Mr. Chairman and members of the Subcommittee, thank you for the invitation to testify on the Taxpayers' Bill of Rights and whether additional follow-up legislation is necessary. I represent the 200,000 members of the National Taxpayers Union who strongly support providing taxpayers with additional rights and protections during the audit and collection process.

Senator Pryor, you and the members of the Finance Committee who backed the Taxpayers' Bill of Rights legislation should be proud of your legislative accomplishment. It's the first time Congress has ever provided a substantial expansion of rights for taxpayers. It was long overdue and much needed.

While many provisions in the bill did not go into effect until last July, I've noticed a slight reduction in complaints. Production pressure seems to have gone down while quality seems to be going up.

The House Ways & Means Committee put the IRS Commissioner on the hot seat in February about the alleged $87 billion of uncollected taxes on the books. The IRS Collection Division has historically tended to overreact in the face of congressional criticism, and this situation is not likely to be any different, particularly because of the large budget deficit.

AS marching orders filter through the bureaucracy, each management layer tends to rewrite the orders stronger, to ensure that the field troops fully understand the new mission. The result may well be that IRS employees could take a much tougher stand with taxpayers, causing more violations of the Taxpayers' Bill of Rights.

Unless the IRS continues to reinforce the importance of following the Taxpayers' Bill of Rights, it might well become ignored on the front line of taxpayer contacts. Apparently IRS has only provided one day of training on the Taxpayers' Bill of Rights, and we have received reports that many Revenue officers still do not have Internal Revenue Manuals.

Taxpayers' Bill of Rights May Not Have Prevented Council Family Tragedy

Although the Taxpayers' Bill of Rights offers important new protections for taxpayers, the job of protecting innocent taxpayers from ruin is far from completion. I have serious doubts that it would have prevented the Council family tragedy.

As Kay Council's case showed, you can suffer enormous financial damages even when you win. Kay was fortunate to receive an award of attorneys' fees for her case. But the fee award didn't come close to paying her total costs. She still owes tens of thousands of dollars.

While her attorneys billed her at $135 per hour or $90 per hour, depending on the seniority of the attorney, the judge reimbursed at a rate of $75 per hour and $49 per hour, leaving Kay to pay the difference.

The judge said "Congress did not intend for the statute to reimburse fully the prevailing party but only to provide some reimbursement." In other words, Congress has said to future Kay Councils -- you'll have to pay through the nose to fight an incompetent or abusive IRS.

Even though her attorneys billed at $135 an hour, they knew about the $75 per hour cap. They felt the most they could ask the court for was $100 per hour by trying to qualify for the special factor standard.

Her attorneys appealed to the Court that several special factors did exist. Most prominent was the fact that the case closely resembled a contingent case. In their brief to the Court, the lawyers said that if they had "been unsuccessful in voiding the deficiency notice, plaintiffs, counsel had no hope of being paid for their services because of the size of the alleged deficiency and the poor financial condition of the plaintiffs due to the tax lien imposed by defendants. Additionally, the only hope of ever being fully compensated for their efforts is this court's award of attorney's fees due to the devastating effect the tax lien has had on plaintiffs, ability to earn a livelihood and Alex M. Council's untimely demise."

But the court found no factors "justifying an award in excess of the statutory rate." The court reduced the hourly reimbursement rate for the senior attorneys from $100 to $75, a 25 percent reduction. The court also reduced the fee for the fourth-year associate by 25 percent, even though the fee presented to the court for his work was only $65!

The fact is that the courts are extraordinarily reluctant to award attorneys' fees in excess of $75 per hour. Proving special factors is almost impossible.

To protect taxpayers from enormous financial losses incurred while fighting the IRS, we strongly urge that the $75 per hour cap be raised substantially or eliminated. The court would still be limited to awarding only "reasonable fees," preventing abusive awards.

Could Kay Council Have Sued the IRS for Damages?

Unfortunately, had the Taxpayers' Bill of Rights been in effect, it appears to me that Kay would have had a very small chance of successfully suing the IRS for damages. Senator Pryor, your original Taxpayers' Bill of Rights would have allowed taxpayers to sue for damages if "any office or employee of the Internal Revenue Service carelessly, recklessly or intentionally disregards any provision" of the tax laws. As the bill progressed through the Congress, the word "carelessly" was dropped.

