure enforcement action also had impact on the 18.9 percent of the 
seizures that were redeemed and the 49.1 percent of the seizures that 
were released for various reasons (the taxpayer entered into an 
installment agreement or the government received their interest in the 
property). Interestingly, of the seizures released, only 3 percent did 
not meet the minimum bid and therefore were also released. The 
remaining 4.5 percent of the seizures were cash seizures, not requiring 
an auction.
    Question. The new IRS you envision is supposed to be more customer 
friendly. As you heard, Robert Lesher tried to get help from a Problem 
Resolution Officer and instead found himself in a bureaucratic maze of 
unavailable forms and unknown time frames. What changes do you envision 
to the PRO system to address these types of problems?
    Answer. While I am not able to comment on the specific 
circumstances surrounding Mr. Lesher's case. I can tell you that the 
local Taxpayer Advocate took action to discover why there was a 
breakdown in securing a Form 911. He learned that the forms 
distribution centers had been instructed to destroy all existing copies 
of Form 911, due to a change in the form. As a result, several 
taxpayers and practitioners were left with no source of Form 911. This 
should not have happened; however, due to the efforts of the Taxpayer 
Advocate, procedures were developed to ensure that Forms 911 are not 
destroyed until replacement copies are available.
    Action was also taken to instruct toll free and walk-in employees 
that they have a responsibility to obtain information from taxpayers 
when they ask for Form 911 and that they (IRS employees) are to take 
action to relieve the hardship or write up Form 911 and route it 
directly to the Taxpayer Advocate's office. In addition, our employees 
are trained to tell taxpayers that they can submit an Application for 
Taxpayer Assistance Order without the Form 911 if necessary.
    This issue raised an important point. We will never eliminate all 
problems, but the point is to identify weaknesses in our way of doing 
business with taxpayers, and take corrective actions so that taxpayers 
are not disadvantaged.
    Question. What are the IRS rules or guidelines for dealing with a 
taxpayer whose family is experiencing severe health problems?
    Answer. While there are no written rules or guidelines for dealing 
with a taxpayer whose family is experiencing severe health problems, 
the IRS does make every effort to provide taxpayers, to the extent the 
law allows, flexibility in interacting with the IRS.
    Question. Mr. Rossotti, you may have read an April 7 article in the 
Boston Globe entitled ``IRS won't take Acton man's canceled check for 
answer''. In a nutshell, the taxpayer paid his 1996 income tax by 
check, which was deposited by the IRS, and the canceled check was 
returned to the taxpayer by his bank. Well, somehow the money got lost 
and now the IRS is demanding that the taxpayer pay again. This seems 
pretty unfair to me. Are you familiar with this article? Can you 
justify the IRS actions?
    Answer. Yes, I am aware of this story reported in the media. While 
I cannot address the specific facts of this individual situation 
because of privacy restrictions, I can give you specifics on the 
procedures the IRS has in place for handling cases when a taxpayer has 
not been credited for a payment. When a taxpayer must be contacted to 
resolve the problem, the IRS asks for a front and back copy of the 
canceled check. The back of the check provides coding information that 
allows for the funds to be traced from bank to bank. The canceled check 
is proof of payment and is honored by the IRS. If the taxpayer in this 
instance was told otherwise, that was incorrect and we have apologized 
to him for this.
    Question. Commissioner Rossotti, you have stated that the IRS has 
begun addressing problem areas that surfaced during the Senate hearings 
last fall about IRS abuse of taxpayers. When will taxpayers, on the 
outside looking in, be able to see a difference in the way they are 
treated by the IRS?
    Answer. As I have previously stated, I believe that the IRS, over 
time, can greatly improve its service to the public. In the near term, 
we are taking action to move forward toward these goals. Since the 
September hearings before the Senate Finance Committee, the IRS created 
a number of initiatives to improve taxpayer service and help taxpayers 
comply with the law. Last November we began hosting monthly Problem 
Solving Days across the country. Taxpayers have consistently given IRS 
high marks for the service they received at Problem Solving Day. We 
extended the hours of telephone service this filing season to 16 hours 
a day 6 days a week. As part of our Saturday Service Days, we also 
hosted Problem Prevention Days and sponsored an Earned Income Tax 
Credit Awareness Day to help taxpayers determine if they are eligible 
for the credit and then show them the correct way to fill out the tax 
return. Even though these are small first steps, the feedback that we 
are receiving is that taxpayers are seeing a difference in the service 
that they receive from the IRS. Testimony provided by practitioner 
representatives before the House Ways and Means Oversight Subcommittee 
praised IRS' efforts to improve customer service performance during 
this year's filing season. One practitioner, in his testimony, stated 
that others in the field have reported that the IRS personnel they have 
been dealing with have mostly been cooperative in their efforts to iron 
out taxpayer problems and assist citizens in putting together 
installment agreements or offers in compromise in order to resolve 
their cases.
