Outline

1. Congress shouldn't micromanage the IRS in the statute; instead it should use oversight hearings.

2. Enactment of H.R. 390 would seriously damage the tax system and would increase the deficit.

3. As to Taxpayer Bill of Rights 2, I think some proposals are sound, some are not, and some are unnecessary.

Introduction

Our system of income and employment taxes imposed on a very wide base of individuals and corporations depends not only upon withholding, information reporting and reasonable but effective enforcement by the Internal Revenue Service but also upon the public's willingness to comply. The last factor does not lend itself readily to analysis, but I think that significant to the public's willingness to comply is a basic belief that the tax system is reasonably fair and is soundly administered. Unfortunately, the mind-boggling complexity of current law, much enacted largely in an effort to seek exact statutory fairness, threatens acceptance of the system and, therefore, compliance with it.

Another important element, as I see it, is how the public views tax administration. Now, no one likes to pay taxes, and no tax collector is likely to win a popularity contest. (I am continually surprised about how two former tax collectors in North Dakota were elected to the Senate.) But the job of the Internal Revenue Service is to try to make sure that all taxpayers pay the taxes due from them. This means filing all required returns, accurately reporting income and determining tax, and paying the tax due. Now there is bound to be some slippage in a system like ours, and there certainly is. If IRS' estimates of the tax gap (roughly the excess of what is actually due from legal-sector taxpayers over what is paid) are reasonably accurate, and I think they are probably low, then our budget would be almost in balance if we could close the tax gap completely and collect a reasonable part of what the illegal sector owes. Of course, this won't happen. But we need to narrow the tax gap if we can, and surely we shouldn't permit it to widen. Not only would widening the gap increase the deficit but it would also send the wrong signal to our many compliant taxpayers: Why should they pay if their neighbors don't?

The IRS is a large organization, as it must be. It should be larger. It badly needs a new computer system but in the meantime it does the best it can with the aging, inadequate system that it has. It has the vast responsibility of trying to make the system work and, like other human organizations, it is not perfect. Some of its many people at times come on too strong with taxpayers, at times are arbitrary, at times are forgetful, and at times are too lenient. I have great respect for the present Commissioner and she is doing an excellent job in trying to reconcile IRS' duty to assist taxpayers and be reasonable toward them and IRS' duty to cope with tax avoidance and evasion and collect overdue and unpaid taxes. By the way, I think it ironic that while IRS is being beat around the head and shoulders (not without some reason) for being overzealous in collecting revenues, the job of collecting child support payments is being pushed on the IRS. If IRS does such a bad job in collecting taxes, why give it an additional nontax task?

H.R. 390

This measure, proposed by Mr. Traficant, would place the burden of proof on the Internal Revenue Service on all issues in all tax cases. In my judgment, this is unwarranted and ill advised. Within a short time it would do great damage to our broad-based income tax system. Without large increases in staffing--which I don't believe will occur--the Internal Revenue Service would be overwhelmed in its efforts to require compliance with the tax laws. Taxpayers (and there are some) who don't want to meet their obligations to their country and to their fellow citizens would soon overlook income and make exaggerated claims to deductions and credits on their returns. The Internal Revenue Service, called on to prove in all matters and all cases that the taxpayer's reporting was wrong, would simply be unable to satisfy this burden. How can the IRS prove a negative without demanding and reviewing all records relating to a taxpayer? It would be unrealistic to believe that the many honest taxpayers who attempt to meet their tax burdens in full would not soon realize that others were beating the system and getting away with it. The tax gap would increase substantially, and compliance with the system would have a commensurate decrease. The deficit would correspondingly increase.

If Congress perceives that current law is not sufficient to rein in overzealous IRS agents, the way to meet the problem is to review and strengthen section 7430 of the Code, which calls for the United States to pay taxpayer's costs in defending against IRS actions which were not substantially justified. One must remember that IRS agents are "real people" too; they don't leave the human race when they sign on with IRS.

Taxpayer Bill of Rights

The following represents my preliminary comments on Taxpayer Bill of Rights 2 (T2) as contained in H.R. 661 and S. 258.

My general comment about T2 is that, as a general rule, it is inadvisable to try to micromanage the Internal Revenue Service through legislation. Although the exercise of oversight responsibilities does consume valuable Congressional time, and I realize how little time Members actually have, I recommend that there be more oversight on how the Internal Revenue Service fulfills its vast responsibilities and less direction in the statute on exactly what the Internal Revenue Service must do and must not do.

1. Taxpayer Advocate.

Let's give the current Ombudsman provision a chance to work. I think it is working reasonably well, but this can be tested, and should be tested, at Oversight hearings. A statutory taxpayer advocate of the kind envisioned would, I think, create as many problems as it would solve. In trying to balance rights of taxpayers against effective and economical administration of the tax laws, I think this drastic step is not needed at this time.

2. Installment Agreements.

A. Installment agreements should be fostered, not discouraged, and I believe the recent step in imposing a $43 charge for installment agreements was ill-advised and should be rescinded. If for some reason any charge of this kind must be made, it should be limited to amounts of unpaid taxes exceeding, at least, $50,000. I do not think that the authority to issue taxpayer assistance orders under IRC § 7811 should be extended to eliminate the current limitation to a "significant" hardship. In a broad sense, all Internal Revenue actions which seek to separate a taxpayer from money create "hardships", for all of us are better off with our money than without it. Surely this should not be the sole test.

