Madam Chairman and Members of the Subcommittee:

I appreciate the opportunity to testify before you today on ways to enhance taxpayer rights and safeguards. Properly defined, this objective embodies the most important challenge facing tax administration. I applaud your interest, concern and ongoing oversight in this area.

While I am appearing today solely in my individual capacity, and not on behalf of any client or organization, I have had the privilege of addressing this issue from other perspectives: as IRS Chief Counsel, IRS Commissioner, and Assistant Secretary for Tax Policy. I also have perspectives on this issue as a private practitioner, taxpayer, and citizen. These different vantage points have shaped my views on how best to maintain and enhance taxpayer rights and safeguards. In particular, they have convinced me that all participants in the tax system -- the Federal government, Treasury and the IRS, taxpayers, tax practitioners and citizens -- share the same overriding objective of enhancing taxpayer rights and safeguards. Moreover, I am convinced that all parties can agree in large measure on the best avenues to achieve "their" common goal.

A. Preliminary Comments.

Before turning to the specific questions you raised in the hearing announcement and in your invitation to appear before this Subcommittee, I would like to offer one general observation. So much of what we do in our public and private lives is about setting priorities and making choices. The same applies to the issue you are addressing today. The list of "things" that could be explored to enhance taxpayer rights and safeguards is truly endless. Any effort to consider (or do) them all would be futile and counterproductive. The challenge is to identify the "vital few" and assure that they are pursued vigorously and successfully.

In my opinion, there are two steps that must be taken to enhance taxpayer rights and safeguards. They both embody the same objectives as an item in the Contract With America: the "Job Creation and Wage Enhancement Act" provisions that focus on reducing the regulatory burden on our citizens. In the context of the tax system, the most important single step that can be taken is to achieve a dramatic reduction in the administrative and compliance burdens placed on taxpayers. The importance of this effort cannot be overstated: an intrusive, unresponsive and unworkable tax system is imposing an unacceptable burden on our citizens, and is a primary cause for the widespread distrust of government.

The two steps I recommend are:

1. Tax Systems Modernization ( "TSM" ).

Fully fund Tax Systems Modernization ("TSM") (including the funds requested in the Administration's Budget Request for FY 1996), and provide the constructive oversight necessary to assure its timely and successful implementation. The IRS is running on outmoded computers and stone age information systems. As a result, taxpayers waste hundreds of millions of hours and dollars each year in their dealings with the IRS. Issues that should never arise take months to resolve. Issues that should be resolved in a phone call require years of correspondence. Taxpayers must deal with numerous IRS employees to resolve the simplest of matters, when only one contact should suffice. A taxpayer needing a copy of his or her tax return to apply for a loan or a scholarship should be able to get a copy from the IRS in days; it now takes an average of several months, and millions of taxpayer requests for copies of their returns are never filled.

TSM can be and has been described in many ways. My own preference is for the framework embodied in the notions of burden reduction and "one stop service." Taxpayers ought to be able to resolve most IRS matters by dealing with one individual, most often through a single phone call. Based on my various experiences in government and the private sector, I am confident that TSM, properly designed and implemented, will save taxpayers hundreds of millions of dollars and hours each year. As a result, full funding of TSM, coupled with constructive oversight, is the single most important action that this Congress can take to enhance taxpayer rights and safeguards.

I recognize that TSM, standing alone, will not be sufficient. I should also emphasize that it will only succeed if the IRS is committed to a vision built around reducing the burden on taxpayers. Finally, I acknowledge that many mistakes are certain to occur along the way in an endeavor of this magnitude. Having said as much, the fact remains that TSM is the one essential step that must be taken. If that effort is delayed, or is not successful, there is nothing that this Subcommittee or any one else can do to rescue our citizens from an intrusive, burdensome and overreaching system of tax administration. ( As I've indicated, the IRS has made mistakes in pursuing TSM, and will make more mistakes as it goes down the road. That's reality, and to be expected. All in all, the IRS is doing a fabulous job. While it should be encouraged and supported in its efforts to do better, there is no turning back. If anything, the pace should be accelerated.