    Question. Is the IRS conducting a thorough review of IRS employees 
who have had any direct interaction with taxpayers of their treatment 
of taxpayers?
    Answer. After the IRS oversight hearings conducted by the Senate 
Finance Committee in September 1997, the IRS Inspection Service 
initiated internal audits on the use of enforcement statistics, 
collection enforcement actions, and controls in the examination 
process. Inspection also initiated some investigations of alleged 
misconduct by IRS employees. Completed investigations have been 
referred to a Treasury review board for administrative action. Internal 
audits and investigations are continuing. In addition, the Treasury 
Inspector General has conducted investigations on this subject.
    In more general terms, in an effort to make sure we have the proper 
mechanism in place to review complaints about employees, IRS will be 
convening a Disciplinary Action Review Task Force to review our 
complaint intake systems (e.g., Automated Labor and Employee Relations 
Tracking System (ALERTS), the Equal Employment Opportunity office, the 
Chief Inspector, and correspondence to the Commissioner (Executive 
Control Management System--ECMS). With the assistance of an outside 
expert, the task force will assess the number and type of complaints/
disciplinary actions; determine if we should integrate the intake 
systems (the same complaint might come in through several channels); 
and determine the appropriate level of agency oversight.
    Question. What type of training are employees with direct 
interaction with taxpayers currently receiving? Are you planning any 
changes to that training?
    Answer. There is a wide range of training in development and 
currently being delivered. For example, front-line employees in 
Compliance (Examination and Collection) are receiving training on 
interviewing techniques, alternative dispute resolution, conflict 
management, and customer service as well as technical training on the 
Taxpayer Relief Act of 1997. In addition, we are developing training to 
move the organization to deliver World Class Customer Service. This 
training will be delivered to all employees to direct our 
organizational focus to the delivery of quality customer service which 
meets the needs of the American taxpayer. We are in the process of 
asking members of the Commissioner's Advisory Group to assist in the 
review of training materials, offer comments and recommend changes in 
the way the material is presented.
    Question. I believe many would agree that IRS employees' attitudes 
must change. Will training help to make that change? The point I'm 
making is that given the reputation of the IRS with the taxpayers, I 
think the front line is the first place for you to start making 
changes.
    Answer. Clearly, training is key to improving the attitudes and 
performance of IRS employees. The front line employees who meet and 
deal with taxpayers must be the immediate recipients of training if we 
are to influence our reputation with the American taxpayer. To this 
end, we have developed competency assessment instruments to measure 
customer service attitudes and technical proficiency. These instruments 
have provided information upon which we have developed and piloted 
training. This training has resulted in greater customer service and 
technical performance on the part of those employees who have 
participated in the training. We will extend this training to all 
employees through the World Class Customer Service initiatives.
    Question. Mr. Rossotti, you heard the testimony of Ken Tuckman and 
what he believes his company can do to assist the IRS. His ideas appear 
to dovetail nicely with your own ideas of providing better customer 
service. Do you think there is a place for such a contract support 
organization within the IRS?
    Answer. To further our goal to provide world class customer 
service, it is my intention to tap into corporate expertise when 
appropriate. Currently, we do have several initiatives underway that 
are customer focused and conceptually similar to Mr. Tuckman's 
proposals. These initiatives are designed to foster improvement without 
relying on new technology. Some of the current initiatives are: 
improvement of training strategies; enhancement of reference materials 
and other tools available to Customer Service Representatives; 
reassessment of work processes, work flow, required skills, etc.; and, 
improved hiring and recruiting practices.
    Question. The most obvious use for such a first-line customer 
service operation is to answer routine non-tax questions--such as where 
to get forms or what form goes with what kind of income. Do you happen 
to know what percentage of calls to the IRS during peak filing season 
fall into that category?
    Answer. During the period of January 1, 1998, to April 18, 1998, 
approximately 6 percent of the calls handled by assistors (on the tax 
law and tax account lines) were requests for information regarding 
forms i.e., forms ordering and forms help. An additional five million 
calls requesting forms were placed to the 1-800-TAX-FORM line during 
this period.
