Mr. Chairman and Members of the Subcommittee,

I am pleased to be with you today to discuss the service's efforts to simplify life for taxpayers in dealing with the tax administration system. In my testimony, I will provide an overview of our continuing efforts in this area and highlight several specific projects I believe are of particular interest.

With me today are Jim Owens, the Deputy Commissioner, and a number of other service officials representing the major functional areas to be covered in my statement. We will be available to answer any questions you or the members may have at the conclusion of my testimony.

IRS Efforts to Simplify Life for Taxpayers

The size and complexity of the Internal Revenue code and the recent volume of tax legislation have kept us busy just trying to keep up with these new developments. Despite the flurry of activity associated with implementing erta and tefra, and despite the fact that our efforts will always be viewed by some as insufficient, we believe significant progress has been made in the past couple of years in simplifying the problems taxpayers face in dealing with the tax administration system.

It is easy to overlook one important fact here -- both taxpayers and the service have an interest in simplification. To the extent that we can simplify life for taxpayers, we also simplify it for ourselves. For example, if we can somehow reduce the amount of information taxpayers have to report, or somehow reduce the number of forms necessary for the reporting of that information, we will have eased the burden on both sides of the tax "equation." or, to the extent we can simplify our forms, instructions, and publications to make them more understandable to a larger portion of the taxpayer population, we may reduce the volume of our 47 million plus taxpayer contacts a year.

My basic point is that the service has no inherent interest in maintaining complexity in tax administration. Those who suggest -- humorously or otherwise -- that we do are wrong, perhaps confused by the obvious difficulties we often face in "translating" complex legislation into simple procedures for taxpayers. Often this cannot be done, or can be done only to a point.

Let me now turn to some specific examples of our efforts to make life simpler for taxpayers. For convenience, we have organized these examples under three broad headings which we feel represent the major initiatives underway: direct taxpayer contacts, tax forms and publications, and rulings and regulations.

1. Direct Taxpayer Contacts

One of the more trying problems taxpayers face in dealing with IRS is our lack of responsiveness to correspondence. Despite improvements made in recent years in reducing the number of complaints, taxpayers and tax practitioners alike continue to find that IRS does not act timely or responsively to correspondence -- even correspondence seeking explanations of our own letters. Frustrations on this subject, which I had experienced myself as a practitioner, were made known to me in the strongest terms by other practitioners as soon as I became commissioner.

Because I view this as a serious problem, I directed the deputy commissioner to convene a task force of top-level service executives to determine what steps were necessary to improve the situation. The draft version of their report was distributed internally for comments last month, and should be issued in final form this summer.

The study contains specific recommendations for improvements in our correspondence policies, procedures, and the letters, notices, and forms themselves. For example, we are considering revisions to our correspondence policies to provide firm, realistic response times for replying to taxpayer letters, and replies that specifically reference which item(s) from the letters we are answering. Operating procedures in all service functions will be reviewed in order to find ways to place increased emphasis on handling taxpayer correspondence, including such possible changes as telling taxpayers exactly when we will respond to them, and then controlling and processing the correspondence in such a way that we can meet those dates. Our letters, notices, and forms will be scrutinized for ways to provide taxpayers more specific guidance on information we are seeking, as well as to keep them better advised of our procedures for resolving their problems.

Once implemented, we believe the changes we are considering will be a pleasant surprise for taxpayers and tax practitioners alike, and will make dealing with the IRS through correspondence an easier job. We are making a major commitment to improving our record in this important area, and expect visible results.

Perhaps IRS' most important recent organizational effort to help taxpayers was the creation of the taxpayer ombudsman position in my office. Besides representing and advocating taxpayers' rights within the service, the ombudsman oversees the IRS' problem resolution program (PRP), which functions in each of our districts and service centers.

The ombudsman also reviews IRS policies and procedures for possible adverse effects on taxpayers, proposes ideas to benefit taxpayers. Represents taxpayers' views in the design of tax forms and instructions, and suggests changes to proposed or existing legislation to aid taxpayers. None of these functions are intended as substitutes for other existing programs, but rather as a means of insuring that these programs work as intended. If they do not, the ombudsman can effect changes.