Was the IRS treatment of the Council family careless and negligent? Absolutely. Was it reckless or intentional? It might have been, but that is a very difficult standard to prove.

In the 1986 Tax Reform Act, Congress substantially liberalized the definition of negligence for individual taxpayers. During the 1980s, tax preparers have also been subject to increasing penalties for not exercising due diligence. Yet incredibly, Congress refuses to require the IRS to exercise reasonable caution in using its incredible array of enforcement powers.

Taxpayers who have been financially harmed or devastated by IRS carelessness should also have the right to sue and recover damages. We suggest language for Section 7431 that would allow taxpayers to sue for damages when "any officer or employee of the Internal Revenue Service fails to make a reasonable attempt, carelessly, recklessly or intentionally disregards any provision" of the tax laws or regulations. (Section 7433)

If a U.S. corporation makes a product that injures a consumer, consumers don't have to prove the corporation recklessly or intentionally harmed the consumer in order for the consumer to win an award. Neither should a taxpayer who falls victim to the incompetence, carelessness or negligence of the all-powerful Internal Revenue Service.

While Section 7432 of the tax law appears to allow a lawsuit for damages for failure to release a lien, it only applies for a failure to release a lien under Section 6325, not the imposition of the lien under Section 6321 in the first place. So, I doubt Kay could have successfully sued under Section 7432.

We also strongly recommend that the cap for damages be raised from the current $100,000 to at least $250,000.

The Berlin Wall of Taxpayers' Rights

When the IRS goes out of control, federal law largely prevents the courts from allowing taxpayers to enforce their rights. The Federal Tort Claims Act allows the government to be sued in certain instances but specifically excludes "any claim arising in respect of the assessment or collection of any tax or custom duty." Of course, the new Taxpayers' Bill of Rights granted two limited exceptions to that rule.

Another unnecessarily restrictive law is the Anti-Injunction Act, the law that we call the Berlin Wall that prevents taxpayers' rights.

Under Section 7421 of the Internal Revenue Code, no lawsuit can be brought by any person in any court for the purpose of restraining the assessment or collection of any tax, except in limited circumstances. If you can call Kay Council lucky at all, this was the one area where she had any luck. You are allowed to sue under Section 6212(a) and (c) and 6213(a), relating to the 90-day letter (notice of deficiency). That's how she was able to eventually get the court to remove the lien and the threat of other collection actions.

There are only a few other areas where taxpayers can sue to enforce their rights - Sections 6672(b), relating to suits for determining liability of the 100% penalty; 6694(c), relating to liability per penalties; 7426(a), relating to wrongful levies; 7426(b)(1), relating to irreparable injuries to superior rights of the U.S.; and 7429(b), relating to appeal of jeopardy assessment procedures.

The case law around the Anti-Injunction Act indicates many problems in obtaining injunctions to restrain the collection of the tax. It is clear that injunctions will be granted where the failure to grant relief would result in irreparable damage to the taxpayer. But an injunction will only be allowed where it is clear that under no circumstances would the government prevail. Otherwise only two remedies are available to the taxpayer: 1) pay the tax, file a claim for refund, and sue for recovery if the claim is rejected; 2) file a petition in Tax Court before assessment and within the short period of time allowed for filing such a petition.

We think that the Anti-Injunction Act should be amended to give taxpayers the ability to enforce their rights if necessary. Taxpayers should be allowed to file suit in a federal district court to enjoin the IRS from enforcement action because: the deficiency assessment was made without knowledge of the taxpayer and without benefit of the appeal procedures provided by law; there has been an improper or illegal assessment; there has been an action in violation of the tax laws or regulations providing for procedural safeguards for taxpayers; the IRS has made an unlawful determination that collection of the tax was in jeopardy; the value of seized property is out of proportion to the amount of the liability if other collection remedies are available; or the IRS will not release the seized property upon an offer of payment of the U.S. interest in the property.

Then, there's also the Declaratory Relief Act. This law says that citizens can file suit to get a court to declare their rights "except with respect to federal taxes."

In author David Burnham's excellent new book, A Law Unto Itself, he quotes California tax attorney Montie Day and his views on these laws that prevent taxpayers from enforcing their rights. He says that allowing such limited lawsuits would make "the IRS more accountable... and make the agency more likely to operate in a lawful fashion."