                        NONDEPARTMENTAL WITNESS

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

                        Introduction of Witness

    Senator Campbell. With that, we will just go right into Mr. 
Tobias' testimony, and thank you also for being here.
    You can just go ahead and proceed, Mr. Tobias.
    Mr. Tobias. Good morning, Mr. Chairman. Thank you very much 
for providing NTEU with an opportunity to testify today.
    I want to start by saying that the vast majority of 
Internal Revenue Service employees are dedicated, committed, 
and extremely competent employees. I say this because I believe 
it and I say it because the data that has recently been 
collected supports that conclusion.
    Over the past 4 fiscal years, fiscal years 1995 to 1998, 
the IRS collected 24 percent more revenue, handled 8 percent 
more returns, with 13 percent fewer resources, or $1 billion 
less in constant dollars. In fiscal year 1995, IRS processed 
193 million returns, and in fiscal year 1998, we will process 
208.4 million returns.
    In addition, the number of calls answered has increased 
from 101.2 million in----
    Senator Campbell. Could I interrupt you just a moment? I 
noticed when Mr. Rossotti sat down, we suddenly had an influx 
of people running up to sit right beside him and behind him. I 
would tell folks in the audience that he can't solve your 
problems here in 10 minutes that you may have with the IRS, and 
I would hope that you would let him hear the testimony, because 
he is going to have to respond to a lot of this testimony, and 
not encumber him with your personal problems. We have a process 
by which we deal with that, and we will certainly help you 
through our Senate office, too. But he needs to listen to this 
testimony.
    Go ahead, Mr. Tobias.
    Mr. Tobias. In addition, the number of calls answered has 
increased from 101.2 million in 1995 to 120.6 million in 1998. 
And the level of access or the opportunity to actually reach 
the IRS has increased from 30 percent, an abysmally low level, 
in 1996 to, as Commissioner Rossotti testified, we expect 75 
percent in 1998. And the accuracy rate for those calls is 96 
percent.
    More work has been done at considerably less cost. In 1995, 
it cost 59 cents to collect $100 of revenue, and in 1998, it 
will be 47 cents. No other tax collection agency in the world 
is even close. Most democracies spend between $1.25 and $1.70.
    More work, less cost, and 11,000 fewer employees since 
1995--IRS employees have performed well.
    The good performance is reflected in the evaluations 
taxpayers who have an actual transaction with the IRS provide. 
The results, I believe, are very good.
    Commissioner Rossotti testified about the problem-solving 
days that the IRS recently initiated, starting on November 15. 
The taxpayers have evaluated employees overall at a 6.45 level 
on a 7-point scale.
    The Examination Division has now begun customer 
satisfaction surveys. The initial results show that 5.9 percent 
rate audits as unfair and 76.3 percent rate the IRS as fair--
the highest rating; and 3.6 percent rate the employees 
disrespectful, and 81.5 percent respectful--the highest rating. 
And there was a Harris poll that was released today which 
showed that 6 percent of the public believe they have been 
treated unfairly by IRS personnel, whereas 76 percent say they 
were treated fairly by the IRS. Five percent of the public say 
the IRS has been discourteous and, in contrast, 83 percent say 
the IRS has been courteous.
    We certainly need more customer satisfaction data, but what 
we have collected is very favorable.
    The solutions, I believe, to the problems you heard today 
lay in a reorganized IRS consistent with what Commissioner 
Rossotti recently testified, an IRS reorganized along business 
lines.
    As a member of the committee to restructure the IRS, I 
supported this concept, and I have supported the Commissioner's 
approach. It will focus accountability and allow the IRS to 
fulfill its responsibilities to those taxpayers who are 
compliant and those who seek to be compliant. The solution to 
the problem also, I believe, is to appropriate the full amount 
requested by the President.
    The IRS needs the requested funds to implement the vast 
changes in the tax law enacted in 1997. It needs the funds to 
implement the Y2K effort. It needs the funds to improve 
business technologies, laptops for revenue agents, computers 
for revenue officers. It needs the money to improve the level 
of access from the 75 percent this year to the planned 86 
percent in 1999. And it needs the money to provide for needed 
training.
    Cutting the IRS budget, as some have proposed, won't solve 
the IRS problems. It will make the IRS worse. I certainly urge 
you and the committee to appropriate the full requested amount. 