In this regard, I should acknowledge recent GAO criticism of the IRS modernization effort. In my opinion, the GAO commentary is simply wrong. It displays a stunning lack of perspective. It ignores reality and is often misleading. I believe it can be fairly characterized as destructive and counterproductive. I realize that these are harsh words. Unfortunately, I believe they are accurate. I recommend that this Subcommittee, and other affected Congressional committees, consider restructuring or terminating GAO's responsibility in this arena and pursue other oversight avenues that will help assure that TSM is carried out successfully. )

2. Tax Simplification.

Pursue tax simplification -- relentlessly and creatively. We are crushing our citizens, as well as our business, charitable and religious institutions with laws, regulations and procedures that are burdensome, duplicative, frequently unworkable, and often counterproductive. Simplification is another essential step that must be taken to enhance taxpayer rights and safeguards.

I acknowledge the common wisdom: when Congress threatens to simplify the tax law, most taxpayers and practitioners decide it's time to duck. That pattern must change. While fundamental reform may be the only way to achieve the kind of dramatic simplification that is called for, major steps can be taken within the confines of the current system. In particular, "think outside the box" -- recognize that any tax system is a grotesque necessity, not an end in itself; abandon the pathological quest for theoretical purity. Skip cosmetic surgery; excise whole tumors. When given the choice, simplify in a way that "loses" a little revenue -- increased receipts from improved compliance and reduced administrative costs will far off-set the "estimated" loss. Don't bother trying to simplify in a way that "raises" revenue -- it simply replaces one form of tax with another; it's just not worth the effort. Beware of "loophole closers": for the most part, they amount to surgery on the capillaries of a patient that's expiring from ruptured arteries. If truth be told, the revenue that most "loophole closers" generate goes to line the pockets of lawyers, accountants, investment bankers and other intermediaries.

B. Comments on Specific Proposals

Various measures previously considered by Congress ( e.g., H.R. 3838, as proposed and as modified for inclusion in H.R. 11), and measures introduced in recent months (e.g., H.R. 390, H.R. 661, and S. 258), contain numerous proposals that are intended to enhance taxpayer rights and safeguards. I will limit my comments to the following broad areas:

(1) the burden of proof;

(2) attorneys' fees; and

(3) a suggested framework for considering myriad specific provisions.

1. Suggested Changes in Rules Governing the Burden of Proof.

From time to time, and for many years, it has been suggested that the IRS should bear the burden of proof in tax litigation. Boiled down to its essence, the appeal of this Siren song is obvious: in a democracy, it's simply wrong to put the burden of proof on a citizen in his or her dealings with the government. Framed this way, I'm certainly tempted to agree.

Unfortunately, I am convinced that shifting the burden of proof in tax cases would be the surest and most direct route to the worst of all possible worlds. It would be an enormous windfall to the few taxpayers who are bound and determined to cheat the system; it would impose an intolerable burden on the vast majority of honest taxpayers who do their best to comply with the law.

For better and for worse, our system relies on self-assessment by taxpayers. The system functions because taxpayers are expected to maintain adequate records and to report properly their items of income, deduction, credits and the like. Changing the burden of proof would have two consequences:

First, it would reduce voluntary compliance. While most citizens would continue to try to pay their fair share, there would be some who would take advantage of the new framework to understate their liability and leave it to the government to prove a different result. While I am convinced that most taxpayers are fundamentally honest, and that the decline in voluntary compliance would be small in percentage terms, the revenue loss and the gradual erosion in the perceived fairness of our system would be sizable. To put this in perspective, a decline of only 1% in voluntary compliance would cause an annual revenue loss of more than $10 billion. While estimates of this sort are highly speculative, my personal view is that the annual revenue loss ultimately would exceed this amount.

