I am Jule R. Herbert Jr., President of the National Taxpayers Legal Fund, a non-profit, tax-exempt charitable foundation with headquarters in Washington, D.C. NTLF engages both in public interest legal work and public policy research designed to reduce the burdens of government and expand the civil and economic rights of all citizens, including the right to own and control private property secure from excessive or arbitrary seizure or taxation.

I commend this Subcommittee for undertaking these timely hearings on S. 2400. Representatives from the National Taxpayers Legal Fund have had the opportunity to testify on previous occasions on the abusive collection practices of the IRS.

I especially call this subcommittee's attention to testimony given on May 20, 1980, before the Subcommittee on Oversight of the Ways and Means Committee of the House. Former Senator Eugene J. McCarthy, who is chairman of this organization, introduced copies of letters from IRS agents complaining about the pressure they were being out under to use property seizures as a "first resort" practice and otherwise to treat delinquent taxpayers in a way contrary to the rules and public pronouncements of the IRS. Senator McCarthy further outlined a variety of case studies undertaken by NTLF as anecdotal evidence of the widespread nature of the problem as it then existed and, in fact, continues to exist, at least as perceived by the American public.

Incidentally, a clear distinction should be made at the outset between the collection practices of the IRS and the growing incidence of either outright "tax resistance" or widespread under-reporting of income. If these phenomena are related in any way at all to the perceived abusive collection practices of the IRS, it is likely that it is in an inverse and not a direct way. This is to say that the perception of IRS abuse in collection areas simply adds to the overall feeling that the entire tax system is outrageously unjust and deserves no respect. If this is true, then typical IRS intransigence over legislative reform in this area is likely to be perversely counterproductive to its stated mission of enforcing the tax statutes efficiently and fairly.

It would be a far happier occasion if the provisions of this bill were being discussed as part of and in the context of a long-delayed and long-overdue debate over fundamental reform of the federal taxing system -- a reform aimed at simplification, equity, and less than confiscatory marginal rates. Instead the debate over taxes this year has apparently been narrowed to the question of how fast federal revenues can be raised without giving another knock-out punch to the private sector.

However that may be, the rationale for S. 2400 is really independent from revenue considerations and from the question of how to redesign a tax system which would have less bad merits stand on their own.

From my own discussions with literally hundreds of troubled and pressured taxpayers in the past five years, I have concluded that most incidents of harassment or abuse, or violations of IRS policy, occur because there is a knowledge vacuum about IRS operations. This can exist for a number of reasons, but the most plausible explanation is that the "tax industry" (the accounting and legal professions, and the business lobbies) have enough to handle just trying to keep up with changes in the tax code. Even though most delinquent taxpayers are small business owners or otherwise self-employed at least for part of their income, they are rarely the financial mainstay of tax practitioners. Most of them can barely afford to have their tax returns prepared, much less pay for active representation against the resources of the IRS.

Most violations of civil liberties or taxpayers' rights would probably not occur if the taxpayer knew as much as the IRS collection employee. It is because taxpayers do not know their rights, or what options and alternatives are available, that they are not able to identify bureaucratic excesses, violations of policy or procedure, or an infringement of their civil liberties. This public ignorance, of which most IRS employees are aware, makes it easy for overzealous tax collectors to conduct either illegal or improper actions, or to intimidate delinquent taxpayers through various subtle or psychological maneuvers.

A taxpayer who is being audited has little problem in obtaining representation. Perhaps as many as 50 percent of taxpayers being audited are represented by a tax practitioner, who could be either an attorney, CPA, or an enrolled agent. But revenue officers and other Collection Division employees probably see representation in less than 5 percent of their cases. Of course, an overwhelming majority of taxpayers seek legal assistance when threatened with criminal charges, but this number is very low relative to the number of taxpayers who are simply delinquent in paying what the government has demanded from them.

The result is that the delinquent taxpayer is treated as a nonentity or as not worthy of representation or protection.

This attitude may exist for several reasons:

Very few tax practitioners know anything about the Collection Division's policies or procedures, and it usually isn't worth their while to learn. The meat and potatoes of a tax practice is tax planning, tax return preparation, accounting report preparation, and audit representation.