I think the IRS is on the right track, and I am hopeful that 
with this appropriation it won't be derailed.
    Thank you very much, Mr. Chairman.

                           Prepared Statement

    Senator Campbell. Thank you, Mr. Tobias. We have your 
complete statement and it will be made part of the record.
    [The statement follows:]
                 Prepared Statement of Robert M. Tobias
    Chairman Campbell, I am very pleased to be here today to discuss 
the views of the National Treasury Employees Union (NTEU) on the needs 
and operations of the Internal Revenue Service. I have served as 
President of the 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.
    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 on which I served 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 hearings held by the Senate 
Finance Committee 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. Senator Roth repeatedly stated that most IRS employees 
do a good job and that Congress' 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, those 
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 with an additional means to help solve taxpayers' 
problems and should serve as a model for how all of the 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 in last September's hearings is 
enactment of H.R. 2676, which passed the House by a vote of 426 to 4 in 
November of 1997.
    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. The federal employees who serve at the Internal Revenue 
Service want to provide world-class service. But as we have heard time 
and again, just like their private sector counterparts, federal 
employees must have the tools to get the job done right. Budgetary 
driven personnel restrictions often prevent the agency from hiring the 
employees they require to adequately handle the workload. Restrictions 
and promotions and limited advancement opportunities lead to morale 
problems. The lack of funding for training creates situations where 
employees are thrust into situations they are unable to handle to the 
level taxpayers expect and deserve. Congress has the ability to correct 
these problems and put the agency on a solid, long-term course with 
success. Not only success from the standpoint of collecting taxes owed, 
but success from the view of taxpayers who must deal with the agency. 
No one will ever enjoy paying their taxes, but, at a minimum, they 
should come away from their dealings with the agency believing they 
have been treated with respect and dignity. The IRS can and will be a 
world-class organization with the proper tools and funding.
    Right now, customer service representatives at the IRS earn on 
average around $28,000 a year, with an absolute maximum salary in the 
highest cost city of 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, earn more money. That must change. IRS 
must be able to attract, retain and promote individuals who will 
provide world class customer service.
    I would note that Senator Gramm of Texas stated at the Finance 
Committee hearing on January 28th 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 to 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 H.R. 2676.
    Mr. Chairman, the plain fact is that no one, not even the Congress, 
can have it both ways. We cannot expect the IRS to eliminate its 
problems if we cut its budget. That makes no sense. I hope this 
Congress will provide the funding necessary to achieve the level of 
service taxpayers expect and deserve.
    NTEU believes that the President's budget proposal is the absolute 
minimum required to begin a reinvention of the IRS ``around taxpayers 
needs.'' However, there are some in the Congress who are seeking to gut 
the IRS budget instead of providing the resources indispensable to that 
necessary restructuring. The Senate Budget Committee's recent action to 
cut the President's request for the IRS by 6 percent--some $500 
million--makes no sense. It is the wrong cut, in the wrong place, and 
at the wrong time.
    Both the recently announced Gore-Rubin ``Reinventing Service at the 
IRS'' report and the President's budget are solid first steps in 
response to taxpayers' concerns. The Congress must not ignore them. As 
the new IRS Commissioner, Mr. Rossotti, advised both the Senate and 
House Appropriations Subcommittees in early March: ``The fiscal year 
1999 budget we are requesting is absolutely essential to begin this 
long-term transformation.''
    The total budget request for fiscal year 1999 is $8.196 billion and 
100,829 FTE. The total budget request includes a net increase of $529 
million and 1,232 FTE over the fiscal year 1998 level. Of this 
increase, $176 million represents part of the cost that would be needed 
to maintain the current level of operations, taking into account 
inflation and mandatory pay increases. The remaining increases 
represent funding dedicated to improved near-term customer service 
($103 million), near-term and long-term technology investments ($227 
million) and organizational modernization ($25 million).
    I have spent a good amount of time with Commissioner Rossotti. I 
support his reorganization proposals and have joined with him to urge 
all IRS employees to do the same. Foremost among the funding 
initiatives proposed for fiscal year 1999, NTEU believes that the 
Congress should consider the $103 million for near-term improvements in 
customer service as one of its highest priorities. In my role on the 
IRS Commission, I advocated the position that the IRS needed to make 
customer service its number one priority. I believe Commissioner 
Rossotti agrees with that view.