Second, largely in response to the foregoing, the IRS would be compelled to alter its approach to enforcement. Most of us believe that the IRS is far too intrusive today, and that tax administration is far too cumbersome, contentious and burdensome. Well, as the saying goes, "you ain't seen nothin' yet." Change the burden of proof and IRS tactics of today will seem like child's play. Of necessity, the IRS would be forced to resort to far more aggressive techniques in auditing taxpayers and developing cases. Summonses, including third party summonses, would become routine. Expanded record-keeping requirements and increased litigation over discovery issues would be standard fare. In addition, the number of revenue agents and audits of taxpayers would likely increase dramatically. In the world of tax administration, it's hard to imagine a more well-intentioned idea that would have more undesirable consequences.

Having said as much, I do believe there are several areas where the burden of proof question could be addressed by Congress. The first involves a clarification included in H.R. 11 in response to the Tax Court's decision in Portillo v. Commissioner, 58 TCM 1386 (1990), rev'd in part and aff'd in part, 982 F.2d 1128 (1991). Section 5503 of H.R. 11 would have required the IRS to provide additional probative evidence in addition to the copy of an information return in litigation regarding the inclusion of additional income reflected on that return. Because taxpayers are faced with the need to "prove a negative" in unreported income cases involving information returns, I believe a change along these lines is warranted. At the same time, however, I should note that this provision reflects current IRS administrative practice and is therefore likely to have little practical impact except in rare and unusual consequences.

A second area where the burden of proof should be shifted involves attorneys' fees. As noted below, I believe that the award of attorneys' fees to taxpayers should be automatic in certain circumstances. Under the current regime, Section 7430 requires a taxpayer who has substantially prevailed to prove that the government's position was "not substantially justified." Once the government has lost, I think it appropriate to require the government to prove that it's position was substantially justified.

2. Attorneys' Fees.

As a citizen, and as an attorney, I believe that provisions contained in the Contract With America's "Common Sense Legal Reforms Act" are long overdue. I congratulate you and your colleagues for your timely action. My one observation is that the original proposals have already been diluted needlessly in some respects; hopefully, they will sail through the Senate during the coming months without taking on any more water.

The rationale underlying H.R. 988 is even more compelling in tax cases. I am confident that the government does not engage in "strike suits" for the purpose of extracting settlements from taxpayers. On the other hand, the practical effect can be the same. Moreover, the government lacks the same kind of settlement initiatives that are present in the private sector because there are no market pressures requiring a rational allocation of resources. Finally, the government occasionally insists on litigating a case to "make" or "clarify" the law without regard to its risk of losing. While such action may be appropriate, there is no reason why a prevailing taxpayer should be required to foot the bill. Accordingly, I recommend that costs and expenses should be imposed on the government under circumstances similar to those identified in H.R. 988 (tailored to meet various procedural considerations unique to tax controversies).

I recognize that consistency would impose a corresponding liability on taxpayers. While that approach might be warranted, I urge the Subcommittee to address that question in light of the other sanctions imposed on taxpayers under current law (e.g., the Section 6662(b)(2) substantial understatement penalty, the Section 6662(b)(3) and (b)(5) valuation misstatement penalties, the Section 6662(b)(4) pension liabilities overstatement penalty, the Section 6621(a)(2)(B) excess interest charge on taxpayers, the Section 6621(c) penalty interest provision applicable to large corporations, and the Section 6673 sanctions where a taxpayer's litigating position is "frivolous")( My personal view, unsupported by any particular logic, is that taxpayers should be permitted to spend their time and money litigating against the government in tax matters despite the odds -- without liability for attorneys' fees. While I recognize that this has the practical effect of imposing costs on all other taxpayers, there is something quintessentially American about challenging the government "just to make a point" (perhaps, about the unintended consequences of the law or the absurdity of the government's own rules).) Stated differently, if a parallel regime governing attorneys' fees is desired, these other sanctions should be revisited and modified. Under no circumstances, however, would I make taxpayers involved in small case litigation (so-called "S" Cases) subject to liability for attorneys fees.

I also recommend that the provisions of Section 7430 be broadened and relaxed in several respects (e.g., as noted above, shift the burden of proof to the government; make the award of attorneys' fees under Section 7430 available to all taxpayers; delete the limitations contained in subparagraphs (b)(1), (b)(3) and (b)(4); relax the "substantially prevailed" standard). The IRS has done a reasonable job of administering Section 7430 as drafted. The problem is that the statute, as drafted, is too narrow.

