Thank you for the opportunity to testify on reforms to improve taxpayer rights. I represent the 300,000 members of the National Taxpayers Union who strongly support providing taxpayers with additional rights and protections during the tax audit and collection process. I am accompanied by Jack Warren Wade, who is an advisor to National Taxpayers Union and author of many books on tax compliance. Mr. Wade once headed the national revenue officer training program for the Internal Revenue Service.

Representative Johnson, we commend you for scheduling this hearing to examine taxpayers' rights. The IRS touches the lives of more American citizens than any other government agency. Because the IRS has more power than any other agency, it is especially important that Congress establish safeguards to protect the rights of taxpayers and to regularly maintain oversight of the tax collection power.

We strongly endorse S. 258, which is similar to the Taxpayer Bill of Rights II provisions in H.R. 11 of the 102nd Congress.

It's Time to Make the Ombudsman More Independent.

The 1992 House bill established a new position, known as the "Taxpayer Advocate" within the IRS. According to the Conference report on H.R. 11, this Taxpayer Advocate "replaces the position of Taxpayer Ombudsman. The Taxpayer Advocate is to be nominated by the President, by and with the advice and consent of the Senate." The final version of H.R. 11 was similar to the House bill, but S. 258 does not include a provision for making the Taxpayer Advocate a political appointee. This would be a serious mistake.

We strongly believe that the Taxpayer Advocate should be a political appointee and not a career IRS employee. As a political appointee the Taxpayer Advocate would be free to be a true taxpayer advocate without concern for his career aspirations within the IRS. He would not have to worry about how other IRS managers view his input into their areas of responsibility. Also, a political appointee would come to the job independent of the restrictive mission-oriented mentality that besets many career agency executives. He would be more receptive to the needs of taxpayers and to changing business-as-usual. A four year term would enable each new administration to replace the Taxpayer Advocate.

Some have expressed concern about the Taxpayer Advocate being a political appointee. When he was Commissioner, Roscoe Egger once testified that such independent power "would not provide a balance between protecting the government's and taxpayers' interests and would open up dangerous potential for political abuse of the tax system." That's absurd. The Taxpayer Advocate would have no powers for such mischief. After all, the Commissioner is a political appointee. We're convinced that there is room in the IRS for one more political appointee. We believe there are proper checks and balances within the agency to prevent any political abuses or mischief. These include oversight from the IRS Internal Security Division and Treasury's Inspector General as well as an agency culture that resists political pressure.

We also support the proposal to mandate that the Taxpayer Advocate annually report "at least 20 of the most serious problems encountered by taxpayers, including a description of the nature of such problems" and to make "recommendations for such administrative and legislative action as may be appropriate to resolve problems encountered by taxpayers." This is a sound proposal. Much of the agency's emphasis has been on ensuring taxpayer compliance, which is certainly part of the mission. But taxpayer compliance also can be increased by reducing problems and taxpayer frustration.

"We believe a provision should be added to require the Taxpayer Advocate to form advisory groups from the public and the tax industry to provide feedback about IRS operations and their effects on the taxpaying public."

Taxpayer Assistance Orders and the Problem Resolution Program.

While the Problem Resolution Program has undoubtedly achieved a great deal of success in helping taxpayers, we think there is still room for improvement. Reports have surfaced about problem resolution officers (PROs) who have not been helping taxpayers even though the circumstances appear to warrant intervention. Bob Kamman, a Phoenix, Arizona attorney, who contributes to our Tax Savings Report newsletter, has written that after a Form 911 is filed with a PRO, "that person refers it to the branch of the agency where the difficulty originated. The response quite often is made by the person who caused the problem in the first place. It's not easy to tell co-workers down the hall, who may eat at the same cafeteria table, ride in the same carpool and bowl in the same league, that they screwed up. Sometimes the PRO does it, but often he won't. That's what happened to my client ..."

I have heard complaints that some PROs believe they are not technically qualified to pass judgment on a particular taxpayer's complaint and temporarily overrule the IRS action. If this is indeed a problem, it would account for the dearth of Taxpayer Assistance Orders (TAOs) that have been granted.