To illustrate this point, he said "assume you are under audit and somehow you learn that the revenue agent has decided the best way to investigate you is to break a window of your office, climb through it and examine your correspondence.

"You come into my office for advice, wanting the court to rule that the IRS agent can't conduct his audit in this way. We consider filing a suit for declaratory relief, but then we remember that the court does not have the authority to issue such a declaration of rights in tax matters because of that exception in the declaratory relief act.

"Then we think about requesting a court order to enjoin the agent from conducting his tax investigation by breaking into your office. This approach, of course, cannot be followed because the court is forbidden to even consider such requests under the anti-injunction act.

"In my hypothetical, after the agent has smashed the window and climbed into the office to examine your records, the IRS decides that the evidence it obtains shows there is no tax case and it sends out what is called a 'no change letter.' You would now like to sue the agency in an effort to require it to pay for the damage of the broken window in your office. I sue for damages. Assuming the agent only examined your return after breaking into your office, the government would argue and the judge would be compelled to agree that under the doctrine of sovereign immunity the suit must be dismissed for lack of jurisdiction."

AS long as taxpayers are banned from suing to enforce their rights, taxpayers will continue at risk of financial ruin and emotional devastation from the IRS. It is completely unfair for the IRS to have all the rights and for taxpayers to have few rights that are only enforced with the greatest of legal obstacles to overcome. We must ensure fair treatment of innocent taxpayers to continue respect for our Constitutional system of government.

Congress Should Require Equitable Use of the Levy Power

Burnham's book presents an impressive array of statistics that the levy power is not applied equally across the United States. Burnham reports that in 1988 "for every 1,000 tax delinquent accounts, 892 levies (occurred] in the Western Region; 860 in the Mid-Atlantic; 735 in the Southwest; 714 in the North Atlantic and the Central; 708 in the Mid-West; and 532 for the Southeast.

There's even more variation in the seizure rate. Burnham reports that in 1988 "the seizure rates in the most active districts were 30 to 40 times higher than the rates in the districts with the least. The IRS has no explanation for the variations."

This is nothing new. As far back as 1976, the Administrative Conference of the United States issued a report titled "Collection of Delinquent Taxes" that said the IRS had no clear guidelines specifying when levy action was to be taken. The report said "lacking guidance, revenue officers vary in their criteria for seizure of assets of individual taxpayers... So long as the Internal Revenue Service fails to delineate clear purposes for the use of summary powers, we believe that these divergent criteria will continue to exist. The variations in practice may lead to the appearance of arbitrariness and caprice in some actions, thus undermining the taxpaying public's confidence in (and compliance with) the taxing system."

These random variations have continued for year after year. The guidelines that exist only in Internal Revenue manuals are not enforceable. Therefore, Congress should require that the IRS issue regulations specifying the circumstances, conditions and situations under which a levy will be made.

Safeguard the Right to be Self-Supporting

The Taxpayers' Bill of Rights made the very necessary improvement of exempting a larger amount of a taxpayer's weekly salary from levy. But it made little change in the amount of property exempt from seizure.

The law lifted the amounts from a paltry $1,500 for personal property to $1,650 and from $1,000 for equipment and property for a trade, business or profession to $1,100. That's hardly any change, and it is far from sufficient to allow a taxpayer to be self-supporting.

What self-employed plumber could maintain his self-employment with just $1,100 in tools, equipment and a truck? What computer programmer or author could do so? Very few, if any.

Who can provide the basic essentials of clothing and furnishings for a family with only a $1,600 exemption?

The original version of Senator Pryor's bill would have raised each exemption to $10,000. We would like to see the exemption amounts lifted to at least $5,000. The current levels are ridiculous.

Employees Who Abuse the Law Usually Go Unpunished

Mr. Chairman, there are many fine employees in the IRS who care about helping taxpayers comply with the law and who care about respecting taxpayers' rights. But given the sheer number of employees and the billions of tax returns and documents that are received by the IRS each year, it is inevitable that mistakes will be made and that some employees will act out of line.