Since tax collection law and procedure is an equally arcane specialty, very few lawyers are able to help their clients in this area because they too are ignorant of the law and procedures. Naturally the IRS has not seen fit to make it any easier in this area by making available in clear and precise fashion just what standards, rules, and procedures it follows.

Many tax practitioners have only a minimum amount of time available to assist their clients with collection related problems. They may be leery of spending hours assisting a nonpayer, with the concern that a client who cannot pay the IRS surely cannot pay them full representational fees.

The lack of legal representation for delinquent taxpayers explains why the rights of these Americans have been largely ignored. If tax practitioners aren't involved in the daily field administration of collection procedures, then they are unlikely to be aware of the abuses that occur and what remedies may be available for their clients. This inattention results in a tremendous administrative leeway for the IRS Collection Division. Except for nominal GAO efficiency reviews, the IRS operates with complete freedom to implement policies or procedures, and officials in the field are free to interpret national office policy in whatever manner, and for whatever purposes and ends they choose.

The situation begs for oversight and remedial legislation by Congress. S. 2400 goes a long way toward doing precisely that. If the members of this Congress have indeed concluded that some fraction of the projected budgetary deficits are the fault of those who pay the taxes and that taxpayers, rather than the various special interests who are the recipients of government spending, should bear the costs associated with getting the budget under control, then the protections embodied in this bill are even more important. You can be sure that any effort to squeeze an additional $48 to $200 billion in tax dollars (or, more accurately, $726 billion in additional tax revenues in the next four years over this year's level) out of the private economy is going to result in the creation of a growing group of "delinquent" taxpayers. It is only fair that the most basic procedural rights of the put-upon taxpayer should be protected, and that taxpayers be advised what, in fact, these rights are. I hope that any tax bill which emerges from the Finance Committee this year will incorporate the provisions of S. 2400.

Several important provisions of the bill deserve special comment:

1) The extension of the period of notice and demand from ten to thirty days before levying upon property.

The current 10 day notice and demand period is not reasonable for a taxpayer who needs to borrow the money or raise cash in some way. Thirty days are more reasonable. As a practical matter, because of the IRS notice process, where three or four notices are sent to taxpayers over a 12 week period, very few levies are made within 30 days of assessment. The levies that do occur within this period are usually related to unpaid employee withholding taxes, and usually where the revenue officer has obtained a voluntarily filed form 941 and has promptly assessed the tax. Revenue officers frequently threaten to seize a taxpayer's business within hours of obtaining an immediate assessment, thereby illegally invoking jeopardy authority using the fact of the delinquency itself as evidence that collection of the tax is in jeopardy. Then, in order not to break the law, the revenue officer waits 10 days and then seizes.

Once the wheels are in motion to seize, the revenue officer will not withdraw from the process for any reason other than full payment. A rapid seizure may actually jeopardize collection itself by making it more difficult for the taxpayer to borrow money to pay the tax. Private and commercial lenders are more reluctant to lend money for a business already under seizure by the IRS.

2) Expansion of the value of property exempt from levy.

Until the passage of the Tax Equity and Fiscal Responsibility Act of 1982, the exemptions of $500 for fuel, provisions, furniture and personal effects, and $250 for the books and tools of a trade, business or profession had not changed since the adoption of the 1954 code. Even though these exemptions were raised to $1500 and $1000, respectively, they still provide inadequate protection for taxpayers since they do not reflect the substantial increases in the cost of living since 1954.

The present law derives largely from an 1866 statute enacted primarily to collect excise taxes on cotton. Exemptions were allowed at $50 for fuel, $50 in provisions, and $300 in furniture, a total of $400 which today is only $1500. In 1866 the books, tools or implements of a trade or profession were exempted at $100; compare that to today's exemption of $1000.

Section 6334(a)(2) presently only applies to a head of household, meaning that such items are not exempted for single persons. In today's society, where many taxpayers are single, and where increasing focus is placed upon the discriminatory aspects of our laws, the Congress should not allow this bias to continue.

