Hearing on Reforms to
Establish Taxpayer Safeguards

The Honorable J.J. Pickle (D., Texas)

Chairman, Subcommittee on oversight,
Committee on Ways & Means,
U.S. House of Representatives,
Announces a Hearing on Reforms to Establish
Taxpayer Safegaurds & Protect the Rights
of Taxpayer Under Taxpayers Under the Internal Revenue Code

The Honorable J.J. Pickle (D., Texas), Chairman of the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, announced today that the Subcommittee will conduct hearings to review reforms to establish taxpayer safeguards in dealing with the Internal Revenue Service (IRS) and to protect the rights of taxpayers under the Internal Revenue Code (IRC). The Subcommittee will consider administrative and legislative improvements to IRS procedures and practices. These hearings are part of the Subcommittee's ongoing oversight of IRS operations, and in furtherance of the Committee on Ways and Means major oversight initiative to review the effectiveness and efficiency of programs within the Committee's jurisdiction.

The first hearing is scheduled for Thursday, July 18, 1991, beginning at 9:30 a.m., in room B-318 Rayburn House Office Building. The Subcommittee has invited the IRS Taxpayer Ombudsman to appear at the hearing. Interested parties are requested to provide written statements for the record according to the procedures outlined below. Additional hearings will be scheduled in September to receive testimony from the IRS Commissioner and interested parties requesting to be heard.

The Subcommittee on Oversight continues to be concerned with the effect IRS administration of the tax system has on taxpayers. The Subcommittee actively monitors IRS activities and routinely receives suggestions from the public on how IRS could treat taxpayers more fairly and equitably. The Subcommittee has also reviewed suggestions from IRS employees across the country, various IRS advisory councils and task forces, private tax practitioners, business and professional associations, and others on how IRS practices and procedures could be improved.

In announcing these hearings, Chairman Pickle stated: "I am concerned, as are most Americans, with finding ways to more efficiently administer the tax system, while at the same time protecting the interests and rights of individual taxpayers. Our tax system must respect and reflect the needs of the taxpaying public, the very people it is intended to serve.

"The American people have always demonstrated a remarkable willingness to make our voluntary tax system work. They recognize the need for each and every citizen to shoulder a portion of the cost of a responsible national government. They want to do the right thing, to pay their fair share. What they resent is the feeling that they are faced by a tax system that is unfair, too complicated, and too bureaucratic.

"In recent years, the tax laws have become more complex as we have sought to close loopholes and distribute the burden of taxation more equitably. At the same time, IRS has increasingly come to rely on an antiquated computer system. Unfortunately, this means that each year thousands of well-meaning taxpayers will receive confusing form letters and vague computer-generated notices from IRS, or have difficulty contacting someone in IRS who can answer a question or correct a mistake.

"Today it is more likely than ever that a taxpayer will be contacted by the IRS and then lost in the cracks. The hundreds of taxpayer letters the Subcommittee receives each year tell how even the simplest problem can become a nightmare of crossed and lost correspondence with IRS. To make matters worse, despite recent efforts to improve taxpayer service, many IRS procedures and regulations do not protect taxpayers from these known shortcomings. From the taxpayer's perspective, this adds insult to injury. I believe IRS has a long way to go before taxpayers view it as an organization that executes a difficult task with courtesy and common sense.

"We cannot turn back the clock at IRS. Automation and computers are here to stay. But, I firmly believe we must find better ways to safeguard the legitimate interests of taxpayers. It is time for frank discussion of these problems and their solutions. I expect the Subcommittee to develop recommendations for the reform of IRS practices."

EXAMPLES OF ISSUES TO BE ADDRESSED DURING SUBCOMMITTEE HEARINGS:

A. Taxpayer Fairness

1. Independent Taxpayer Ombudsman: The Office of Taxpayer Ombudsman was created at IRS in 1979. The Taxpayer Ombudsman's duties are to serve as the primary advocate within IRS for taxpayers. As the taxpayers' advocate, the Taxpayer Ombudsman participates in an ongoing review of IRS policies and procedures to determine their impact on taxpayers; relays ideas from the public concerning tax administration; and identifies areas of tax law that confuse taxpayers or create an unfair administrative burden or inequity for taxpayers.