The IRS has issued rules requiring tax preparers to exercise "due diligence" in the preparation of tax returns. In certain situations, preparers must cite "substantial authority" for the positions they take on tax returns. Failure to do so may result in monetary fines, disbarment from practicing before the IRS, and a full scale audit of all the preparers' clients.

Yet, IRS employees are often allowed to violate IRS rules, regulations, policies, procedures, and guidelines at will and without fear of recourse. The law is so overwhelming and sweeping in its power conferred upon the tax collecting authority that there are almost no checks and balances on the exercise of that authority.

Taxpayers need more protections from the arbitrary and capricious abuses of the IRS and IRS employees should be held accountable for their violations.

One theme that comes across again and again in Burnham's book is that the IRS almost always will not punish employees who make big mistakes in handling taxpayers.

It is clear that the IRS is more interested in controlling, regulating, and punishing taxpayers and practitioners for their violations than they are in controlling, regulating, and punishing their own employees for comparable infractions. If this double standard continues to exist, the compliance system as we now know it could be in serious trouble.

Burnham reports "a disturbing footnote" about the occasions "when the IRS has crossed the line in its zealous enforcement of the tax laws: Agency officials involved in questionable activities are seldom punished. He also notes that many lawyers are worried "that the zealous, anything-to-win tactics are more and more becoming the accepted practice of the government." One of the fundamental principles of the U.S. Constitution is that people's rights shall be respected, even if it means that some people will escape being penalized for laws they break.

Five years ago, Congressman Andy Jacobs introduced an amendment to a tax bill that would have permitted federal judges to make IRS employees personally liable for attorneys' fees paid by taxpayers who proved IRS agents acted arbitrarily and capriciously in pursuing the taxpayers. While this proposal may have gone too far and could have affected the ability of the IRS to recruit employees, the concept is a good one -- it would serve notice to IRS employees that they should be careful to protect taxpayers' rights.

We expect that tax return preparers will be careful in preparing tax returns. Is it too much to ask that IRS employees be subject to some limited financial sanctions if they act to intentionally harm the taxpayer? We think not.

Installment Agreements

An early version of Senator Pryor's Taxpayers' Bill of Rights contained an important provision for individual taxpayers - the right to an installment agreement if the taxpayer had not been delinquent in the previous three years and the liability was under $20,000. The provision was dropped because of concern about the $20,000 liability.

We think the concept was a good one, especially if it is limited to individual Form 1040 taxes. A liability cap of a smaller amount, say $2,500, might make the concept more agreeable. Of course, any interest in penalties that would normally be owed would still continue to accrue.

Taxpayer Assistance orders and the Problem Resolution Program

While the Problem Resolution Program has undoubtedly achieved a great deal of success in helping taxpayers, we think there is still room for substantial improvement. Recently, reports have surfaced about problem resolution officers (PROs) who have not been helping taxpayers even though the circumstances appear to warrant intervention. In one instance, a PRO told a taxpayer he would not intervene because the taxpayer owed money to the IRS. In another recent report, an attorney from California was told by an IRS branch chief that she was going to disregard his request for intervention and proceed with enforced collection in violation of established IRS policies. After pleading for help from the district chain of command and the PRO, the attorney was granted none. Surprisingly, the attorney contacted the office of Inspector General in Washington and got results.

I have also heard reports that Problem Resolution Officers simply pass the request from the taxpayer or the taxpayer's representative to the person who is causing the problem in the first place. Bob Kamman, an attorney in Phoenix, recently wrote in the Wall Street Journal that after a form 911 is filed with a PRO, "that person refers it to the branch of the agency where the difficulty originated. The response quite often is made by the person who caused the problem in the first place. It's not easy to tell co-workers down the hall, who may eat at the same cafeteria table, ride in the same carpool and bowl in the same league, that they screwed up. Sometimes the PRO does it, but often he won't. That's what happened to my client..."

I have also heard complaints that PROs often feel that they are not technically qualified to pass judgment on a particular taxpayer's complaint and temporarily overrule the IRS action. If this is indeed a problem, it would account for the dearth of Taxpayer Assistance orders (TAO) that are granted.

The IRS will undoubtedly say that the reason for the dearth of TAOs is that the mere threat of a TAO often will accomplish the task. Mr. Kamman makes the excellent point that "we don't evaluate the effectiveness of police carrying guns, by the number of times they shoot them." But the TAO is hardly the equivalent of a bullet, and I'm concerned about why so few have been issued.

