A Proposal for Consideration of
Amnesty for Nonfilers and Underreporters

A Recommendation to Raise Billions in
Revenue Without Raising Taxes

Testimony before the United States Senate Committee on Finance,
Subcommittee on Oversight of the Internal Revenue Service

By Jack Warren Wade, Jr.

Mr. Chairman:

It is my firm conviction that the voluntary compliance system, as we know it, is in great danger of collapse. The spiraling inflation of the '70s, and the budgetary cutbacks in IRS staffing and overhead during the same period combined to create an underground economy that has exploded to dangerous proportions. This "tax revolution" is chipping away at the foundation of respect that makes voluntary compliance work, and that makes our country the greatest in the world.

The trick now is to increase voluntary compliance and break the back of the underground economy without calling out the U.S. Army to back up the IRS, or turn the country into a police state. This is no easy task, and will require much work, dedication, creativity, and serious long-range planning with objectives that may even require an overhaul of the entire Tax Code. Since the problem of the underground economy is a complex one, there is no one panacea; but obviously, every small idea that tackles at least one aspect of the problem is a major step in the right direction.

In the past decade, many of our honest and hard-working citizens have tried to save money by either dropping off the tax rolls, underreporting their income, or exaggerating their deductions. The IRS estimates that in 1973 the losses to the government were around $29 billion. Today, the losses may be as high as $100 billion. Total losses over the past ten years may be as high as $600 billion, or one-half the national debt. There is no need to explain or debate why this has occurred. What is important is that we bring these people back into the tax system as "dues-paying members" of our society, not only for the country's sake, but also for theirs. It is important to recognize that not all tax dodgers are criminals. Even Donald Reagan has told Congress that the $90 billion tax gap is mostly caused by "honest people," who are otherwise law-abiding citizens who earn their livings respectably. Less than one-tenth of the tax gap is caused by illegal activities such as gambling, drugs, and prostitution.

My experience as a revenue officer has convinced me that many nonfilers are caught in a vicious web of delinquency they want to abandon but don't know how. Either unable to put their financial records in order, or to make sense of complicated tax laws, they go a year without filing and then don't file in subsequent years because of fear of being caught for nonfiling the previous year. Many of these people are truly afraid of the IRS and of going to jail. If they can be assured that they will not be prosecuted for coming forward, then a great contribution will have been made to restoring people's faith in their government.

A nonfiler never knows from one day to the next if he may be discovered by the IRS. Many are discovered as a result of IRS's resources. For example in F.Y. 1983, IRS secured or received over 3.6 million delinquent 1040s. But we also know that millions may never be discovered by the IRS and thus may escape paying any taxes at all. There could be as many as 12 million people who didn't file a 1040 last year even though they had a legal requirement to do so.

While some nonfilers aren't concerned or worried about this problem, many others are truly very scared and worried, and would like to be in compliance, but they have no way to right their wrong without fear of severe punishment. The prospect of criminal prosecution hangs like a veritable albatross during every filing season.

It is for these taxpayers that I am proposing that the government grant an AMNESTY from criminal prosecution to all tax dodgers, nonfilers and underreporters alike. A grant of amnesty would allow large numbers of these people to return to the tax rolls voluntarily and immediately. The government could be the recipient of billions of dollars in back and future taxes without even raising taxes. And, after all, collecting the revenue to fight a massive budget deficit is more important than maintaining compliance through the fear of criminal enforcement.

Practically, the government has very little to lose by enacting such a program and it would work because:

• there will be no cost or direct loss to the Treasury,

• the benefit of a guaranteed "no prosecution" pledge will appeal to many nonfilers and underreporters and will allow them to seize the opportunity while it is available, - raising revenue without increasing taxes would be politically palatable, - a temporary incentive to come forward would be the money saved from imposition of numerous civil penalties, which would otherwise apply if the delinquency is later discovered by the IRS, and - the increased IRS staffing, new computer technology, new withholding requirements, and increased penalties will also encourage people to come forward once they realize what their future chances are of being caught.

I am proposing the following 7-point AMNESTY plan:

1. Whenever made effective, any person who has not already been notified by the IRS of the discovery of a nonfiling or underreporting may qualify for amnesty from criminal prosecution and from certain civil penalties for any past-due nonfiling or underreporting. The program would end within a defined time period: for example, six months may be sufficient. 2. Amnesty may be declared by writing AMNESTY across the top of a filed delinquent tax return or an amended return, or by filing an amnesty declaration with the IRS at the time of filing. Such declarations should be available at IRS offices and post offices, and would be signed upon request by various delegated IRS employees. 3. The IRS would waive all civil penalties, except the failure to pay penalty at 6%. Interest would be charged at the normal rate.

4. Persons declaring amnesty would be afforded liberal installment agreement privileges to pay their back taxes, as long as they comply with current withholding and estimated tax requirements; they would also be allowed to compromise their liability under appropriate circumstances.

5. The IRS must not be allowed to share any amnesty tax returns with any other government agency for the purpose of discovering nontax statute violations.

6. No person would be forced to reveal the source of his reported income if it would violate his rights against self-incrimination regarding any other laws.

