Mr. Chairman, and members of the Subcommittee, thank you for the opportunity to present testimony on S. 2400, the Taxpayers' Procedural Safeguard Act. The National Taxpayers Union, representing 130,000 taxpayers nationwide, has long been concerned with the tax burden and taxpayers' rights.

We strongly support S. 2400, and commend the chairman for his concern and diligence in addressing taxpayers' burdens and rights.

Appearing with me is Jack W. Wade, Jr., an advisor to the National Taxpayers Union. He worked as a Revenue Officer for the Internal Revenue Service for eight years and wrote more than twelve IRS manuals on tax collection and enforcement. He is author of the book, "When You Owe The IRS", published last year by Macmillan Publishing Company.

Even with the 1981 Economic Recovery Tax Act tax rate reductions, tax rates remain at near record high levels. The most recent poll by the Advisory Commission on Intergovernmental Relations found that the federal income tax is now thought to be the "worst tax -- that is, the least fair." A poll conducted for USA Today found taxpayers to be almost evenly split when responding to the question "Do you think you're treated fairly by the federal income tax system?" The poll also found that 53% of those questioned agreed with the statement that "tougher enforcement of tax laws would not significantly cut down on cheating."

It's important for the Internal Revenue Service to maintain respect for the federal government's administration of the tax laws. Although the tax laws need fundamental reform and tax rates need to be further reduced, much more can be done to fairly and efficiently administer the tax system.

General Accounting Office reports, congressional hearings, and private sector survey efforts all indicate that improvements can and should be made to safeguard taxpayers rights.

I will now briefly summarize each substantive section of S. 2400 and briefly address the need for each provision in the bill.

SECTION 2 - Levy and Seizure Safeguards

Section 2(a) -- IRS notices of intent to seize would have to inform taxpayers of appeal procedures, possible alternative collection remedies, and the tax code provisions and procedures on seizure and sale of property. The notice would have to be delivered at least 10 days, but not more than 30 days, before seizure. In 1978 the GAO reported that 25% of the taxpayers they interviewed were not aware of IRS' seizure authority and 57% were not told that seizure was the next action to be taken. While IRS's computer notices do inform taxpayers of this right to seize, the notices are not clear enough in conveying IRS's intent to seize and when seizure will occur.

The IRS would also be required to notify taxpayers of their rights under the code allowing for a redemption or release of property at the time of seizure. IRS employees are not required by any code provision, regulation, or any manual direction to notify the taxpayer of these rights. These changes are needed to prevent any misunderstanding about the taxpayer's right for return of his property after seizure.

This section should also change the ten day notice and demand period to 30 days. At present, the IRS is only required to wait ten days after mailing a notice and demand of an existing tax liability before any seizure action is allowed. Ten days is insufficient time for a taxpayer to either respond or obtain sufficient funds to pay the tax. Thirty days is a more reasonable period.

Section 2(b) -- The effect of a levy made upon a taxpayer's salary or wages is continuous until the liability is either paid or becomes unenforceable. IRS regulations provide that a levy may be released when it will facilitate collection of the tax and "the delinquent taxpayer makes satisfactory arrangements to pay the account of the liability in installments." But the Code makes no provision for the right of taxpayers to enter into an installment agreement, nor does it provide for the release of a levy for conditions other than full payment (IRC 6337), or when it will "facilitate collection of the liability" (IRC 6343). There are times when an installment agreement should be considered as preferential over the seizure and sale of property, even when the installment agreement does not necessarily facilitate collection of the liability. (The regulations do not define what it means to "facilitate collection. " )

Section 2(b) also requires the IRS to release a levy when the taxpayer enters into an installment arrangement, and thereby removes the condition that the installment arrangement must facilitate collection. It also requires that the levy be released when the tax liability is satisfied or if the IRS has determined that the tax is not currently collectible due to financial hardship of the taxpayer.

Presently, a taxpayer who has a financial hardship, but who has experienced an IRS levy of his property is not entitled to a release of the levy by either the Code, IRS regulations, or IRS policy.

Section 2(c)(1) raises the levy exemption amounts to $20,000, a level sufficient to protect a taxpayer's household furniture and personal effects. It also applies the levy exemptions to all taxpayers. The Code presently only allows personal property exemptions to "heads of a family."