Finally, while it does not relate directly to the awarding of attorneys' fees, I would like to comment on costs incurred by taxpayers arising out of the so called Taxpayer Compliance Measurement Program (TCMP). While such examinations are wholly appropriate in that they seek to determine the taxpayer's proper tax liability, they also purport to serve other objectives relating to tax administration ( As noted above, this same concept provides an additional rationale for requiring the government to pay attorneys' fees.). The ordeal that taxpayers must endure to survive a TCMP audit defies description. If this program is continued, I believe that taxpayers should be entitled to recover reasonable costs incurred in the process ( In the spirit of full disclosure, I should acknowledge my oft-stated view that TCMP has outlived its usefulness and should be restructured or abandoned.).

3. Framework for Considering Other Proposals.

I suggest that the Contract With America, and Phil Howard's recent book, "The Death of Common Sense: How Law is Suffocating America" (1994) serve as a starting point for considering myriad other proposals to enhance taxpayer rights and safeguards. I also recommend Bayless Manning's remarkably prescient article, "Hyperlexis: Our National Disease," 71 Northwestern university Law Review 767 (1977), as well as Gordon Henderson's "Controlling Hyperlexis--The Most Important 'Law And.. ....'," 43 Tax Lawyer 177 (Fall 1989).

The Contract, Mr. Howard's book, and the articles by Mssrs. Manning and Henderson make a simple and compelling case. We can't legislate common sense or good judgment. We cannot enact laws to right every wrong. While such efforts may be well-intentioned, they do more harm than good.

The same applies to tax administration and to legislation designed to enhance taxpayer rights and safeguards. Legislation that is intended to mandate common sense, or to right every wrong, is sure to fail. There are simply too many areas where common sense is required, and where its application to specific circumstances cannot be adequately anticipated. Likewise, there are too many "wrongs" that cannot be "righted" by legislation. The law of unintended consequences has far too wide a reach.

The best of legislative intentions often pave the road to more litigation, greater taxpayer burdens, increased uncertainty, and counterproductive side effects. In all too many cases, legislation of this type is a futile effort to treat symptoms, while ignoring causes. If Congress concludes that there are areas where the Service consistently displays a lack of common sense, the better approach is to use the oversight process.

The primary focus of legislation -- and administrative actions -- should be to remove barriers to the exercise of common sense. I am convinced that taxpayers' rights are violated most often in cases where "the rules" prevent (or are perceived as preventing) fair play and the exercise of good judgment.

Finally, I would like to return briefly to the point I made at the outset regarding choices and priorities, and reference the Contract With America's attack on unfunded mandates. Every measure you enact entails a choice, and sets a priority. Every measure you enact imposes a "mandate" on the IRS. If you require the IRS to take any action, it means the IRS will not do something else, or will do something else less well.

With these observations in mind, I have the following comments on various proposals that may be considered by this Subcommittee as it deliberates in the months ahead. They are not intended as an exhaustive list; rather they are intended to illustrate the difference between attempting to legislate common sense and empowering the exercise of good judgment. Because I am more familiar with H.R. 11 as approved by Congress in 1992, my references are to provisions of that bill. By and large, my comments are equally applicable to taxpayer rights legislation introduced since that time.

Proposal #1: Restructure the Ombudsman position, and limit authority of senior officials

Comments on Proposal #1:
This is an effort to legislate common sense by imposing rigid lines of authority and reporting chains. It would accomplish little good, could cause much harm, and would be a barrier to the exercise of good judgment.