    Mr. Chairman, even though we agree that the IRS needs to do much 
more to improve its operations, IRS employees are performing 
exceedingly well in comparison to any similar organization in the 
world. Over the past four fiscal years, fiscal year 1995 to fiscal year 
1998, the IRS collected 24 percent more revenue, handled 8 percent more 
returns with 13 percent fewer resources, or more than $1 billion less, 
in constant dollars. In fiscal year 1995, the IRS processed 193.3 
million returns. In fiscal year 1998, it is expected to process 208.4 
million returns. In the past year, the total tax revenue collected rose 
by more than $70 billion while the agency processed an additional 5.8 
million returns. Revenues were $1.36 trillion in fiscal year 1996; $1.5 
trillion in fiscal year 1997; $1.58 trillion in fiscal year 1998, and 
projected revenues for fiscal year 1999 are $1.64 trillion. In 
addition, the accuracy rates for tax law inquiries, accounts 
information and refunds have dramatically improved.
    In fiscal year 1995, the cost to collect $100 of revenue was 59 
cents. In fiscal year 1996, the cost was 53 cents and in fiscal year 
1997, 48 cents. In fiscal year 1998, the cost to collect $100 should 
drop to 47 cents. No tax collection agency anywhere comes close, much 
less matches the IRS cost per dollar of revenue raised. Most 
democracies spend nearly three to four times that much, $1.25 to $1.70, 
to collect $100 in income tax revenue.
    In 1997, the 102,000 IRS employees collected more than $1.5 
billion, processed 215 million tax returns, issued almost 88 million 
refunds, assisted more than 110 million taxpayers, distributed more 
than one billion forms and publications, sent 70 million notices and 
letters to taxpayers, processed more than one billion information 
documents, completed more than 1.5 million audits and assessed $10.4 
billion on delinquent returns. In fiscal year 1998, the IRS will answer 
more than 120 million telephone calls, provide walk-in service to 
nearly nine million taxpayers, and will examine nearly 1.3 million 
individual returns.
    Mr. Chairman I believe this data shows without a doubt that IRS 
employees have been performing remarkably well. Despite inadequate 
resources and a host of poor management practices that failed to 
prevent the well-publicized failings of some, IRS employees are the 
best in the world at what they do and are consistently getting better. 
But you can only squeeze people so hard for so long. There's a limit. 
We cannot expect the IRS to continue to improve, especially in the area 
of customer service, without investing the resources that Commissioner 
Rossotti, the Rubin-Gore Task Force and the Restructuring Commission 
have recommended. NTEU strongly urges that the Congress to provide 
these resources.
    Mr. Chairman, thank you for this opportunity to present the views 
of the National Treasury Employees Union at today's hearing. I applaud 
you and other members of the Subcommittee for taking a closer look at 
the operations and the needs of the Internal Revenue Service. I would 
be pleased to answer any questions you may have.

                     Accountability for IRS Budget

    Senator Campbell. Our committee will be dealing with their 
budget, as you know, and we have the last couple years been 
trying to provide the additional revenue to bring them up to 
speed, particularly for the needed equipment for particularly 
the year 2000. But in addition to that, you know, we have to 
have accountability. And as you probably know, in the past 
there has been money appropriated that it has been very 
questionable about what it was used for. I have heard a lot of 
different numbers, and I don't want to try and dig through my 
hearing notebook, but there was literally millions and millions 
of dollars that apparently was misspent on the wrong kinds of 
equipment, the wrong kinds of computers and so on. So, you 
know, I am supportive of bringing it up to speed so it can do a 
better job, but by the same token, I have to be accountable to 
my constituents about where we are spending their money. And I 
think the agencies have to be equally accountable about how 
they are using it.
    I might say from your particular position, you are, I 
guess, a little like me in that you, in fact, become sort of an 
ambassador. You are a representative of that agency, working 
for it, just as I am of the U.S. Senate. And even though the 
statistics say most people in any given area, let's say 
policemen, for instance, do a terrific job, you only have to 
have one really bad experience with a policeman--or a Senator 
or perhaps an IRS official or an IRS agent--to really sour you 
on the whole thing. And I think when people tell us about how 
they lost their home, my gosh, literally had their family 
destroyed, boy, those are crucial, terrible things to hear.
    So from that perspective, I think a lot of us kind of try 
and use the zero tolerance theory. If there is one bad apple in 
the Senate, it taints all of us. If there is one bad employee, 
even though you have tens of thousands, it certainly taints the 
whole agency. And one bad policeman taints a police department.