Section 2(c)(2) also raises the exemptions for books, tools, equipment and property for a trade business or profession to $10,000, to better reflect the essentials needed for an individuals to be able to support himself. Except for a small change made in TEFRA, the exemptions from levy have not changed since adoption of the 1954 code. Even now, though, the amounts of exemption provide little protection for taxpayers since they do not reflect the substantial increases in the cost of living since 1954. The bankruptcy laws provide taxpayers better protection than the Tax Code.

The right of an individual to be self-supporting needs to be recognized in the levy provisions of the Tax Code.

Section 2(c)(3) raises the exempted weekly amounts from levy upon a taxpayer's wages, salary, or other income to $200 from $75 for himself, and to $50 from $25 for each dependent or spouse. Current exemptions are too low. Few, if any, taxpayers could possibly maintain themselves or their families under such a levy. Congress intended to reform the levy provision of the Code by making continuous the levy upon wages, salary, and other income and by allowing the weekly exemption amounts from levy. But these provisions, which first originated in the Tax Reform Act of 1976, are actually more restrictive and burdensome to taxpayers than the previous levy provisions which did not allow minimum exemptions and which were not continuous.

Section 2(c)(3)(B) clarifies the Code by applying the weekly exemptions to the wages, salary, or other income subsequently deposited into a financial institution. IRS regulations clearly ignore the meaning of the words "received by" when specifying the minimum exemptions from levy for wages, salary and other incomes "payable to or received by an individual" as specified in the Code. The effect of this is to grant certain weekly exemptions to a taxpayer on his wages, salaries, or other income before it has been paid to the taxpayer, but to deny the taxpayer these same exemptions after his wages, salary, or other income, has been paid and deposited into a financial institution. The Tax Reform Act of 1976 appears to apply these minimum weekly exemptions from levy to wages, salaries, and other income already received by a taxpayer.

Section 2(c)(4) says that levy or seizure action on a taxpayer's residence, his primary source of transportation, or his business assets could only be authorized by IRS district management. An exception is made when the collection of tax is in jeopardy. The levy power of the IRS is a far-reaching authority. Next to criminal enforcement, distraint action is the most sweeping action that adversely affects taxpayers. It should not be just the decision of a collection employee and his immediate supervisor, but should represent an agency decision. Requiring approval at the District Director level will ensure that these types of seizures are warranted.

Section 2(d) -- The IRS would be restricted from seizing any taxpayers property when it is apparent prior to seizure that the government's estimated minimum bid price for the property would not meet the expenses incurred in seizing and selling the property. This would prevent the IRS from making purely "harrasive" seizures.

The IRS would also be restricted from seizing a taxpayer's property on the same day the taxpayer is responding to a summons issued by the IRS. This would prevent, for example, the IRS from seizing a taxpayer's car in the IRS parking lot while the taxpayer is responding to the IRS summons.

Section 2(e) entitles taxpayers to a release of levy under certain conditions. This section would require the IRS to release a levy when: the tax liability has been satisfied; the release of the levy will facilitate the collection of the liability; the taxpayer has entered into an installment agreement; the taxpayer can substantiate grounds for financial hardship; the expenses of levy and sale of such property exceed the amount of such liability, and the value of the property exceeds such liability and the release of the levy on a part of such property could be made without burdening the collection of such liability. The provision does not restrict the IRS from making a subsequent levy on the property released under this provision.

IRS regulations currently specify certain conditions that are considered to "facilitate collection of the liability" before a release of levy can be made without full payment by the taxpayer. IRS policy imposes another condition not stated in the regulations or the Code that says "subsequent full payment must be provided for." The imposition of current IRS policy in these situations constitutes such an unreasonable burden and requirement on taxpayers as to deny them their Fourth Amendment right against unreasonable searches and seizures.

SECTION 3 - Review of Jeopardy Levy or Assessment Procedures

Section 3 expands the judicial review of jeopardy assessments to also include jeopardy levies. It gives the taxpayer 90 days to make a judicial appeal, rather than the current 30, which is far too restrictive and unreasonably short.