Proposal #2: Installment Agreement Changes: automatic right, mandatory 30-day notice, mandatory "independent administrative review"

Comments on Proposal #2:
Once again, an effort to legislate commonsense by imposing rigid rules. Proposals would accomplish little good, would cause much harm (including a substantial increase in noncompliance and lost revenue), would impose needless administrative costs and prompt needless litigation, and would be a barrier to the exercise of common sense. The IRS is doing a far better job in administering Offers in Compromise and Installment Agreements (thanks in large measure to the work of this Subcommittee). The primary challenges are to achieve greater consistency (there are still pockets of resistance to change) and to continue refining standards (not every taxpayer can be expected to win the lottery or inherit a million dollars). Legislation is not the way to assure progress on these fronts. On the other hand, it is clearly appropriate to suspend the failure to pay agreement.

Proposal #3: Preclude the issuance of retroactive regulations

Comments on Proposal #3:
In very rare and unusual circumstances, retroactive regulations may be justified. While Congress may wish to legislate guidelines limiting their use, I believe that the government has generally (though not always) exercised its retroactive authority with proper care. A more effective avenue may be ongoing oversight to assure that Treasury and IRS use good judgment.

It is also worth noting a related problem: the rush to judgment. While I would not recommend a legislative solution at this time, I am concerned that a preoccupation with "protecting the revenue" leads to IRS rules and regulations with immediate effective dates that are not well thought out from a policy or implementation perspective. While nominally prospective,these pronouncements can be every bit as pernicious as facially retroactive rules.

Proposal #4: Interest abatement

Comments on Proposal #4:
I am of two minds on this issue. The arguments against abatement authority are: interest is simply a charge for the use of money; it is a mechanical computation and abatement is inappropriate. Moreover, abatement authority would spawn substantial new litigation over standards that would be extremely difficult to apply in practice.

The argument in favor of abatement focuses on IRS-caused delays, and the additional cost that those delays impose on taxpayers.

I think this debate misses several points. First, many taxpayers do not see themselves as "borrowers" -- as the result of an honest mistake, a financially strapped family is faced not only with an unanticipated tax bill, but an enormous interest charge as well. Second, the tax law imposes numerous failure charges in addition to interest (e.g., failure to file and failure to pay penalties). Third, deficiency interest rates do not reflect the government's cost of funds; they purport to reflect taxpayer borrowing costs.

On balance, I think that the interest abatement proposals under consideration will accomplish less than hoped (c.f., attorneys' fees under Section 7430), and will cause far more administrative difficulties than imagined. As a first step, I think that the better approach would be to do a better job of clarifying objectives, and explore various mechanical changes (e.g., lower rates under certain circumstances) to achieve those ends. If it's not possible to make the mechanics work properly in that context, I would recommend abatement authority that is broader than currently proposed: permit the IRS to take all factors into account (e.g., hardship, nature of the adjustment, taxpayer's prior compliance history, role of outside advisors, etc.). It may also be appropriate to limit the abatement authority to amounts above the government's cost of funds.

Following are other examples of provisions that give taxpayers or the IRS more latitude to exercise common sense:

• Sections 5301 and 5302 of H.R. 11 (relating to joint returns) -- provides taxpayers with greater latitude to exercise common sense

• Sections 5401 and 5402 of H.R. 11 (modifications to lien and levy and offer-in-compromise provisions) -- provide the IRS with greater authority to exercise common sense

Following are examples of provisions that I believe are futile or counterproductive efforts to legislate common sense:

• Sections 5604(a) and (c) of H.R. 11 (relating to the Section 6672 penalty for failure to collect and pay over tax) -- the goals and the approach are both laudable, but the mechanical rules are likely to create more problems than they solve

• Section 5801 of H.R.. 11 (required content of certain notices) -- notice clarity, like beauty, is in the eyes of the beholder; more to the point, neither can be legislated. (And, moving from the sublime to the ridiculous, the legislative history provides that IRS failure to comply with the statute has no consequences.)

• See, also, Sections 5901 and 5902 if H.R. 11.

C. Conclusion.

Perhaps the best way to summarize my views is to urge you to heed the teachings of the Contract With America: set priorities -- don't try to enact laws to solve all the ills that afflict tax administration; focus on reducing the burden that the tax laws and tax administration place on taxpayers and citizens; don't try to legislate common sense -- empower the exercise of good judgement; be sensitive to unfunded mandates, even on the IRS.