    So I would hope that the NTEU is also aware of that and is 
continually trying to strive to, you know, upgrade their 
performance, do a better job with their customers or, as we 
call them, constituents.
    Mr. Tobias. Well, I believe, Mr. Chairman, that every 
transaction that an IRS employee has is like opening night of a 
Broadway play; that is, that employee is indeed the face of the 
IRS, and the IRS is judged ill or well based on that 
transaction. And I think it is important that employees not 
only understand that intellectually, but that they be provided 
the technology, that they be provided the training, and they be 
provided the time--the time--in order to provide the kind of 
service that I think employees want to provide.
    I believe the employees in the Internal Revenue Service 
want to provide that service, and if they are provided the 
time, the technology, and the training, I think you will see 
many, many fewer of the kind of taxpayer transactions that we 
have been hearing about over the last year.
    Senator Campbell. Well, those of us in the Senate are 
dealing with it. I think we are determined to make change, and 
I really think that the Commissioner is also determined to make 
change. And I would hope that the NTEU is also willing to 
participate in that and to help effect changes that are going 
to make it better for everyone, not only employees of the IRS 
and the Federal Government but the constituents and the average 
American taxpayer that has to pay the bill.
    Mr. Tobias. There is no question that NTEU is interested in 
participating in making the IRS more efficient, more effective, 
and, most importantly, more responsive to the complaints of the 
taxpaying public.
    Senator Campbell. OK. I thank you.
    I thank you for your appearance, and that is the last 
person who will testify. And, Mr. Tobias, we may have some 
additional questions to send in, if you would submit your 
answers in writing.

                         Conclusion of Hearing

    And if there is anybody in the audience who would like to 
comment on this hearing, if you would submit in writing what 
you would like us to study and to be included, if you think 
there are some changes--these bills are working their way 
through Congress now--we would appreciate you submitting those 
in about the next 7 days before our hearings are completed.
    With that, thank you for your attendance, and that 
concludes the hearing.
    [Whereupon, at 11:58 a.m., Tuesday, April 14, the hearing 
was concluded and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]



         MATERIAL SUBMITTED SUBSEQUENT TO CONCLUSION OF HEARING

    [Clerk's note.--The following material was not presented at 
the hearing, but was submitted to the subcommittee for 
inclusion in the record subsequent to the hearing:]
 Prepared Statement of Charles Pat Smith, State Adjutant, the American 
                     Legion, Department of Colorado
    Thank you for the opportunity to appear before this committee to 
discuss the IRS and The American Legion.
    My name is Charles Pat Smith and I am the Executive Director for 
The American Legion Department of Colorado. The American Legion is a 
veteran's organization founded in 1919 to assist those returning WWI 
veterans with their physical and mental problems that they encountered 
while serving their country. We were founded also to assist the widows 
and orphans of those who did not return, to promote Americanism and 
Patriotism in our country, to speak out on issues affecting the 
security of our country and to enhance the lives of the children of 
this country. After almost 80 years our mission remains the same today. 
The American Legion has always enjoyed the status of a non-profit 
organization under IRS guidelines and we have been provided a group 
exemption number. The beginning of our preamble to our constitution 
states, and I quote, ``We associate ourselves together for the 
following purposes: To uphold and defend the Constitution of the United 
States of America; to maintain law and order * * *.'' The American 
Legion truly believes in these precepts. A study of our history will 
show that we are law-abiding citizens. As an organization we pay our 
taxes that we are required to pay. We follow the laws of the country as 
set forth by the Congress of the United States. Where we disagree with 
the laws we seek to change those laws in a peaceful orderly manner. We 
use the system of government that we, as veterans, fought to preserve 
to make meaningful changes for all of our citizens. And that brings us 
to the subject before us today, abuses by the IRS as they relate to the 
American Legion, and other non-profit organizations.
    Early in the 1930's the Congress of the United States passed a law 
that required those individuals in our society who sought to enrich 
themselves through illegal gambling activities to register with the IRS 
as a professional gambler and to pay one-quarter of one percent (\1/4\ 
of 1 percent) of their gross ``wagers.'' Those professional gamblers 
were also required to pay an ``occupational tax'' of $50.00. The law 
was designed to provide a method of prosecuting those ``gangsters'' of 
the time who were preying on society since prosecutions and convictions 
of other types of crimes were hard to come by at that time. The 
American Legion does not believe the intent of Congress back then was 
to penalize non-profit organizations for conducting legal charitable 
gaming activities in their communities. The American Legion does not 
believe that subsequent changes in the law by Congress and regulations 
and revenue rulings issued by the IRS apply to our charitable bingo and 
pull tab operations.
