Madam Chairwoman, I am pleased to be here today to testify regarding the Subcommittee's exploration of the development of Taxpayer Bill of Rights II legislation. I was the Commissioner of Internal Revenue at the time the original Taxpayer Bill of Rights was passed in 1988. Although I did not initially support all of the provisions in the 1988 legislation, when it became clear that the Congress intended to pass the legislation, I worked with members of the tax writing committees in Congress and their staffs in the development of the 1988 legislation, and I oversaw the initial activities by the IRS to carry out the provisions after enactment. After leaving the IRS in 1989, I have continued to take an interest in the subsequent Taxpayer Bill of Rights proposals including correspondence with members of Congress and discussions with their staffs about various provisions in those proposals. Some of my comments today have been adapted from, and therefore are similar to, my prior communications.

During my tenure as Commissioner I worked with your predecessor in attempting to assure that the IRS met its obligations to fully and fairly collect the proper amount of tax owed to the Federal government. In addition, I have represented taxpayers in dealing with the IRS before and after serving as Commissioner. I therefore recognize, as I know you do, the difficulties that the IRS faces in collecting the amount of tax properly owed and at the same time doing so in a fair, even-handed and professional manner.

I take seriously the importance of balancing the authority needed by the IRS to discharge its obligations with the rights of individual taxpayers in their dealings with the IRS. You well know, and I recognize, that the balancing of such authority needed by the IRS with the rights of individual taxpayers is often as difficult as it is important. This is particularly true at the present time in light of the government's need for revenue, the complexity of our Federal tax laws, and the increasing lack of confidence and respect of our citizenry in governmental authority.

In view of these competing considerations, I have considered carefully many of the provisions in the subsequent Taxpayer Bill of Rights proposals. Some of the provisions may be helpful, but I have substantial concerns about the impact of other provisions on our Federal tax system. There are three provisions that I feel so strongly about for the reasons indicated below that I urge you not to include them in any legislation that you may subsequently consider.

1. Shifting the burden of Proof.

H.R. 390 would change the law to provide that in any Federal tax proceeding the burden of proof with respect to all issues would be upon the IRS. As indicated in the excellent summary prepared by the Staff of the Joint Committee on Taxation for this hearing, under present law the taxpayer generally has the burden of proof in all civil Federal tax proceedings. Therefore, the change proposed by H.R. 390, if enacted, would shift the burden of proof from the taxpayer to the government. I oppose this change because I believe it is misguided, is likely to result in increased noncompliance with our tax laws, and is likely to mislead innocent taxpayers.

The policy behind this change is misguided because, I believe, there is a failure to understand how our Federal income tax system operates. In many countries, the tax collector initially decides how much tax to assess against a taxpayer, and then the taxpayer has the burden of proving that the tax collector is wrong. In the United States, taxpayers initially decide how much tax to pay and assess themselves by filing their Federal income tax returns. On the basis of taxpayers' self-assessments, the IRS each year pays refunds that average about $1,000 each to approximately 85 million taxpayers, for a total annual cost to the government of around $85 billion.

This is particularly significant when one considers that for most taxpayers the chances are less than 100 to l that the taxpayer's return will be audited. Further, if a taxpayer is audited, it also is significant that the taxpayer, and not the IRS, generally has all of the records and personal knowledge of the facts surrounding the transactions and activities reflected in the tax return. In light of all this, our present system is predicated on the assumption that because a taxpayer initially prepared and filed the return based on the taxpayer's information and knowledge (and often received a substantial refund based on the return as filed), it is fair to ask the taxpayer to bear the burden of proving that the return is correct if the IRS subsequently disagrees.

In short, under our present system, the taxpayer is presumed to have correctly prepared and filed the return, and for 85 million taxpayers--almost 75 percent of all taxpayers--the IRS relies on this assumption to pay substantial refunds without any questions asked. For these reasons, it is totally inappropriate to suggest, as some have stated, that a taxpayer is "presumed guilty" until "proven innocent" under the present system.

If the Congress passes the proposal in H. R. 390, I believe that some taxpayers may be led to understate their tax and overstate their refunds. Last Wednesday's Wall Street Journal discussed a recent survey which suggests that five percent of our taxpayers cheat on their taxes, and twelve percent would do so if they thought they would not be caught. Similar studies suggest that, apart from cheating, many taxpayers are more inclined to take aggressive positions on their tax returns if they believe that they are less likely to ultimately have to pay any additional tax. If Congress passes legislation shifting the burden of proof and taxpayers become less compliant because of their belief that the IRS will not be able to prove the lack of compliance, not only will our government's tax revenues decrease but also in such event the tax burden on compliant taxpayers will increase.

Finally, taxpayers who subsequently litigate with the IRS and do not properly prepare their cases under the mistaken belief that the shift in the burden of proof means that IRS must "prove everything" may be surprised and upset when they are confronted with discovery demands by the IRS and ultimately by an adverse decision by the court. All of us who have been involved in litigation understand that in today's climate of substantial discovery, it is likely to be difficult for a taxpayer to use burden of proof as a substantial sword or shield. Taxpayers representing themselves before the IRS and the courts, however, may be misled into believing that they do not have to produce information and arguments justifying the amount of their income and deductions if the government is required to bear the burden of proof. For these taxpayers, any new legislation shifting the burden of proof ultimately may be seen as a cruel hoax.