B. T2 would provide an automatic right on the part of an individual taxpayer to cause the Service to enter into an installment agreement if the unpaid tax in questions is less than $10,000 and if the taxpayer "has paid any tax liability for the three preceding taxable years". If I understand this provision, I think it goes much too far. However, T2 is correct in suspending the failure to pay penalty while an installment agreement is pending, and I do not take exception to its proposal for 30-days notice by IRS if an agreement is denied or terminated. The exception for cases in which collection of tax is in jeopardy should meet IRS' administrative needs. In my judgment, any gain by providing an administrative appeals structure is outweighed by additional costs.

3. Interest.

T2 would extend the provisions permitting abatement of interest, and would extend the interest-free period for payment of tax after notice of demand from 10 days to 21 days. I am concerned about these provisions, particularly that calling for mandatory abatement for small taxpayers. Small taxpayers deserve to be treated exceptionally reasonably and fairly, but I don't think this should extend to interest-free loans from the Federal government to those who haven't paid their taxes. While some of the changes seem worthy, I suggest you move cautiously here to preserve equity while forestalling another rash of lawsuits.

4. Joint Returns.

These provisions are all right with me in principle. As to technical issues, I believe that the American Bar Association will comment.

5 . Collection Activities.

This is the most sensitive area, as I see it. The Internal Revenue Service has been heavily criticized for not being an efficient bill collector, and recently some have wanted to privatize collection of taxes. Perhaps on the basis of obsolete information about how private bill collectors go about their jobs when they are paid a percentage of the amount collected, I think that if collection of taxes were privatized, within a very few years taxpayers would be beseeching Congress to give the job back to the IRS. In the past the IRS has not been fully consistent in its collection stance either from time to time or from one locality to another. Some districts have been hardline and some have taken a much softer approach. Surely the IRS should strive to prescribe uniform and reasonable rules and apply such rules uniformly throughout the country. But curtailing IRS powers to collect taxes means, to me at least, that less taxes will be collected and more will be written off. Again, we have a balancing problem.

My specific comments are as follows:

(a) Withdrawal of Lien Notices; Why not? (But we need administrable standards.)

(b) Return of Levied Property; Why not?

(c) Increasing Exemption Levels; Why not?

(d) Expanding Authority to Accept Offers in Compromise; Clearly $500 is too low, but $50,000 may be high. Given possible integrity and other problems, I would settle for $30,000. We can always increase the ceiling further if needed.

(e) Notice Before Examination; Is this really needed? What happens if the notice is defective?

(f) Limits on Recovery of Civil Damages; $200,000 would be plenty. Raising the level to $1 million would encourage bounty-hunting by contingent-fee lawyers whose practice will soon be diminished, I hope, by the enactment of long-needed legal reform.

(g) Review of Designated Summons; I think this should be left to the IRS; is this legislation really needed?

6. Information Returns.

While I think that taxpayers receiving information returns should be provided with access to those issuing returns in order to clear up questions, this proposal raises questions which, at this very preliminary stage, I am unable to evaluate. What effect would an incorrect telephone number have on the information return? On balance, I would strongly encourage the IRS to seek to provide taxpayers with what they need, but I would hesitate to put it in the law until further consideration. Moreover, I would extend the effective date until 1996.

7. Civil Damages for Fraudulent Information Returns;

Why not?

8. Requiring IRS to Make "Reasonable Examination" of Information Returns;

Given the enormous volume of information returns, I think this goes too far.

9. Section 6672 Penalty.

The exception for jeopardy situations makes the proposed requirement of preliminary notice rules of somewhat less concern, but on balance, I question whether it is needed.

10. Warnings and Notification Requirements.

If my understanding is correct that taxpayers may not use the lack of warnings to escape the 6672 penalty otherwise due from them, then I don't object to the warning provisions. However, I have substantial doubt about whether the notification requirements are administrable, and I recommend they be dropped. Both of these issues are better handled without legislation.

11. Litigation Costs and Fees.

I would increase the cap as recommended but omit the other changes.

12. Other Provisions.

(a) Required Content of Notices. Provided the proposed change doesn't give rise to wholesale invalidation of notices, it seems all right.

(b) Substitute Returns. Seems fine.

(c) Retroactivity of Regulations. Although I certainly don't agree with Treasury and IRS all the time about their substantive pronouncements or, in a very few cases, about their respect for the rule that sound tax administration calls for fairness and leniency in selecting the effective dates of regulations, I don't think that the proposed changes are a good idea. Let's caution the administrators to turn square corners with the public, but in this situation, as in many others, it is better to leave the law where it is. Through oversight hearings and correspondence Congress can see to it that the administrators try to do their jobs correctly. I am particularly concerned about the proposed effective date of this provision: Eliminating retroactivity of regulations would be implemented retroactively.

(d) Required Notice of Payments. How about 90 days?

(e) Unauthorized Enticement of Information. Unless I am missing something, this seems all right.

13. Form Modifications.

Let's leave this to the administrators and ask them at oversight hearings and otherwise what they are doing to make sure that taxpayers are fully informed.

14. Studies and Reports.

Same comments as above. Besides, I don't think a law is needed for Congress to communicate with the General Accounting Office about Congressional needs and priorities.

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