Madam Chair Johnson, Ranking Member Matsui, members of the Subcommittee on Oversight, thank you for the privilege of testifying today. My name is Joseph F. Lane and I am an Enrolled Agent engaged in private practice in Menlo Park, California. Prior to commencing private practice fifteen years ago, I served with the Internal Revenue Service for almost ten years. While with the Service, I served at the District Office, Regional Office, and National Office levels and was the Collection Division Chief for the State of Hawaii, the Taxpayer Service Division Chief for the State of Connecticut, and the Resources Management Assistant Division Chief for the Manhattan District. I am here to testify on behalf of the National Association of Enrolled Agents ( NAEA).

NAEA appreciates the opportunity to testify on behalf of its approximately 9,000 Enrolled Agent members and to speak for the individual and business taxpayers whom we represent. Enrolled Agents are professional individuals whose primary expertise is in the field of taxation and taxpayer representation. As the Committee members well know, the Enrolled Agent profession was created by an Act of Congress in 1884 to provide for competent and ethical representation of claimants before the Treasury. We are proud to say we have been diligently fulfilling this role for the American taxpayer for the past 111 years.

Enrolled Agents establish their expertise in taxation and taxpayer representation by either passing the Internal Revenue Service's comprehensive two-day examination on federal taxation or by serving as an IRS employee in an appropriate job classification for at least five years. NAEA members maintain their expertise by completing at least 30 hours of continuing professional education each year. Our members work with more than four million (4,000,000) individual and business taxpayers annually.

It is in our role as the voice for our members and for the general taxpaying public that NAEA submits this testimony on a proposed Taxpayer Bill of Rights 2.

Our testimony is prepared following the outline of the major titles of H.R. 661 for ease of reference and is as follows:

Title I - Taxpayer Advocate

We have reviewed the proposal for the establishment of the Office of the Taxpayer Advocate within the Service and have several concerns about this suggestion. We do not see a clear benefit from replacing the current Taxpayer Ombudsman position with the new Taxpayer Advocate position.

It is our feeling as taxpayer representatives that the Problem Resolution function as currently organized serves the taxpaying public well, is responsive to taxpayer complaints, and is endowed with sufficient ability to effect changes in the direction of action proposed by the enforcement divisions. It is not clear from the proposed language in the Bill if this Taxpayer Advocate would be a political appointee, although the mention that he or she would be compensated at the same level as the Chief Counsel would seem to indicate that this individual would not be a career Service executive.

We believe the organizational culture of IRS would severely inhibit the effectiveness of any political appointee placed in charge of a Service-wide network of career civil servants such as the Problem Resolution function. It would be far preferable to maintain the current structure, which, at least, has the benefit of wide-spread support within the Service and work to improve the reporting mechanisms back to the Congress if that is of concern. With respect to the Annual Reports due the Committee, we feel the Bill's approach is in error when it does not permit the Commissioner's staff to review and comment. If the Congress believes that it is not getting accurate information from the Commissioner, it has the ability to ask the GAO to study the question or verify the data. We question the advisability of requiring an employee of the Commissioner to prepare "secret" reports to the Congress without coordination within the agency. Any proposal which sets up the Taxpayer Advocate function to be viewed as adversarial to the rest of the Service will be counterproductive to the Bill's intent.

Title II - Modifications to Installment Agreement Provisions

We agree with the proposed changes in the installment agreement section of the Bill with the exception that we believe that the right to an installment agreement ought to be extended to all taxpayers, even those who may have been delinquent in the past three years. Many installment agreement taxpayers are married couples earning minimum wages who discover to their dismay that the withholding tables leave them under withheld when they combine their wages for tax reporting purposes on their joint return. Many of these people have had installment agreements each year to finish paying off their prior year's liability. The fact that they have had taxes due each of the prior three years should not bar them from having the right to an installment agreement, especially since the only really practical way of collecting from these people is by installment agreement. Since this is the case, why make these people subject to the additional penalty charges which will accrue on their account?