The IRS will undoubtedly say that the reason for the dearth of TAOs is that the mere threat of a TAO often will accomplish the task. Mr. Kamman makes the excellent point that "we don't evaluate the effectiveness of police carrying guns by the number of times they shoot them." But the TAO is hardly the equivalent of a bullet.

The Standard of Hardship is Unnecessarily High for a TAO.

One other potential explanation is that the IRS is using an excessively strict standard of hardship. We strongly support the S. 258 provision to reduce the hardship requirement.

If the IRS is violating its internal policies or the tax laws, the Taxpayer Advocate should have the power to issue a TAO. This is altogether reasonable. After all, why should the taxpayer have to bear significant hardships in order to qualify for a TAO?

Mr. Kamman makes several sensible suggestions about how to liberalize the criteria to qualify for a TAO. He suggests that the following questions be considered:

1) Is the taxpayer falsely being accused of filing an incorrect return, or not paying taxes owed?

2) Is the taxpayer incurring expenses paid to tax professionals in an attempt to resolve a problem, not just to calculate a liability?

3) Did an admitted IRS error cause the problem in the first place?

4) Has there been an unreasonable delay in IRS remedial action?

If the answer to any of these questions is yes, hardship should be presumed de facto, and further inquiry into the particular burden of the hardship need not be made.

The Taxpayer Advocate should have the right to intervene in any enforcement proceeding or activity when a taxpayer has made a petition to the Ombudsman that at least one of the following conditions exist:

• There has been an improper or possibly illegal assessment.

• There has been an assessment made without the knowledge of the taxpayer and without benefit of the taxpayer's appeal rights.

• There has been an action in violation either of the statutory procedures of the Tax Code, the policies or regulations of the IRS, or the procedural requirements specified in the Internal Revenue Manual.

Taxpayers Can Still Lose Even When They Win.

Although the Taxpayers' Bill of Rights passed in 1988 offers important new protections for taxpayers, the job of protecting innocent taxpayers from ruin is far from complete. For example, I have serious doubts that it would have prevented the well documented Council family tragedy.

The original Taxpayers' Bill of Rights proposal would have allowed taxpayers to sue for damages if "any officer or employee of the Internal Revenue Service carelessly, recklessly or intentionally disregards any provision" of the tax laws. As the bill progressed through the Congress, the word "carelessly" was dropped from what became Section 7433 of the tax code.

Was the IRS treatment of the Council family careless and negligent? Absolutely. The Court's decision was clear on this point. Was it reckless or intentional? It might have been, but that is a very difficult standard to prove.

In the 1986 Tax Reform Act, Congress substantially liberalized the definition of negligent actions by individual taxpayers. During the 1980s, tax preparers have also been subject to increasing penalties for not exercising due diligence. Yet incredibly, Congress refuses to require the IRS to exercise reasonable caution in using its vast array of enforcement powers. We believe Congress should require the IRS to practice due diligence in its enforcement actions in order to prevail in litigation where a taxpayer sues for damages. Congress should require that the IRS issue regulations defining a due-diligence standard for actions by its employees. We expect that the IRS would include the procedures already outlined in the Internal Revenue Manual as much of the criteria to define this standard.

Taxpayers who have been financially harmed or devastated by IRS carelessness in ignoring a due-diligence standard should have the right to sue and recover damages. We strongly support allowing taxpayers to recover damages for negligent action by the IRS. We also strongly support the proposal in S. 258 to raise the cap for damages to $ 1,000,000.

If a U.S. corporation makes a product that injures a consumer, consumers don't have to prove that the corporation recklessly or intentionally harmed the consumer in order for the consumer to win an award. Neither should a taxpayer who falls victim to the negligence of the all-powerful Internal Revenue Service.

I would also like to note a flaw in Section 7432 of the tax law. While it appears to allow a lawsuit for damages for failure to release a lien, it only applies for a failure to release a lien under Section 6325, not the imposition of the lien under Section 6321 in the first place. Legislation should correct this flaw.

Attorney Fee Awards Are Woefully Inadequate.

As Kay Council's case showed, taxpayers can suffer enormous financial damages even when they win. Kay was fortunate to receive an award of attorneys' fees for her case. But the fee award didn't come close to paying her total costs. She still owed tens of thousands of dollars.