Our taxpayer service program is another organizational effort to aid taxpayers in their dealings with the IRS. As you well know, Mr. Chairman, this program has been the focus of intense debate recently. Because of the efforts of many in the congress, including yourself, taxpayers are receiving the same level of tax assistance in FY 1983 as last year. We share your concern over the need to help taxpayers meet their filing responsibilities and resolve their tax account problems, and will continue to seek the most cost-effective ways to provide these vital services.

In fiscal year 1982, IRS received over 170 million returns and related documents for processing. The sheer volume of paper and information we receive makes it difficult to answer questions on specific taxpayer accounts in a timely way. Because of this, the service is ever mindful of the value of automation in helping us more efficiently deal with taxpayers. One major initiative in this area is the implementation of our microfilm replacement system (MRS), which speeds the provision of information to employees responding to taxpayers' questions on their accounts. Research which previously required two weeks can now be completed in 24 hours, allowing us to give taxpayers the very latest information on their accounts. Be more accurate and timely in replying to correspondence, etc. Considering that the service received nearly 16 million inquiries in FY 1982 which required microfilm research, the magnitude of improvement in this area becomes clear. All of our service centers and associated district offices have converted to MRS except Cincinnati, which does so next Monday, the 23rd.

The chief counsel's office has sought to simplify the courtroom aspects of taxpayer contacts with IRS. In June of 1982, after consultation with members of the tax court and private attorneys, counsel order 4000.6 was issued. It made revisions to the procedures for tax court litigation involving small cases designed to simplify the process for taxpayers representing themselves before the tax court. These provisions are significant because taxpayers represent themselves in some 60% of these small cases, which involve less than $10,000. As of December 1982, over 21,000 of these cases were pending in the tax court. In addition, of the 31,000 new cases filed with the tax court in FY 1982. Taxpayers represented themselves in over 16,000.

These revised procedures included reducing paperwork by using documents for multiple purposes; increasing the use of oral arguments and decisions (authorized by the miscellaneous revenue act of 1982); emphasizing the use of plain language in taxpayer correspondence and court documents; and expediting preparation of settlement documents. These changes are benefiting taxpayers, members of the bar and the tax court, and IRS alike by streamlining the litigation process and by providing much faster resolution of these cases.

2. Tax Forms and Publications

The problems taxpayers face in dealing with IRS are often directly related to our many forms, instructions, and publications. The complexity of these documents is the result of two major factors: the difficulties inherent in translating complex legislation into simple procedures, which I noted earlier; and the requirements to gather certain information from taxpayers to properly implement the laws.

However, we have made a number of significant strides in this area to simplify the forms and related items, and to make them available through a wider variety of channels. Let me briefly highlight some of these efforts for you.

In an effort to give our forms, instructions, and publications the widest possible distribution this year, we used a network of over 55,000 public outlets serving as distribution points for IRS tax materials. These outlets made available to individual filers over 1.5 billion forms and over 45 million instruction booklets, tax guides and specialized information publications -- all in addition to the annual mailout of over 90 million tax packages.

IRS added 8,200 forms outlets in 1983, and most of this increase is tied exclusively to the voluntary efforts of public and college librarians. Many of the country's largest library systems are stocking bulk supplies of major IRS tax forms and maintaining a file of reproducible master copies of many of the lesser-used forms. They have created reference sections for our information publications and added audio cassettes on the preparation of tax returns as part of their multimedia programs. In addition, they disseminate on our behalf brochures and promotional material on such IRS programs as tele-tax, tax dial, toll-free, VITA, TCE, and many of the alternative IRS programs available for obtaining tax material or tax assistance. Over 18,000 libraries across the country performed at least one of these functions last year.