We support the proposal to suspend the running of the failure to pay penalty during the period of the installment agreement. This gives real incentive to taxpayers to stay current with their installments, provides very real relief from the "crushing" accumulation of interest and penalties and restores the taxpayer involved to the ranks of compliant taxpayers sooner. The only change we would like to see is that this penalty relief be extended to those taxpayers in notice status after assessment and not just those taxpayers who request an installment agreement on or before the due date of the return. As currently drafted, the Bill provides an advantage to the taxpayers who have professional tax practitioners prepare their returns. They will be advised to request an installment agreement when they file. Those taxpayers who prepare their own returns or who may not be able to afford professional assistance would find out too late that this relief provision was available. This would place taxpayers least able to afford it at a disadvantage.

We also support the proposals which establish a notice requirement and a review process in the event the Service decides not to extend an installment agreement to the taxpayer. We urge the Congress to define what constitutes jeopardy situations wherein the Service can disregard the notice requirements required by the Bill. In our experience, what Service employees define as jeopardy situations often fail to meet any objective understanding of the term, in any judicial sense of the word.

Title III - Interest

We agree with the proposed modifications to the law governing interest due and applaud the extension of the interest free period for payment of tax after notice and demand is given. The ten day provision has long been unreasonable. We would like to see the period extended to thirty days. We would also like to see special provisions for extension of the interest free period beyond the thirty days if it can be demonstrated that the taxpayer had no knowledge of the assessment ever being made and had not received notice and demand.

Title IV - Joint Returns

We endorse the proposal to permit disclosure of collection activity data to the joint parties of the assessment. This is a change which has long been overdue in terms of equity to taxpayers and in terms of permitting the Service to defend its actions on cases.

Title V - Collection Activities

The proposals to permit withdrawal of prematurely or erroneously filed Notices of Federal Tax Lien are excellent. In addition, we would like to see restrictions on the ability of Service employees in the Automated Collection Sites or the replacement Taxpayer Service Centers to file Notices of Federal Tax Lien without proper managerial reviews for appropriateness and suitability. All too often, liens filed by ACS prevent taxpayers and their representatives from utilizing commercial credit sources to retire tax debts thereby necessitating more expensive installment agreements with the Service, a situation from which neither the Service nor the taxpayer derive any benefit.

The increased levy exemption amounts are too low, in our opinion. The amount of personal effects exempt from levy ought to be $2,500.00 with additional annual adjustments as proposed for indexing inflation. The tools of the trade exemption ought also to be $2,500.00, with future indexing. In addition, a business vehicle such as a truck or specially adapted vehicle ought to be allowed to be excluded up to the levy exemption amount. The Service currently maintains that the levy exemptions do not apply to motor vehicles, regardless of their manner of use.

We agree with the modification requiring District Counsel review on Offers in Compromise over $50,000.00. The prior threshold amount of $500.00 was absurdly low and contributed to a backlog in processing cases efficiently.

We agree with the provisions which would increase the limit on recovery of civil damages for unauthorized collection actions.

We would like to see the definition of third party record keepers extended to Enrolled Agents for purposes of the administrative summons provisions.

We would note that under Circular 230, Enrolled Agents have the same professional rights and responsibilities with respect to their practicing before the IRS as do attorneys and certified public accountants.

As I mentioned earlier, an individual does not become an Enrolled Agent without first demonstrating special competency in tax matters. This may be achieved by working for the IRS as a tax specialist for a minimum of five years or by passing a rigorous examination. This demonstration of competency is similar to that imposed on attorneys and certified public accountants. Furthermore, Enrolled Agents are required to maintain their competency through 30 hours of continuing professional education each year. Again, this parallels the continuing education requirements for certified public accountants and attorneys.

Finally, Circular 230 requires persons maintaining records for others to assist the IRS in the agency's efforts to conduct legitimate and effective investigations. Under Section 10.23 of Circular 230, Enrolled Agents, as well as attorneys and certified public accountants, may not unreasonably delay the prompt disposition of a matter before the IRS. Also, to the extent a client of an Enrolled Agent, attorney, or CPA has knowledge that a client has violated the revenue laws of the United States, that professional is required to promptly advise the client of the omission.