The exemption allowed in IRS 6334(a)(2) should be raised to a level that would protect the average middle class taxpayer's entire household effects. While the IRS has not made it a practice to enter into taxpayers' houses for the purpose of seizing property, the Supreme Court's "G.M. Leasing" decision may now provide an opportunity for the IRS to obtain a court-ordered Writ of Entry to do so.

If this is so, the IRS now has the power to enter a taxpayer's residence and seize everything in the household but $1500 worth of property, a paltry, insignificant sum. The IRS should not have the authority to seize and sell almost everything a taxpayer owns. The $20,000 limitation would be sufficient to protect almost every household in the country.

Section 6334 (a) (3) should be changed to encompass other items that better reflect the essentials needed for an individual to be able to support himself. The right of an individual to be self-supporting needs to be recognized in the levy and seizure provisions of the Tax Code.

3)Establishment of an office of Ombudsman.

NTLF strongly endorses the bill's provision that an Ombudsman be a political appointee, and not a career IRS employee. As a political appointee the Ombudsman would be free to be a true taxpayer advocate without worry for his career aspirations within the IRS. This would enable him to operate totally unaffected by how other IRS managers feel about his input into their areas of responsibility. Also, political appointee will come to the job totally free in his thinking and expectations, and independent of the restrictive mission-oriented mentality that besets so many career executives. Not being engraved with IRS philosophy, thinking, approaches, and methods of operation, he should be more perceptive to the needs of taxpayers and more receptive to change the old ways of doing things.

The IRS has expressed some concern about the independence of the Ombudsman being a political appointee. Commissioner Egger has testified that such independent power "would not provide a balance between protecting the government's and taxpayers' interests and would open up dangerous potential for political abuse of the tax system." These arguments do not really hold water. After all, the Commissioner is a political appointee and few have suggested that the fact opens up dangerous potential for political abuse. I'm convinced that there is room in the IRS for one more political appointee.

Commissioner Egger has also stated that the Ombudsman, "perceived as an independent authority, may be even less effective in working within the Service to resolve individual taxpayer problems and systemic problems." We do not agree with that assessment either. It is true that if the Ombudsman is a career employee, his knowledge of agency operations may expedite the flow of things. But the Problem Resolution Program has been operational for five years and has become firmly established within the IRS bureaucracy. It no longer has much value to the delinquent taxpayer.

In closing, let me again congratulate you for holding this hearing. The conduct of the American taxing system has now become a real danger to our "domestic tranquility."

Of course, changing a few procedural rules about the tax collection process is just a beginning. For example, it is no longer possible to deny that the problems of the U.S. economy over the last several decades were caused in substantial part by the tax system. The fact that this system has a pervasive institutional bias against saving, capital formation, work incentives, and relative price coordination seems to be generally recognized. Certainly the positive reforms which were passed in 1981 (especially tax rate indexing and the reduction of the marginal rates) could not have passed in the intellectual climate of just a few years earlier. That more was not done in 1981 was not because the advantages of easing the constraints imposed by the tax system on the market economy were not seen by many, but because there has been little progress in linking tax reform to necessary reforms of government spending.

I would argue that the cost of runaway government spending is much greater than the amount of resources which are thus taxed, borrowed, or taken from the American people through the insidious process of inflation. Its growing drain on the ability of government to conduct itself in a rational manner not only presents an almost insurmountable obstacle to needed tax reform, but in addition entails negative "nonfiscal" effects on the social structure, damaging thereby the market economy and, indeed, the very prospects for a stable political order.

The whole ethos which provides the justification for work, saving, voluntary exchange, and property rights is undermined as government spending expands without apparent constraint. If groups can simply "vote" themselves increasingly larger shares of the community's wealth, then the effectiveness of free-market institutions for the production of wealth becomes problematical.

I wish the members of this subcommittee the best of luck and wisdom in addressing these problems.

The National Taxpayers Legal Fund
Suite 116
201 Massachusetts Avenue, Northeast
Washington, D.C. 20002
(202) 546-5190