The reforms under consideration would: (a) statutorily establish the independent position of the Taxpayer Ombudsman; and (b) mandate that the Taxpayer Ombudsman include, in his annual report to the tax-writing committees, a description of the 10 most serious problems taxpayers face when dealing with IRS, as well as the Taxpayer Ombudsman's recommendations for administrative and legislative action needed to correct each of these problems.

2. Installment Agreements: Installment agreements are monthly payment plans that IRS grants to taxpayers who cannot otherwise pay in full the taxes they owe. While IRS is authorized by statute to enter into these agreements, their terms and conditions are established pursuant to IRS regulations. The Subcommittee is considering reforms to ensure fair treatment of taxpayers who request and obtain these agreements.

The reforms under consideration would: (a) simplify procedures for requesting installment agreements; (b) allow qualifying taxpayers to enter into installment agreements at the time they file a balance-due return, receive an IRS deficiency notice, or agree to an IRS audit finding that they owe additional tax; (c) require IRS to inform taxpayers of the specific cause for an installment agreement default, at the time IRS determines an agreement has defaulted; (d) prevent levy actions against taxpayers who have written IRS to respond to their defaulted installment agreements by requiring IRS to respond to their reinstatement requests prior to issuing a levy; and (e) prevent IRS from imposing the "failure to pay" penalty for taxpayers who promptly enter into installment agreements and meet the conditions of the agreements.

3. Marriage, Divorce, and Community Property: The Subcommittee is considering reforms to ensure that both spouses signing a joint return are treated in an equitable manner. Generally, these reforms would require that both spouses be informed of any liabilities for which they are jointly responsible, that both spouses receive clear explanations of their rights, and that both spouses be afforded an opportunity to pay or appeal an assessed liability as soon as possible, thus avoiding unnecessary interest charges. The reforms would also help ensure that both individuals are treated fairly if collection action becomes necessary.

The reforms under consideration would: (a) require that both spouses signing a joint return sign any subsequent IRS audit report, thus acknowledging their liability for additional tax; (b) ensure that taxpayers who file a joint return are both advised of any deficiency or adjustment IRS subsequently proposes involving that return; (c) ensure that taxpayers understand IRS is not required to honor divorce decrees that apportion responsibility for tax liabilities; (d) simplify criteria that taxpayers must meet to qualify for protection as an "innocent spouse"; (e) extend "injured spouse" protection to taxpayers living in community property States; (f) require that IRS seize community property only as a last resort measure when the liability was clearly created by one individual; (g) require IRS to take certain actions to identify the location of both taxpayers filing a joint return before collecting the entire amount of a joint tax liability from the spouse who is located first; and (h) clarify IRS's final notice of deficiency to better describe the taxpayers' petitioning rights and ensure that spouses who live apart both receive a notice.

4. Collection Activities: The Subcommittee is considering reforms to ensure that Federal tax liens and levies are imposed only when they are necessary to ensure collection of outstanding tax liabilities, and ensure accurate taxpayer credit records. The reforms would also assist taxpayers in settlement negotiations and other procedural activities.

The reforms under consideration would: (a) give IRS the authority to revoke Federal tax liens that are filed prematurely or on the basis of bad judgement by an IRS employee, for example, when taxpayers have made arrangements with an IRS employee to pay the liability; (b) give IRS the authority to return to taxpayers the proceeds from levies on their wages or bank accounts when keeping the proceeds would be inconsistent with IRS policies or representations IRS has made to the taxpayers that establishing installment agreements will prevent levies from being imposed; (c) ensure that taxpayers' credit records are promptly and accurately corrected after IRS release of a tax lien; (d) clarify which IRS officials are qualified to reach settlement agreements with taxpayers and the circumstances under which IRS can later rescind such agreements; (e) provide additional protections for taxpayers who extend the statute of limitations on IRS tax assessments; and (f) allow taxpayers to obtain a court-ordered injunction against IRS in certain situations.

5. Penalties and Interest: IRS currently has the authority to abate the interest on a tax liability only in very limited situations, such as when a refund has been erroneously issued or when an IRS employee fails to perform a "ministerial act" after contacting the taxpayer. The Subcommittee is considering reforms that would expand IRS authority to waive the interest charged to taxpayers and provide other penalty- and interest-related reforms.