This revision would provide fair protection to taxpayers and to their representatives without causing undue restrictions on the Service.

The imposition of Counsel review in the case of corporate summons issuances is a good change, as is the requirement of notice to the corporation of summons issuances to other persons in connection with the corporate audit.

Title VI- Information Returns

The proposal to establish civil damages for fraudulent filing of information returns is long overdue and should be enacted. We have seen many innocent people, both taxpayers and government employees damaged by these fraudulent filings. It is important to insure that these violators are prosecuted to the full extent of the law. Of course, our support for this new provision goes hand in hand with the inclusion of the new proposed subsection which requires the Service to conduct reasonable investigations of information return disputes.

Title VII - Modifications to Penalty for Failure to Collect and Pay Over Tax

The proposed changes relating to proper notification are good changes. We have all seen cases where no prior notice was provided to taxpayers before assessment and taxpayers were ill-equipped to defend themselves years later due to unavailability of records.

We would like to see additional language in the statute providing exactly when the statutory period for assessing the Trust Fund Recovery Penalty commences and expires. For many years, there was common agreement between the Service and the practitioner community that the period for assessment was three years from the presumptive filing date of the employment tax returns from which the liability arose. The Service in recent litigation has tried to make the case that the Trust Fund Recovery Penalty does not arise from any particular employment tax return and therefore is not subject to the three year rule but rather that there is an "open" statute of limitations. Despite a decades long record of representing in court after court and case after case that the three year statute of limitations rule applied to Trust Fund Recovery Penalty cases, the Service is now contending that the Trust Fund Recovery Penalty is a "separate and distinct" liability from the employment tax liability of the employer entity. Taking this position means that there is no Internal Revenue Code Section 6501 (a) limitation period trigger. The Service is maintaining that since Congress never specified that Section 6501(a) or any other statute of limitations should govern Section 6672 assessments, there is no statute on these assessments. We do not believe this was the original intent of Congress and neither did the Service for many years. We urge Congress to put this flagrant ruse to an end immediately by stating in this Taxpayer Bill of Rights legislation that the Trust Fund Recovery Penalty assessments are subject to the statute of limitations provisions and requirements of IRC Section 6501(a).

We support the proposal to permit disclosure of information to other persons assessed the same Trust Fund Recovery Penalty concerning the status of IRS efforts to collect from fellow assesses. We believe that this change will insure a more even-handed collection effort by the Service - which in the past has tended to pursue the easily available parties disproportionately.

Title VIII - Awarding of Costs and Certain Fees

We support the proposed modifications for motions for disclosure of information and for the increase in attorney's fees.

Title IX - Other Provisions

The proposal to grant relief from retroactive application of Treasury Department regulations is acceptable provided that the section providing the taxpayers with the right to elect retroactive application is also approved. This would permit taxpayers to avail themselves of beneficial rulings.

We also support the requirement to notify taxpayers of payments which the Service cannot identify and associate properly with their account.

The new provisions for civil damages for unauthorized enticement of information disclosure appear to be acceptable.

Title X - Form Modifications; Studies

We particularly note the importance of the Congressional oversight of IRS employee misconduct. We urge that the Service be required to report to the Committee on an annual rather than a biennial basis. In addition, we urge that the Privacy Act be amended to permit reports back to taxpayers and their representatives regarding specific allegations of employee misconduct brought to the Service by taxpayers or their representatives once the Service has reached a final determination and personnel actions have been taken. This process insures taxpayers and the practitioner community that the Service follows through on allegations of employee misconduct and subjects employees to disciplinary actions when deemed warranted.

Comments on H.R 390: "Burden of Proof"

We have reviewed the provisions of H.R. 390 and find that the proposed changes with respect to shifting the burden of proof in civil cases from the taxpayer to the Secretary are much too radical. If Congress is seriously giving this proposal consideration we believe all taxpayers have serious cause for concern about the stability of our taxation system. If we only represented tax evaders we would whole-heartedly endorse this proposal! But we represent millions of compliant taxpayers who diligently maintain their books and records, compile their annual tax return data and self-assess themselves. These taxpayers are the rock-solid base of our entire voluntary compliance system. It is for these taxpayers that we register our concern about the proposed changes sought in H.R. 390.