To make members of congress aware of the services we offer taxpayers in this area. I wrote each member of congress on march 11 of this year to point out the specific ways constituents could receive forms and publications in that district or state. This letter included appropriate phone numbers and addresses for the member, and was in addition to my January 11 letter to all members, which provided sample copies of publications 17, 334, 225, and 910, our principle publications for assisting individual taxpayers. We understand this information has been extremely helpful to congressional staffers who handle constituent inquiries in this area.

Our Improvement Efforts on Specific Tax Forms and Publications Could be Divided into Three Groups: New Developments, Simplification, and Consolidation.

Perhaps our best-known new development was the introduction of the form 1040EZ for 1982. This form is intended for single taxpayers with one personal exemption, no dependents, and income based on wages, salaries, tips, and no more than $400 in interest.

The 1040EZ has only 11 lines, half as many of the 1040A, and is divided into steps that guide taxpayers through the form. Because of its plain language and new graphic layout, we estimate that completing the 1040EZ should take less than half the time it takes to complete the form 1040A, and only about one-eighth the time needed for the basic form 1040, without attached schedules.

Our statistics to date indicate that the form 1040EZ has been a success with taxpayers, particularly those who previously used the 1040A. Between January 1 - may 14 of this year, nearly 15 million 1040EZ's were filed, along with nearly 21 million 1040A's. During the same period east year, over 37 million 1040Ais were filed.

Besides simplifying filing requirements for almost 15 million taxpayers, the introduction of the 1040EZ will save IRS up to half a million dollars in processing costs annually -- a perfect example of simplification working for the taxpayer and the IRS, as I mentioned earlier.

Another new development this year was publication 910, "taxpayer's guide to IRS information and assistance", which as I mentioned was sent to each member of congress in January. This valuable reference provides an overview of the major IRS services available to taxpayers, and shows them where to find additional help if needed. Information on our major publications is also included.

In the employee plans area, two new short forms (5307 and 6406) were developed for requesting determination letters on plan amendments for previously-approved plans and for determination letters for master or prototype plans. This simplified method relieves practitioners from providing unnecessary information, while at the same time allowing the service to expedite a decision without researching the original plan approved.

Finally, we are developing a form 1120-a, U.S. short form corporation tax return, for possible use in 1985. Introduction of this form could simplify reporting for small corporations by reducing the amount of information required (such as dropping schedules a, c, e, and f, as well as simplifying the balance sheets) and by raising the threshold filing requirements for the submission of more detailed information. We estimate that about one million corporate filers would be able to use this new, shorter form.

With regard to simplification, our leading effort was the extensive redesign and rewriting of form 1040A and its instructions. This effort began as part of our development of the new form 1040EZ; like the 1040EZ, the 1040A now is designed to guide the taxpayer through the form in a series of clearly-marked steps. Each major part of the form is labeled with a step number and heading. Additionally, graphic and typeface changes have improved the appearance of the form and reduced its visual clutter.

The 1040A instructions were rewritten to parallel the new steps on the form. They too were set in new typeface, and used a one-column format with a wide left margin that included "tax tips"-- notes about benefits that taxpayers might not be aware of otherwise. Worksheets were also redesigned, and examples improved and expanded.

Based on our successes with the 1040EZ, we are considering -- and will soon be testing -- several more changes to the 1040A for the next filing season. Basically, these center on two different and expanded versions of the 1040A that should draw millions of taxpayers from the longer, more complicated form 1040. Both versions would add child care credits. IRA deductions, and fully taxable pensions to the 1040A for the first time. One version would also add limited itemized deductions, so many homeowners would be able to switch to the 1040A and still take advantage of itemized deductions.

The result of these tests will help us determine if the potential disadvantages of a slightly longer 1040A would outweigh the advantages of having fewer taxpayers use the more complex 1040.

We have also developed a simplified one-page version of form 2106, employee business expenses, by eliminating a number of items and condensing others. We eliminated the depreciation schedule on form 2106 and reduced substantially the detail of information required to support deductions for automobile expenses. Also, we now request only the most important information regarding deductions for educational expenses. Our intent to request less information wherever possible has also been reflected in similar burden reduction efforts on form 1040: schedule c, profit (or loss) from business or profession; schedule d, capital gains and losses; schedule e, supplemental income schedule; schedule g, income averaging; and schedule SE, computation of social security self-employment tax.