While her attorneys billed her at $135 per hour and $90 per hour, depending on the respective seniority of the attorney, the judge was restricted by the outdated $75 per hour cap in the current law. He therefore only allowed reimbursement at a rate of $75 per hour and $49 per hour, leaving Kay to pay the difference. Does Congress want to say to future Kay Councils that they'll have to pay through the nose for legal help to fight a careless, incompetent or abusive IRS?

It's very difficult to win attorneys' fees. Also, the courts are extraordinarily reluctant to award attorneys' fees in excess of the $75 per hour cap in the current law. Proving special factors is almost impossible.

Unlike the standard for award of attorneys' fees in the Equal Access to Justice Act, plaintiffs in tax cases must prove that the IRS "was not substantially justified" in pursuing the case. It would be much fairer to require that the government prove it was acting reasonably in order to prevent an award of attorneys' fees.

To protect taxpayers from enormous financial losses incurred while fighting the IRS, we strongly support the proposal in S. 258 to raise the outdated $75 per hour cap to $110 per hour, then index it to inflation The court would still be limited to awarding only "reasonable fees," preventing excessive awards. The proposed change that would allow taxpayers to collect more costs is also very important. We strongly recommend that the $110 per hour cap be lifted to $150, or at least reflect inflation since 1992. The original Senate bill of the 102nd Congress contained the $150 figure.

Taxpayers' Rights Review.

One provision of S. 258 would create a " 1-year pilot program for appeals of enforcement actions (including lien, levy, and seizure actions) to the Appeals Division of the Internal Revenue Service." This is an excellent idea, and we hope that such a program would be made permanent. Had this proposal been in effect years ago, it may have prevented the Council family tragedy. It will certainly help ensure fair treatment during the tax collection process.

Taxpayers who are being treated unfairly by the IRS often don't have the financial means to mount an expensive court fight. This new administrative appeal procedure can help ensure fair treatment for taxpayers of modest means.

The Berlin Wall Stopping Taxpayers' Rights.

In the rare cases when the IRS goes out of control, federal law largely prevents the courts from allowing taxpayers to enforce their rights. The Federal Tort Claims Act allows the government to be sued in certain instances but specifically excludes "any claim arising in respect of the assessment or collection of any tax or custom duty." Of course, the 1988 Taxpayers' Bill of Rights granted two very limited exceptions to that rule.

Another unnecessarily restrictive law is the Anti-Injunction Act, the law that we call the Berlin Wall against taxpayers' rights. Mr. Chairman, it's past time to tear down this wall.

Under Section 7421 of the Internal Revenue Code, no lawsuit can be brought by any person in any court for the purpose of restraining the assessment or collection of any tax, except in limited circumstances.

The case law around the Anti-Injunction Act indicates many problems in obtaining injunctions to restrain the collection of the tax. It is clear that injunctions will be granted where the failure to grant relief would result in irreparable damage to the taxpayer. But an injunction will only be allowed where it is clear that under no circumstances would the government prevail (or the taxpayer would not owe the tax). Otherwise only two remedies are available to the taxpayer: 1) pay the tax, file a claim for refund, and sue for recovery if the claim is rejected; 2) file a petition in Tax Court before assessment and within the short period of time allowed for filing such a petition.

We think that the Anti-Injunction Act should be amended to give taxpayers the ability to enforce their rights if necessary. Taxpayers should be allowed to file suit in a federal district court to enjoin in the IRS from enforcement action because: the deficiency assessment was made without knowledge of the taxpayer and without benefit of the appeal procedures provided by law; there has been an improper or illegal assessment; there has been an action in violation of the law or tax laws or regulations providing for procedural safeguards for taxpayers; the IRS has made an unlawful determination that collection of the tax was in jeopardy; the value of seized property is out of proportion to the amount of the liability if other collection remedies are available; or the IRS will not release the seized property upon an offer of payment of the U.S. interest in the property.

Then, there's also the Declaratory Relief Act. This law says that citizens can file suit to get a court to declare their rights "except with respect to federal taxes."