The Tax Reform Act of 1976 provided for judicial review of jeopardy assessments. But there is no judicial review of a jeopardy levy made without regard to the 10 day notice and demand period required by section 6331 (a). Under IRS policy, as provided in the Internal Revenue Manual section 5213.4, revenue officers may request that immediate assessments be made on voluntarily filed tax returns, and that they may enforce collection without regard to the 10-day notice and demand period when certain conditions exist. These conditions are so vague that they could be applied to almost every taxpayer who can't pay in full at the time he files his return. A Jeopardy levy made by the IRS could actually hinder the taxpayer's efforts to raise enough money to fully pay the liability, and could cause the taxpayer to suffer needless financial damage and losses. The jeopardy levy should be used judiciously and the IRS should be held accountable to the courts for their exercise of this power.

SECTION 4 - Awarding Court Costs and Certain Fees

Section 4 changes the standard for award of attorney's fees and court costs to automatically award litigation costs unless the position of the U.S. was substantially justified. The current standard requires the taxpayer to prove the IRS was unreasonable. This allows the IRS to take far too many untenable positions with taxpayers, knowing that most taxpayers are more likely to accede to IRS's demands rather than incur major expenses in litigation.

SECTION 5 - Installment Agreements to be Binding

Section 5(a) authorizes the secretary to enter into a written installment agreement with a taxpayer if such an agreement will facilitate collection of the tax.

Section 5(b) -- Any individual income taxpayer who owes the IRS less than $20,000 and who has not been delinquent in the prior three years, would be entitled to pay his tax liability in installments consistent with his ability to pay.

Section 5(c) requires installment agreements to be binding on the IRS. It allows the IRS to disallow an installment agreement if the taxpayer failed to provide adequate and accurate information. It also provides for procedures to revise an installment agreement if a taxpayer's financial circumstances change.

There is sufficient evidence to indicate that the IRS has a double standard regarding the terms of the installment agreement. If a taxpayer does not comply with all the terms of the agreement, the IRS reserves the right to cancel the agreement and levy the taxpayer's property without further notifying the taxpayer.

But the IRS has been known to revoke installment agreements, sometimes without notification to the taxpayer, even when the taxpayer has been in compliance with all the terms of the installment agreement. Such revocations usually occur when the taxpayer's case has either been transferred to a new Revenue Officer, or a new management official has reviewed the case and arbitrarily revoked the agreement. If the IRS considers the installment agreement a contractual arrangement to be upheld by taxpayers, then taxpayers should also have the right to expect the IRS to uphold its end of the contractual obligation.

Sufficient evidence exists to prove that Revenue Officers frequently revoke installment agreements with nothing more substantial than an alleged belief or knowledge that the taxpayer's financial condition has changed, or improved. For this reason, taxpayers who have entered into installment agreements need Code protection from arbitrary and capricious use of IRS's powers. Section 5(c) allows the IRS to review a taxpayer's financial situation during the course of the installment agreement, but requires that taxpayers be given proper notification and that a hearing be held on such financial review. Thirty days for responding are provided and should be sufficient.

SECTION 6 - Written Advice Given By Officers and Employees of the IRS to be Binding

Section 6(a) requires that any information, advice, or interpretation given in writing to a taxpayer by an officer or employee of the IRS acting in his official capacity be binding.

It makes a logical and reasonable exception to this requirement when the taxpayer fails to provide adequate and accurate information.

IRS Policy Statement P-(11)-88 states that "Taxpayers will assume that they can rely on the accuracy of all official publications." Written information and advice should be reliable and binding.

Section 6(b) requires the IRS make provisions for notifying the public that any oral information, advice, or interpretation given by an IRS employee may not be binding. This notification could occur by posting signs in IRS offices and printing caveats in IRS publications.

SECTION 7 - Procedures Involving Taxpayer Interviews

Section 7(a) requires that IRS audits be conducted at a time and place that is as convenient to the taxpayer as it is to the IRS. For the most part, taxpayers usually conform their schedules for the convenience of the IRS, but IRS auditors should be just as willing to hold an audit at a time and place beneficial and convenient to the taxpayer.

It also allows taxpayers to record an audit interview. Even though the IRS now allows recorded interviews, this right is so important as to be safeguarded by law.