One other potential explanation is that the IRS is using a standard of hardship that is too high.

Serious consideration should be given to better defining what a hardship is, and providing the ombudsman more flexibility to issue a TAO if the taxpayer is incurring expenses in attempting to resolve a problem; ___________________________ before pursuing administrative remedies; or facing an unreasonable delay in IRS action to resolve the case.

One enrolled agent reported to me that he still finds that the Collections Division often ignores the power of attorney a taxpayer has given to him. He also reports that in many districts, the revenue officers still do not have an Internal Revenue Manual.

How can we expect revenue officers to follow IRS policies if the agency won't even issue them a manual?

We also believe that more can and should be done to advertise the availability of the Problem Resolution office. Many taxpayers are still completely unaware that the program even exists. I hope the next tax form cover letter from the Commissioner will draw attention to the Problem Resolution Office in a more prominent fashion.

Tax Complexity Invites Abuse

A few years ago, an IRS instructor claimed that he could find mistakes in 99.9 percent of tax returns. While he may have been exaggerating, he made a valid point.

The tax laws are so incredibly complicated that many taxpayers can't say with absolute confidence that they know the law or have filed their tax returns with 100 percent accuracy. Indeed, the March issue of Money magazine reported that 48 out of 50 tax professionals who took its annual test for professional tax preparers made at least one mistake [an error rate of 96 percent]. Money reported that "for the third year in a row, no two preparers came up with the same tax due for our hypothetical family of four ... Answers ranged from $9,806 to $21,216; the average was $13,915." Money said the correct tax was $12,038.

This incredible complexity opens up the potential for abuse. Vague laws allow enforcement abuses. If the IRS wants to "get" you, the complex laws allow the agency to make a plausible cause against virtually anyone.

IRS Errors

The April issue of Money magazine reports that "a telephone poll of 300 Money subscribers by the Gallup Organization in late February revealed that half of that generally higher income group received such notices -- one in four in the past two years (the poll's margin of error is plus or minus six percentage points). A stunning 45% of those who contested their notices report that the IRS claims were totally incorrect, and an additional 24% said they were at least partially wrong. What's more, of those who challenged the IRS on their own, 53% wound up paying nothing and another 17% succeeded in getting the bill reduced." Incredibly, Money says that "a convincing case can be made that at least $7 billion [per year] should never have been collected at all because around half of those imposing official notices were inaccurate."

Everyone can certainly understand that Congress wants to collect every dime owed by taxpayers. But it's simply not right that the IRS collects billions of dollars in taxes that are not owed.

Another program that is generating billions of dollars in assessments that are incorrect is the "substitute for returns" program. This program is used if a taxpayer hasn't filed a tax return, but the IRS computer has a record of income earned through W-2's and 1099's. Under the program, the IRS will send the taxpayer a bill for tax owed, whether or not the information documents are correct, and whether or not the taxpayer knows of this action.

This program needs additional flexibility. Obviously, the IRS is completely following the law in attempting to ensure that people who should file tax returns do file tax returns. Under this program, the IRS is typically assuming that the taxpayer is single and has absolutely no deductions, and there are indications that those notices may be going out without giving taxpayers credit for their withholdings.

Of course, the proposed assessments go to the taxpayer's last known address, and often these addresses are incorrect. Not surprisingly though, once the assessment becomes final, because the taxpayer has not responded to the notice of deficiency, the IRS is able to track the taxpayer down. At that point, of course the agency attitude is pay the tax and file a claim for a refund.

If the tax bill was calculated in such an exaggerated fashion, it may well be impossible for the taxpayer to afford to pay the tax that is claimed in order to file for the refund. While the program has the potential to be effective in collecting taxes, it is important that it be administered fairly.

It's also doubtful that the IRS has sent out any refund checks under this program, although it is technically feasible to do so.

Conclusion

Mr. Chairman, the job of protecting taxpayer rights will never end. Much progress has been made, but more legal protections are necessary. Equally important, continuing aggressive oversight by this Subcommittee and other committees of Congress is absolutely essential to ensure that IRS properly implements the Taxpayers' Bill of Rights. The Finance Committee has made a great start in this important area of tax fairness and we urge you to continue this important work.