    I would like to quote the government's position taken from a recent 
audit of an American Legion post. Quote, ``The fact that an 
organization is exempt from Federal income tax under section 501 (a) of 
the Code does not determine whether the taxes imposed by sections 4401 
and 4411 are applicable. No provision in the Code exempts a nonprofit 
organization, as such, from the wagering tax.'' We would submit to you 
that no exemption is present in the code because, again, the intent of 
Congress was to ``catch'' illegal gambling activities. If, in fact, 
non-profit organizations are engaging in illegal activities where 
individuals in the organizations are preying on society then apply the 
law to those individuals and prosecute them, not the organization.
    The IRS has launched a selective attack on American Legion Posts in 
Colorado. We currently have 88 American Legion Posts and Auxiliary 
Units conducting legal charitable gambling activities under the state 
bingo and raffles law. The IRS agents have initiated audits of 13 of 
those American Legion Post and/or units. The selection of the posts 
that they are auditing apparently was random and they are apparently 
using these posts as their ``test bed.'' It appears that the audits are 
selective enforcement of the law and they are not conducting their 
audits consistently across this state. The agents know they are dealing 
with volunteers and that intimidation is easy. Several of our American 
Legion Posts have paid the occupational tax and are paying the gross 
wager fee on a monthly basis. They did so because it was easier to pay 
than to question whether the law applied to them.
    Of the 13 posts currently under audit the finding of tax liability 
for those 13 amounts to under $40,000. The American Legion intends to 
challenge the IRS's determination of liability through the internal IRS 
appeal process and to tax court, if that becomes necessary. It is our 
understanding that for the IRS to litigate a case before tax court it 
will cost the government about $50,000 per individual case. For the 13 
cases pending that would amount to $650,000 to collect just under 
$40,000. How ridiculous. In addition to the cost to the government it 
will cost the American Legion in legal fees, money better spent in the 
community.
    The IRS believes we are liable for the tax because sometimes 
proceeds from our charitable gaming activities are used to pay 
operational expenses for our post homes. Their rational is that this is 
illegal because the payment of those expenses constitutes ``inurement 
to the benefit of private shareholders and individuals.'' Again, how 
ridiculous. We require our members to pay dues to give them the 
opportunity to volunteer their time and support the organization with 
their additional donations. Our post homes are community centers and 
they do require upkeep and maintenance. Our post homes are used for 
many activities that benefit the community, including boys and girls 
scouts, community blood drives, and meeting places for other community 
based organizations that don't have their own meeting place. For the 
IRS to say that we can't use those legal gaming proceeds to pay 
operational expenses is really stretching the law.
    The other issue that indicates to us that The American Legion is 
being singled out for these audits is that they have determined that 
501c(4) social welfare organizations are not liable for the tax. The 
American Legion is a 501c(19) organization; a classification designed 
for veterans organizations. We meet all the requirements as set forth 
in the c(4) status, and in fact we were originally a c(4) organization. 
The difference is that Congress granted The American Legion the c(19) 
status for two reasons. First to permit us to sell life insurance 
products to our membership and, second to permit us to spend money in 
pursuit of issues before Congress affecting veterans and their 
families, or lobbying if you will. In every other aspect we are a c(4) 
organization. So the question arises why are we being treated 
differently, just because we are permitted to lobby Congress? At what 
point does the liberal interpretation of the law in this case by the 
IRS cease to be enforcement and become harassment?
    So what is the solution? In our view we are not liable for the tax 
and we will not be intimidated any further by the IRS. We believe they 
are wrong and we will exercise our rights that we fought for as 
veterans. Unfortunately that will cost everyone, both money and time. 
We would ask this committee to ask the IRS Commissioner to look at this 
situation with The American Legion here in Colorado and to rule on the 
arbitrary and selective enforcement of the law. We would ask that this 
committee consider writing into the law a specific exemption for non-
profit organizations that will settle the issue and again express the 
intent of Congress as it existed when the original law was passed. 
Let's punish the crooks, not the care-giving members of the American 
Legion and their Auxiliary. Thank you for your time.