In author David Burnham's excellent book, A Law Unto Itself, he quotes California tax attorney Montie Day and his views on these laws that prevent taxpayers from enforcing their rights. He says that allowing such limited lawsuits would make "the IRS more accountable ... and make the agency more likely to operate in a lawful fashion."

To illustrate this point, he said "assume you are under audit and somehow you learn that the revenue agent has decided the best way to investigate you is to break a window of your office, climb through it and examine your correspondence.

"You come into my office for advice, wanting the court to rule that the IRS agent can't conduct his audit in this way. We consider filing a suit for declaratory relief, but then we remember that the court does not have the authority to issue such a declaration of rights in tax matters because of that exception in the Declaratory Relief Act.

"Then we think about requesting a court order to enjoin the agent from conducting his tax investigation by breaking into your office. This approach, of course, cannot be followed because the court is forbidden to even consider such requests under the Anti Injunction Act."

As long as taxpayers are largely banned from suing to enforce their rights, taxpayers will continue to be at risk of financial ruin and emotional devastation from the IRS. It is completely unfair for the IRS to have all the powers and for taxpayers to have few rights that can only be enforced with great legal difficulty. We must ensure fair treatment of innocent taxpayers to continue respect for our Constitutional system of government.

Congress Should Safeguard the Right to be Self-Supporting.

The Taxpayers' Bill of Rights made the very necessary improvement of exempting a larger amount of a taxpayer's weekly salary from levy. But it made little change in the amount of property exempt from seizure.

The law lifted the amounts from a paltry $1,500 for personal property to $1,650 and from $1,000 for equipment and property for a trade, business or profession to $1,100. That's hardly any change, and it is far from sufficient to allow a taxpayer to be self supporting.

What self-employed plumber could maintain his self-employment with just $1,100 in tools, equipment and a truck? What computer programmer or author could do so? Very few, if any.

Who can provide the basic essentials of clothing and furnishings for a family with only a $1,600 exemption?

The bankruptcy laws provide far more protection than this. The Food Stamp program allows citizens to qualify for benefits with more assets than allowed under the tax laws!

We would like to see the exemption amounts lifted to either $10,000 or to provide the same protection as the bankruptcy laws. Many taxpayers are forced into bankruptcy court by the IRS. Raising the exemption amounts would take some of the load off the bankruptcy courts and safeguard the right to be self-supporting. The current levels are ridiculously low, and the proposed increases in S. 258 are not adequate to safeguard the right to be self-supporting.

Employees Who Abuse the Law Usually Go Unpunished.

There are many fine employees in the IRS who care about helping taxpayers comply with the law and who care about respecting taxpayers' rights. But given the sheer number of employees and the billions of tax returns and documents that are received by the IRS each year, it is inevitable that mistakes will be made and that some employees will act out of line.

The IRS has issued rules requiring tax preparers to exercise "due diligence" in the preparation of tax returns. In certain situations, preparers must cite "substantial authority" for the positions they take on tax returns. Failure to do so may result in monetary fines, being disbarred from practicing before the IRS, and a full scale audit of all the preparers' clients.

Yet IRS employees are often allowed to violate the IRS rules, regulations, policies, procedures, and guidelines at will and without fear of recourse. The law is so overwhelming and sweeping in its power conferred upon the tax collecting authority that there are few checks and balances on the exercise of that authority.

Taxpayers need more protections from arbitrary and capricious actions, and IRS employees should be held accountable for their violations. One theme that comes across again and again in Burnham's book is that the IRS almost always will not punish employees who make big mistakes in handling taxpayer disputes.

It seems clear that the IRS is more interested in controlling, regulating, and punishing taxpayers and practitioners for their violations than they are in controlling, regulating, and punishing their own employees for comparable infractions. If this double standard continues to exist, the compliance system as we know it could be in serious trouble.

Burnham reports a "disturbing footnote" about the occasions "when the IRS has crossed the line in its zealous enforcement of the tax laws: Agency officials involved in questionable activities are seldom punished." He also notes that many lawyers are worried "that the zealous, anything-to-win tactics are more and more becoming the accepted practice of the government." One of the fundamental principles of the U.S. Constitution is that people's rights shall be respected, even if it means that some people will escape being penalized for the laws they break.