7. Any return filed under the amnesty program that has been fraudulently prepared would be excepted from the amnesty provisions.

Mr. Chairman, if only 20% of the nonfilers and underreporters come forward, the government may increase its revenue by $100 billion over the next five years, a sum that would go a long way to assist in balancing the budget. Now is the time to take action before the underground economy destroys our voluntary compliance system.

Summary of Recommendations for a
Comprehensive Act to Further Strengthen Taxpayer Safeguards

Testimony before the United States Senate Committee on Finance,
Subcommittee on Oversight of the Internal Revenue Service

By Jack Warren Wade, Jr.

The following is a summary list of recommendations being made by me to further strengthen taxpayer safeguards. The complete details of the changes being recommended and the supporting reasons for the changes are presented completely in my new book, "The Power To Tax - A Critical Look at IRS's Collection Powers." The full recommendations outlined in that book are reproduced in the written statement of the National Taxpayers Legal Fund presented today before this subcommittee.

1. IRC 6334(a)(2) and 6334(a)(3) which refer to exemptions from levy should be updated to recognize inflationary increases in taxpayers' property values.

2. IRC 6331(d)(3)(A) relating to the continuous effect of a levy on salary or wages should include provisions for a termination of the continuous effect when the taxpayer has entered into an installment agreement, or the IRS has determined that the taxpayer has substantiated a case of financial hardship.

3. IRC 6343(a) relating to Release of Levy should be amended to require the IRS to release a levy when the taxpayer either: enters into an installment arrangement, or substantiates financial hardship, or pays the IRS the U.S. interest in the seized property, or presents evidence that the value of the U.S. interest is insufficient to meet the expenses of seizure and sale.

4. IRC 6331 should include a provision requiring the IRS to make written notification to the person whose property is being levied of the right of redemption under IRC 6337, and of the right of release under IRC 6343.

5. IRC 6331(c) relating to Successive Seizures should be amended to prevent a successive seizure within a 90 day period following a release of levy made either because the taxpayer paid the IRS the U.S. interest in the property, or because the value of the U.S. interest in the property was insufficient to meet the expenses of levy and sale.

6. IRC 6331 should include a provision requiring the IRS to issue regulations specifying the circumstances, conditions, and situations under which a levy will be made.

7. IRC 6334(a)(9), relating to minimum exemption from levy should be made applicable to the salaries and wages deposited in a financial institution.

8. The IRS should be specifically prohibited from making a levy when it is apparent prior to levy that the value of the U.S. interest in the property is insufficient to meet the expenses of seizure and sale.

9. The IRS should be prohibited from making a levy during the day a taxpayer is appearing at the IRS office to comply with a summons.

10.IRC 6331(a) relating to the 10 day notice and demand period should be amended to extend the notice and demand period to 30 days.

11.The IRS should be restricted from levying the following property unless it has been approved by the District Director or Assistant District Director:

(a) A principal residence of a taxpayer.

(b) An automobile used as primary transportation to and from work or employment.

(c) Tangible business property if the levy would result in the closure of the business.

12.The IRS should be required to issue a "Notice of Intent to Seize" within the 10 to 30 day period preceding the date of levy.

13.Taxpayers should be granted the right to file suit in a Federal District Court either prior to levy or subsequent to levy, to enjoin the IRS from selling the property, or to obtain a release of seized property when either:

(a) There has been an improper or illegal assessment.

(b) A deficiency assessment was made without knowledge of the taxpayer and without benefit of appeal.

(c) There has been a violation of the Tax Code, the policies or regulations of the IRS, or the Internal Revenue Manual.

(d) The IRS has made an unlawful determination that collection of the tax was in jeopardy.

(e) The value of the seized property is out of proportion to the amount of the liability, and other collection remedies are available.

(f) The value of the U.S. interest in the seized property is insufficient to meet the expenses of seizure and sale.

(g) The IRS will not release the seized property upon an offer of payment of the U.S. interest in the property.

(h) The IRS has arbitrarily established a minimum-bid price on the seized property in such a way as not to preserve or protect the taxpayer's equity in the seized property.

14.Taxpayers should be allowed to administratively appeal a decision to file a Notice of Federal Tax Lien when such filing would hamper or jeopardize collection of the tax.

15.The IRS should be required to issue a notice to taxpayers during any interview in connection with the assessment of a deficiency that the taxpayer has the right not to disclose any information or evidence that would violate his Fifth Amendment rights against self-incrimination.

16.The Ombudsman should be an appointee of the President who would serve a four-year term, and the Ombudsman should have the right to intervene in any enforcement proceeding when:

(a) There has been an improper or possibly illegal assessment.

(b) An assessment was made without the knowledge of the taxpayer and without benefit of the taxpayer's appeal rights.

(c) There has been an action in violation of either the Internal Revenue Code, the policies or regulations of the IRS, or the Internal Revenue Manual.

17.Taxpayers should be granted the right for a judicial appeal of a levy made without regard to the 10 day notice and demand requirement as allowed under IRC 6331(a) when collection of the tax is in jeopardy.

18.Congress should legislate how the IRS is to establish the minimum bid computation prior to sale of seized property.