The reforms under consideration would: (a) expand IRS authority to abate interest charged to taxpayers when IRS is responsible for unreasonable delays in processing taxpayer cases; (b) give IRS the authority to waive interest charged to taxpayers when the interest charges can clearly be shown to have resulted from incorrect advice given by an IRS employee; (c) require IRS to disclose the total dollar amount of penalties and accrued interest when discussing tax liability settlement agreements with taxpayers; (d) provide that penalty and interest not be charged for periods prior to IRS notice of examination; and (e) equalize the interest rates charged on tax deficiencies and paid on overdue tax refunds.

6. Taxpayer Procedural and Appeal Rights: Taxpayers experience difficulties in dealing with the IRS during the examination, appeals and collection processes, and in litigation. The Subcommittee is considering reforms to provide taxpayers with additional protections.

The reforms under consideration would: (a) require IRS to establish formal taxpayer appeal procedures covering the IRS collection process; (b) allow taxpayers to challenge in Tax Court assessments of additional interest that are based on IRS determinations that underpayments were tax-motivated; (c) shift the burden of proof from taxpayers to IRS in certain situations; (d) improve taxpayers' access to reimbursements for attorneys' fees; and (e) provide protections for taxpayers who make "good faith" efforts to comply with the tax laws during the period between enactment of the law and issuance of clear guidelines and final regulations.

7. Tax Refunds: The Subcommittee is considering reforms to ensure that taxpayers promptly receive refunds of their overpayments and information about any adjustments made by IRS.

The reforms under consideration would: (a) simplify IRS procedures for reissuance of a lost or stolen refund check, reducing the reissuance time from about one year to two months; (b) extend the three-year statute of limitations for claiming a tax refund; (c) require that IRS notify taxpayers who have made payments which IRS cannot associate with any outstanding tax liability, thus giving these taxpayers an opportunity to explain the payment, apply it to a future liability, or claim a refund; (d) simplify procedures for abating interest charges on erroneously issued refund checks, where the reason for the erroneous refund is apparent and responsibility for the error clearly lies with IRS; (e) ensure that notices of an IRS adjustment to taxpayer refund checks are sent in the same envelopes as the refund checks, explaining why the refund checks are more or less than expected; and (f) clarify IRS authority to apply tax refunds to tax liabilities after taxpayers have established court-approved plans to repay all creditors, including the IRS.

B. Taxpayer Assistance

1. Information and Assistance to the Public: Taxpayers commonly encounter situations where they must comply with unfamiliar areas of the tax laws. The Subcommittee is considering reforms to help taxpayers understand what IRS expects of them. These reforms involve issuing taxpayer information packets, publications, and other educational materials, and correcting procedures which cause long delays in responding to taxpayer telephone inquiries.

The reforms under consideration would require IRS to: (a) produce information packets for use by estate executors and administrators; (b) include in Publication 1, "Your Rights as a Taxpayer," information to explain taxpayers' rights to make offers-in-compromise; (c) distribute educational materials on the money laundering provisions of IRC section 6050I, outlining the special responsibilities of businesses in reporting large cash transactions; and (d) ensure that taxpayers calling an IRS toll-free telephone number receive a response to their questions within five working days, when IRS cannot answer their questions immediately.

2. Information Documents, Forms and Notices: Complying with the tax laws is unnecessarily burdensome when information documents, tax forms, and IRS notices contain confusing language or incomplete information. The Subcommittee is considering reforms to alleviate taxpayer frustration with these documents.