In the employee plans area, filing requirements for form 5500g were eliminated for governments and most churches, and form 5310 was revised to satisfy both IRS and PBGC filing requirements for a plan termination. Thus providing "one stop service" for taxpayers.

In exempt organizations, revisions to form 990 raised the filing threshold (relieving some 16% of all 1981 filers from filing in 1982), simplified recordkeeping requirements along lines adopted by the AICPA, and made the form acceptable to 31 states and the district of Columbia for their reporting needs. These states have jurisdiction over about 96% of the charities which formerly had to file one or more state forms. Both the treasury department and OMB have approved the establishment of a "form 990 committee" to continue improvements in this area.

Publications 568a and 594, both on "the collection process", were revised to provide individual and business taxpayers with an easier to understand, more concise version covering their rights and duties in the tax administration system.

Our efforts at consolidation have resulted in the reduction of the "families" of forms 1087 and 1099, and form 4347, from a total of twenty forms to nine. Further, our new form 5471, "information return with respect to foreign corporation," replaces five separate forms previously used to obtain the same information.

Finally, Mr. Chairman, you expressed an interest in the extent to which the paperwork reduction act has stimulated reduced complexity in our forms. The service had achieved significant burden reductions before the act was passed. The act caused us to continue and intensify our earlier efforts to take a close and hard look at our need for the information we ask taxpayers to supply. As I said earlier, the service believes that simplification works for both taxpayers and the service, and both of those reasons have been ample incentive for IRS to do more in simplification. The improvements we are seeing now in the 1040EZ and 1040A had their beginnings before the act was passed, and are a tribute to our continuing commitment to progress in tax forms simplification. We believe that this commitment has resulted in many more taxpayers being able to prepare their own tax returns. In fact, over the past five years, the percentage of tax returns completed by paid preparers has declined from 43% to 37%.

3. Rulings and Regulations

Just as our efforts to improve taxpayer-IRS contacts and simply our forms and publications provide benefits to all taxpayers. So do our efforts to simplify the rulings and regulations processes. It is through these mechanisms that we provide technical guidance to taxpayers and their representatives.

We believe expanded use of the "safe harbor" approach to substantiation of items claimed on the return has the potential to be a major advance in the regulations and rulings area. While not new, this approach provides previously untapped possibilities for simplifying tax administration. It offers benefits to the taxpayer, who has reduced paperwork and recordkeeping requirements while using it, as well as the service, which has fewer issues to consider in processing and examining returns. Perhaps the leading example of this to date is the proposed regulation establishing a standard rate for meal expenses for taxpayers who are traveling. They may elect to use this standard "safe harbor" rate without substantiation, or to continue to substantiate actual amounts if in excess of the standard rate. We are now looking at other areas to see if they too have potential for the safe harbor approach.

In cooperation with the department of the treasury, we have made a significant effort to expedite the regulations review process. The system we have developed enables us to focus on the more significant regulations and to reduce the time required for treasury review of routine regulations, both of which promote prompter publication.

This effort to expedite the review process has three major elements. The first is the use of a three-tier classification system. Under it, all regulations projects are assigned either a category III (significant policy issues), category ii (some policy issues but largely interpretative and technical), or category I (no policy issues, but important to administration of the tax system) ranking.

The second element is the use of goals for the number of projects to be transmitted monthly to the staffs at the treasury department. In addition, the transmission dates for these projects are scheduled up to a year in advance wherever possible.

The third element is the revision of chief counsel's internal procedures, which now feature a coordinated process allowing for the timely review and approval of projects by the chief counsel review group. A member of my immediate staff is a delegate to the group.