Several years ago, Congressman Andy Jacobs introduced an amendment to a tax bill that would have permitted federal judges to make IRS employees personally liable for attorneys' fees paid by taxpayers who proved IRS agents acted arbitrarily and capriciously in pursuing the taxpayers. While this proposal may have gone too far, the concept is a good one-it would serve notice to IRS employees that they should be careful to protect taxpayers' rights.

Section 552(F) of the Federal Freedom of Information Act contains a standard that may be useful in drafting such a provision in the Federal tax law. It says that "Whenever the court orders the production of any agency records improperly withheld from the complainant and assesses against the United States reasonable attorney fees and other litigation costs, and the court additionally issues a written finding that the circumstances surrounding the withholding raise questions whether agency personnel acted arbitrarily or capriciously with respect to the withholding, the Special Counsel shall promptly initiate a proceeding to determine whether disciplinary action is warranted against the officer or employee who was primarily responsible for the withholding."

We expect the tax return preparers will be careful in preparing tax returns. Is it too much to ask that IRS employees and the agency be subject to some limited financial sanctions if they act to intentionally harm the taxpayer? We think not.

Installment Agreements.

Another provision of S. 258 would provide the right to an installment agreement if the taxpayer had not been delinquent in the previous three years and the liability was under $10,000. We think this is a good proposal, especially since it is limited to individual Form 1040 taxes. More taxpayers would be willing to concede to the IRS after an audit if they knew they would have time to pay an unexpected bill. Currently, taxpayers have an incentive to stall if they can't pay. Of course, any interest and penalties that would normally be owed would still continue to accrue.

Marriage, Divorce, and the IRS.

One of the most common complaints I hear comes from taxpayers who have divorced and one spouse has disappeared. Perhaps following a tendency in human nature, the IRS often goes after the spouse it finds first, whose name and address the IRS readily has on its computer, even though that spouse may be innocent.

Of course, in some cases, taxpayers can be relieved of the tax liability on a joint return under the so-called "innocent spouse" rule. However, its provisions are so complicated that it should be known as the "lucky spouse" rule for the few people who can meet all of its tests.

In one case in Arizona, the IRS dunned Carol Bettencourt, even though she had been divorced for five years. Her former spouse ran out on a court-ordered $60-a-month child support payments. Carol never saw a dime from him, but she was expected to pay his tax debts. Carol turned to the IRS Problem Resolution Officer, who told her that since she had once filed joint returns with her ex-husband, the only solution was to pay up.

But the Problem Resolution Officer failed to note that the IRS hadn't sent Carol's notice of tax deficiency to her last known address which the tax law requires. Fortunately, an attorney volunteered to review her case. With his help, Carol got her tax refund, which had been withheld to pay her husband's tax debt.

It is especially important to simplify and ease criteria that taxpayers must meet to qualify for protection as an "innocent spouse."

I don't see any reason why the IRS should not be required to honor divorce decrees that apportion responsibility for tax liabilities, provided that a decree splits such potential liability in proportion to the income earned by each spouse. A court could, for example, rule that in the last three years of marriage the husband earned 55 percent of the income and the wife earned 45 percent and thus require that any federal and state income tax liability that may be assessed against the couple be split accordingly to that ratio.

If the Congress is unwilling to do that, it should consider evenly splitting the liability between spouses. We currently have a situation that creates joint liability where the IRS tries to collect from one person -- an innocent spouse who is complying with the tax laws and is easier to find -- rather than from the responsible spouse, and that is often grossly unfair. The IRS should be required to pursue the spouse responsible for the tax problem. Any tax that arises from a business entity such a reported on a Schedule C should be apportioned to the spouse who owns the business entity. If additional tax arises from unreported income, the additional tax should be collected from the spouse who failed to report the income.

A divorced spouse should also have the right to petition the IRS for a final determination of any outstanding or potential tax liabilities. This would provide protection from a tax surprise on one spouse after a divorce is final.

I have heard reports that the IRS computer system is unable to set up separate collection accounts when the two divorced spouses live in different IRS districts. If this is true, then it is not simply a question of the IRS trying to collect the joint tax liability from the spouse who is located first, but the spouse whose case is being aggressively pursued by one of the two districts. Or, a Revenue Officer may determine that another spouse lives in another district and refer his case to the other district for collection. Case closed, problem transferred.