The reforms under consideration would: (a) require standardization of Forms W-2 and, to the extent possible, Forms 1099; (b) eliminate the requirement that taxpayers file Forms W-2 with their income tax return; (c) require that the payor's telephone number be printed on Forms 1099 and FOrms K-1 so that taxpayers or preparers can contact the payor to discuss apparent errors; (d) require IRS to address problems taxpayers encounter when false information returns are filed with IRS; (e) clarify the IRS letter notice which informs taxpayers that IRS records show they have income requiring them to file an income tax return, so that they know what type of income the IRS records show as unreported; (f) make it easier for taxpayers to request that IRS examinations of their returns be done at IRS offices nearest their homes; (g) require that IRS clarify Forms 872 so that taxpayers understand that a previously signed waiver extending the statute of limitations for assessments can be terminated at their request; (h) require county and municipal governments to provide taxpayers with tax and assessment statements that identify the various components of the total bill that are tax deductible, allowing taxpayers to claim State and local tax deductions properly on their Federal income tax returns; (i) clarify information reporting requirements as applied to Forms 1099-B; (j) simplify the procedures taxpayers must follow to notify IRS of a change of address and change of name due to marriage; and (k) provide that IRS deficiency notices must adequately describe the tax due, interest, penalties, and other charges, in order to constitute sufficient IRS notice to the taxpayer.

3. Special Services: The Subcommittee is considering reforms that would require IRS to assist the elderly, physically-impaired, foreign-language-speaking, and other taxpayers with special needs to obtain information about the tax system and what they must do to comply with the tax laws.

The reforms under consideration would: (a) require the Social Security Administration (SSA) to allow IRS tax-assistor volunteers on SSA premises so that elderly and physically-impaired taxpayers can obtain information about the taxability of their social security, disability, and other benefits without having to make separate trips to an IRS office; (b) require IRS to print certain income tax instructions and worksheets in large print for vision-impaired and elderly individuals; (c) establish a separate toll-free telephone line to provide assistance for Spanish-speaking individuals; (d) make Spanish-language Forms W-4 and certain income tax form instructions and worksheets available to taxpayers outside of Puerto Rico; and (e) give IRS the authority to uniformly address the problems that arise for taxpayers victimized by natural disaster or acts of terrorism.

C. Business Taxpayers

1. Administration of the Federal Tax Deposit System: The Federal Tax Deposit (FTD) System is used by businesses to remit withheld employee income and social security taxes, corporate income taxes, and certain excise taxes to the Federal Government. The Subcommittee is considering reforms to minimize the administrative burden this system currently places on business taxpayers and their employees.

The reforms under consideration would: (a) require that IRS correct the problem of erroneous FTD penalty notices being sent to business taxpayers; (b) revise FTD penalty notices to clearly reflect the reasons for penalty assessments; (c) ensure that deposits are credited properly and that penalties are avoided by making blank FTD deposit coupons more readily available to taxpayers and their tax professionals; (d) develop an "EZ" version of Forms 941, Employer's Quarterly Federal Tax Return; and (e) simplify IRS forms and procedures for amending employers' quarterly Federal tax returns and annual Federal unemployment tax returns.

2. Responsible Officers: Employers are required to withhold employee income and social security taxes from their employees' paychecks, and to report and deposit these amounts with IRS. If the employer fails to properly deposit these withheld taxes, certain employees of the business, considered "responsible officers," are held personally responsible for 100 percent of the taxes due. The Subcommittee is considering reforms to protect the rights of these employees.

The reforms under consideration would: (a) require IRS to print a warning on the front of the FTD deposit coupons and Forms 941, explaining that certain employees may be held personally liable if their employer does not make a timely payment; (b) require that IRS develop a special information packet explaining the FTD system, the 100-percent penalty that can be assessed against responsible officers, and the employees' responsibilities to promptly report to IRS any failure by their employers to remit such taxes; and (c) establish a Federal "cause of action" so that responsible officers assessed the 100-percent penalty can pursue legal action against other responsible officers of the business for the taxes due.

3. Miscellaneous Improvements: The Subcommittee is considering reforms to reduce the burden placed on businesses and further protect the rights of employees.

The reforms under consideration would: (a) allow employers to file reconciliation statements with employees' Forms W-2, showing the Federal income tax withheld on sick pay by third parties; (b) eliminate the requirement for partnerships to file IRS Forms 8736 when requesting an automatic extension of time to file their tax returns; (c) protect employees by shortening the three-year time frame in which employers can obtain a refund check for taxes they withheld from their employees' paychecks, and give IRS the authority to credit these withholding directly to the employees when a conversion of this type is made; and (d) require that IRS establish audit procedures allowing IRS agents to take into account possible tax revenue losses when making audit adjustments.

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