These efforts have paid off in better use of our chief counsel resources and a more effective use of treasury staff's time. While our backlog of regulations projects is still extensive, progress is being made, and we anticipate even greater progress as our experience with this new system increases. Both BNA's "daily tax report" and CCH's "taxes on parade" have noted the recent improvements in this area.

Revenue procedure 82-51 was a major development in allowing taxpayers under examination to pre-pay their tax liabilities while retaining their appeal rights. The advantage to taxpayers is that such pre-payment stops the running of interest on unassessed deficiencies, yet preserves the right to contest the same liability in the tax court.

Finally, a series of revenue procedures have eliminated the need for taxpayers to apply and receive permission for the adoption of, or a change in, accounting periods or methods. This "automatic consent" approach saves time and paperwork for both taxpayers and the service.

The Issue of Amnesty

I understand you are interested in exploring the issue of amnesty for non-filers, as a way of bringing them back into the tax administration system. Before going into the details of this issue, I'd like to briefly define what the service means when we speak of an amnesty. To us, amnesty means forgiveness from criminal prosecution only, and has no effect on the imposition of civil tax penalties or the collection of tax, penalties, and interest. Even under this definition, amnesty would be available only under certain conditions, such as the absence of any service investigation of that taxpayer.

Let me give you a brief summary of the history of this issue in IRS as background for our current position on it. From 1934 to 1951, the service followed a general practice of not recommending prosecution in cases where taxpayers made voluntary disclosures before investigations had been initiated. In 1952, this practice was officially abandoned because of administrative difficulties; e.g., some taxpayers who had received immunity subsequently defaulted on their liabilities and could not be prosecuted. In 1961, as part of the servicewide installation of data processing, a news release was issued suggesting that this was a good time for voluntary disclosures and, without promising anything, noted that the likelihood of prosecution was not high in these cases. Policy statement p-9-2, "prosecution of criminal investigation cases," includes voluntary disclosure as a criterion in determining whether a case warrants criminal prosecution.

Amnesty does offer the potential benefit of bringing non-filers into the system. Which you mentioned. There are. However, a number of serious drawbacks to the idea. For example, honest taxpayers may perceive an amnesty as "special treatment" for dishonest taxpayers, and therefore unfair, inequitable, and contrary to IRS' policy of administering the tax laws uniformly. Moreover, instituting one amnesty might encourage the belief that the offer would be repeated in the future, leading to non-compliance in the interim. Finally. The administrative difficulties encountered earlier are likely to reappear. Making implementation difficult.

While we are aware of what seems to be an increasing interest in this idea, and are always willing to discuss it further, my view at this point is that the idea does not warrant implementation.

Taxpayer Safeguards

You also expressed an interest in the adequacy of the taxpayer safeguard provisions in tefra, and whether or not they needed improvement. As you may recall, the service participated in the early drafting of these provisions. And supported them throughout debate on the bill.

We believe it is still too early to tell with any certainty if these provisions are working as intended. Once we have more operational experience with tefra overall. We will be in a better position to examine the adequacy of the safeguards. You may be assured that we will advise the congress if we find additional legislative measures are necessary.

We have placed emphasis throughout the service on the need to safeguard taxpayers' rights, and will continue to do so; I testified on our extensive system of safeguards before chairman Rangel in April of 1982. The success of our voluntary self-assessment system rests largely on taxpayers' perceptions that the service is firm but fair in its administration of the tax laws. And we will make every effort to see that we deserve their confidence.

Conclusion

Mr. Chairman, I have attempted to cover in my statement a few of the most significant efforts the IRS has made recently to simplify life for taxpayers. There are many other examples which I have not included here in the interests of brevity.

Some of our work began as efforts at internal efficiency and productivity, which also provided benefits to taxpayers; other advances were conceived and developed exclusively for the taxpayers' benefit. The common thread in both cases is the desire to do our job -- which by definition includes both internal efficiency and increases simplicity for taxpayers -- better. We are constantly striving to improve in both aspects of our job, in order to make the "service" in Internal Revenue Service more than just an empty word.

My associates and I will be pleased to answer any questions you or the members may have.