Much more needs to be done to protect divorced spouses.

Administration of the Federal Tax Deposit System.

If an employer does not report and deposit withheld income and Social Security taxes, then certain responsible officers can be held personally responsible for the taxes plus a one hundred percent penalty. This is an area ripe for reform.

When the IRS seeks to collect these trust fund taxes, it often assesses liabilities on everyone in sight (including bookkeepers, accountants, bank officers, inactive directors, inactive or resigned corporate officers and family members), whether they are truly a responsible officer or not. Inside the agency, this is called the shotgun penalty approach. A lot of innocent people get hurt.

Unfortunately, the burden of proof is on the taxpayer to prove that he or she was not responsible for the lack of payment. You might as well ask the taxpayer "When did you stop beating your spouse?" Proving a negative is a difficult proposition at best.

The burden should be on the IRS to prove the taxpayer was responsible.

Why can't the tax laws define the responsible parties as the chief executive officer, the chief and senior financial officers, those who serve on the board of directors and own a significant stake in a privately held corporation, and other responsible parties designated on a schedule that could be attached to the corporation's last quarterly 941 tax return of each year? The attached schedule would clearly state the serious responsibilities to remit trust fund taxes and require the signature of each named responsible person to indicate their knowledge of and consent to these rules.

If the IRS had the names and addresses of such persons in its computer, then these responsible persons could be immediately notified when a payment has been missed. It would allow these officers and other responsible persons to immediately investigate why these taxes have not been remitted oh time, protecting the Treasury and innocent taxpayers.

Tax Complexity Invites Abuse.

Burnham wrote that an IRS instructor once claimed that he could find mistakes in 99.9 percent of tax returns. While he may have been exaggerating, he made a valid point.

The tax laws are so incredibly complicated that many taxpayers can't say with absolute confidence that they know the law or have filed their tax returns with 100 percent accuracy. Year after year, Money magazine reports that virtually all of the tax professionals who take its annual test for professional tax preparers made at least one mistake and they all come back with a different calculation of the tax liability!

This incredible variation opens up the potential for abuse. Vague laws allow enforcement abuses. If someone in the IRS wants to "get" you, the complex laws allow the agency to make a plausible case against virtually anyone.

We hope that this Congress will thoroughly examine proposals by Congressmen Bill Archer and Dick Armey to scrap the current income tax system in favor of a greatly simplified sales or flat rate income tax.

Congress Should Require Equitable Use of the Levy Power.

Burnham's book presents an impressive array of statistics that the levy power is not applied equally across the United States. Burnham reports that in 1988 "for every 1,000 tax delinquent accounts, 892 levies [occurred] in the Western Region; 860 in the Mid Atlantic; 735 in the Southwest; 714 in the North Atlantic and the Central; 708 in the Mid West; and 532 for the Southeast."

There's even more variation in the seizure rate. Burnham reports that in 1988 "the seizure rates in the most active districts were 30 to 40 times higher than the rates in the districts with the least. The IRS has no explanation for the variations."

This is nothing new. As far back as 1976, the Administrative Conference of the United States issued a report titled "Collection of Delinquent Taxes" that said the IRS had no clear guidelines specifying when levy action was to be taken. The report said "lacking guidance, revenue officers vary in their criteria for seizure of assets of individual taxpayers .. . So long as the Internal Revenue Service fails to delineate clear purposes for the use of summary powers, we believe that these divergent criteria will continue to exist. The variations in practice may lead to the appearance of arbitrariness and caprice in some actions, thus undermining the taxpaying public's confidence in (and compliance with) the taxing system."

These random variations have continued year after year. The guidelines that exist only in Internal Revenue Manuals are not enforceable. Therefore, Congress should require that the IRS issue regulations specifying the circumstances, conditions and situations under which a levy will be made.

Conclusion.

The job of protecting taxpayer rights will never end. Much progress has been made, but more legal protections are necessary. We sincerely appreciate the efforts being made by members of this subcommittee to formulate legislation to better protect taxpayer rights.