Because of the inherent fairness of our present system, the risk of potentially substantial losses of revenue if the burden of proof is shifted, and the confusion and uncertainty of pro se taxpayers about the implications of the shift, I oppose and would urge you to reject this legislative proposal.

2. Retroactivity of Treasury Regulations.

Presently, Treasury and IRS officials nave discretion about the extent to which regulations can be promulgated retroactively. Under Section 5803 of H.R. 11, proposed and temporary regulations could not be applied retroactively to periods preceding the date of publication unless Congress so provided or unless necessary to "prevent abuse of the statute to which the regulation relates" or "correct a procedural defect in the issuance of any prior regulation."

As a former Commissioner and as a practitioner, I support the notion that regulations should be issued promptly after legislation is enacted in order to provide affected parties with appropriate guidance and also to avoid the problems that retroactivity creates. However, because of the volume and complexity of tax legislation so frequently passed by Congress over the last thirty years, in my experience it has been increasingly difficult (maybe impossible) for the Treasury Department and the IRS to issue regulations as promptly as desirable and needed. Further, it is my experience that, under our government of checks and balances, it often is easier for taxpayers and their representatives to block or defer the issuance of regulations than it is for the Treasury and IRS to issue them timely, particularly those regulations that are perceived to affect the interests of taxpayers adversely.

Tax policymakers and administrators must deal with the delicate and difficult decision as to whether and to what extent a regulation should be retroactive or prospective. They must deal with a variety of different situations in which retroactivity, rather than prospectivity, is called for or required. I do not believe that the exceptions in the proposal to permit retroactivity are sufficient to cover the myriad of situations and conditions in which the issues arise. Indeed, in light of these circumstances, I seriously doubt the wisdom of attempting to prescribe in advance when regulations should be promulgated retroactively or prospectively. I believe that flexibility to respond to the exigencies of the particular situation is critically important, and that such flexibility is fundamentally what is included in the present provisions of Section 7805(b) of the Internal Revenue Code.

In balancing the needs of the IRS with the rights of taxpayers, I believe that the present flexibility should be continued. Courts have fashioned numerous remedies to permit taxpayers to overturn or circumvent regulations in appropriate circumstances. Over the last thirty years the courts consistently have demonstrated a willingness to uphold taxpayers' actions despite contrary provisions of the regulations when a court determines that the taxpayer has substantially complied with his or her tax obligations or that the IRS has abused its discretion in formulating or administering its regulations. Therefore, I urge you to reject this proposal.

3. Political Appointment of Ombudsman.

Presently, there is a Taxpayer Ombudsman on the staff of the Commissioner of Internal Revenue who is appointed by the Commissioner and who oversees the Problem Resolution Program (PRP) of the IRS. Section 5001 of H.R. 11 would replace the Ombudsman with a 'Taxpayer Advocate.' who would be appointed by the President and confirmed by the Senate and who would supervise all of the PRP personnel. As a former Commissioner and a practitioner, I have worked directly with the Ombudsman and PRP representatives, and I enthusiastically support their goals and activities. My experience suggests that the role and importance of the Ombudsman and the PRP programs are increasing. I believe that among the keys to continued effectiveness of these programs is the need to institutionalize the attitudes and objectives of the Ombudsman and PRP throughout the policies, procedures and personnel of all of the functions of the IRS.

In my opinion, the proposal in H.R. 11 would do just the opposite. By creating a new office headed by an independent Presidential Appointee and given a statutorily mandated independent function, the proposal separates PRP. In any large organization, once a program is separated, it becomes almost impossible to institutionalize the attitudes and objectives of the program. If the present proposal is enacted to statutorily mandate the Presidential appointment of a Taxpayer Advocate to whom the PRP program will be responsible, I believe that the detriments resulting from such change will more than offset any intended benefits.

Further, I am concerned that the rigidity and difficulty of amending statutory provisions will stifle the activities of the Ombudsman and PRP. At a time when the business, organization, and activities of the IRS are undergoing substantial and continuing change, I believe that the Ombudsman and PRP must have the flexibility to make changes in organization, activities and functions that will not be permitted by the proposed statutory provisions in H.R. 11. In light of the difficulty that Congress has had in passing technical corrections bills in recent years, I do not believe that there is sufficient flexibility in the Congressional tax legislative process to be able to accommodate the need for changes in the statutory provisions that future events affecting IRS in general, and the Ombudsman and PRP in particular, may require.

I am particularly concerned that the changes proposed may politicize the Ombudsman and thereby render the Ombudsman less effective in leading and managing PRP. As you may know, the Ombudsman presently is involved personally on a daily basis in numerous audit, collection and other enforcement activities affecting specific taxpayers. Often taxpayers or their representatives request the involvement of the Ombudsman. History has taught all of us about the dangers inherent in the involvement of political appointees in such activities on a day-to-day basis at the request of taxpayers. I therefore oppose and urge you to reject this proposal.

Thank you for inviting me to testify. I will be happy to answer any questions.

Lawrence B. Gibbs
Miller & Chevalier, Chartered
655 15th Street, N.W., Suite 900
Washington, D.C. 20005
Telephone: (202) 626-6005