Section 7(b) requires that the IRS advise the taxpayer of his rights to have a representative accompany him during the interview, that he has the right not to disclose any information or evidence that he believes would violate his 5th Amendment rights against self-incrimination, and that he has the right to consult an attorney at any time during the interview. Although the IRS audit is a civil matter, it is also a procedure that could lead to a criminal investigation. Even though it may seem that informing every taxpayer of these rights before an audit interview could unnecessarily alarm them, the language could be constructed in a non-threatening manner while being informative and beneficial to the taxpayer's constitutional rights against self-incrimination.

SECTION 8 - Presidential Appointment of a Taxpayer Ombudsman

Section 8 provides that the IRS Ombudsman be a political appointee, 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, or about how other IRS managers feel about his input into their areas of responsibility. A political appointee would come to the job independent of the restrictive mission-oriented mentality that besets so many IRS career executives. Not being ingrained with IRS philosophy and methods of operation, he should be more understanding of the needs of individual taxpayers and more receptive to changing the old ways of doing things.

The Ombudsman would have authority to administer an administrative appeals procedure that would review either pre-levy or post-levy petitions to ensure that the IRS has complied with the law. The Ombudsman presently administers the Problem Resolution Program, but has no power to intervene in any enforcement proceeding or activity in a formal manner.

Upon review the Ombudsman would be able to intervene for 90 days to either prevent a levy, or to release a levy. Since this appeals procedure would be restricted to specified circumstances, there is very little chance of taxpayers using this procedure to unduly forestall collection of the tax. On the contrary, the taxpayers who are experiencing unreasonable IRS actions would be entitled to an administrative appeals procedure that would protect them from enforcement actions which are designed more for harassment than for collecting the tax.

The Ombudsman would establish procedures to review and evaluate taxpayer complaints. The Ombudsman would also survey taxpayers to obtain an evaluation of the quality of the service provided by the IRS and the Ombudsman. With the IRS continually changing its procedures and tax forms, the Ombudsman can serve as a safeguard to ensure that taxpayers rights are being respected and that taxpayers are not unnecessarily paying too much in tax.

The Ombudsman would compile data on the number and type of taxpayer complaints in each area of the country, and the response to such complaints. The Ombudsman would submit an annual report to the congressional tax writing committees along with any recommended legislation.

SECTION 9 - Civil Action For Violation of Procedures

Section 9 provides another avenue of appeal for the situations outlined in Section 8 to a U.S. District Court should the Office of Ombudsman fail the taxpayer's request.

SECTION 10 - Minimum Price

Section 10 reforms the procedures for setting a minimum bid price for sale seized property. When real or personal property has been seized by the IRS, a minimum bid price must be established before the property can be offered for sale. A minimum bid price is the lowest bid the IRS will accept at a sale of the seized property. This prevents seized property from selling for substantially less than the forced sale value of the property.

The IRS has designed a formula for computing the minimum bid price, but IRS policy requires that after using the formula, the minimum bid price must not exceed the tax, penalty, interest, and all other charges on the account. For instance, if the taxpayer owes the IRS $50,000 and the minimum bid formula indicates an otherwise minimum bid of $75,000, the IRS will restrict the minimum bid to the $50,000 amount the taxpayer owes the IRS. In this example, the IRS could sell the taxpayer's property for $50,000 resulting in a substantial loss to the taxpayer of $25,000. But if in this case the taxpayer owed $75,000 or more the minimum bid formula would be used without restriction and the property would be sold for not less than $75,000 thereby preserving the taxpayer's equity in the property. This practice noted by the GAO in their report of July, 1978 entitled "IRS Seizure of Taxpayer Property: Effective, But Not Uniformly Applied." The GAO also said that the IRS was applying the provisions of 31 USC 195 even though those provisions did not apply to IRS seizures and sales.

Mr. Chairman, we hope the Subcommittee and the U.S. Congress will promptly approve your proposed bill. We will be happy to assist you, other members of the Subcommittee, and staff, on this important set of reforms.

National Taxpayers Union
A Nonpartisan Nonprofit Organization Dedicated to the Public Interest

325 Pennsylvania Avenue, Southeast
Washington, District of Columbia 20003
Telephone: (202) 543-1300