If this change is adopted, the Congress shifts the burden for proving any one taxpayer's income or deductions not only from that individual taxpayer to the Service but also to every other taxpayer and business entity the individual being audited transacted business with in any given tax year. The record keeping requirements would far exceed anything imaginable under our current system and would cost all taxpayers far in excess of the amount they now expend. Aside from the essential unfairness of expecting everyone else the taxpayer deals with to assist the Service in making proper tax determinations, we also feel that the basis of our system assumes that taxpayers will have records to support the self-assessments they file. They are, after all, the ones who had the income and the expenses and are best in the position to establish, at the least cost and time, what those items were.

We believe the Internal Revenue Code, as presently structured, provides manifold safeguards for taxpayers to administratively proceed through the Service and Courts to arrive at correct tax determinations. The Congress should be very wary of changing procedures as fundamentally as those proposed in H.R. 390 because the consequences on taxpayer compliance with such drastic change cannot be accurately predicted or measured.

Additional Suggestions for Improvement

We are encouraged by the prompt attention shown to the issue of Taxpayer Rights by the 104th Congress. Many of the areas addressed in the proposed legislation were addressed in H.R. 11 and deserve to be brought back on the table now. We have provided our frank opinions on these issues and made suggestions where we felt the proposed legislation needed additional emphasis.

Whenever we are addressing the issue of taxpayer rights, we think it appropriate to point out that the really serious matters regarding taxpayer interface with the Service occur at the enforcement Division level. Taxpayer concerns run highest when forced to deal with the reality of being audited or owing taxes. We believe any effective, worthwhile Taxpayer Bill of Rights will address concerns about how these Divisions carry out their responsibilities while at the same time inflicting the least possible harm on the taxpayers involved.

By way of illustrating taxpayer fears we feel should be addressed by any Taxpayer Bill of Rights, we offer the following procedures or policies the Service recently embarked upon or announced which have heightened concerns among taxpayers about their vulnerability in dealing with Service employees. For example:

• The Collection Division is in the process of developing new procedures to be employed when evaluating the taxpayer's ability to pay delinquent taxes. These new procedures, which concentrate on determining what are necessary monthly expenses and what constitutes reasonable amounts for those expenses, are an attempt to satisfy GAO criticisms about the Service being "too lenient" when determining taxes are currently not collectible. The new approach basically relies on Bureau of Labor Statistics data about family expenditures to set standard expense levels for taxpayers. We believe this process would be acceptable if the taxpayers could not document their true level of expenditures and the Service relied on the BLS data as a base. We disagree about using these statistics when taxpayers have ample documentation about their family expenditures to offer in their stead.

• The Collection Division has recently implemented a "user fee" charge on taxpayers who require installment agreements to pay off their delinquent taxes. We opposed this "user fee" in our testimony before the Service's committee on the proposed rule making and oppose it again here in our testimony. We think user fees ought to be prohibited for installment agreements. Taxpayers who need to pay on installment already pay interest and late payment penalty charges which would be considered usury under most state laws. To heap on them yet another charge for the cost of servicing their account is an outrage. To put it in perspective for the Committee, if the taxpayer is working for the minimum wage, the user fee is approximately two days pay!

• The Examination Division has recently announced the commencement of "economic reality" audits whereby the taxpayers, not the tax returns, will be audited. This interest in the taxpayer's lifestyle has aroused a great deal of concern among taxpayers. Taxpayers are fearful of their every financial transaction being scrutinized by the Service, apprehensive about their credit files and other financial data being subject to Service review on a wholesale basis, and frankly concerned about Service employees abusing the right to inquire into their financial records. We cannot fault the Service for seeking to make its audits more productive or for its effort to search out undeclared income - after all that is the primary mission of the organization and as taxpayers we support them. But, at the same time, we have grave concerns about the potential misuse of this confidential taxpayer data and concerns about who in the Service gets to decide in what circumstance the expansion of an audit into questions of lifestyle is appropriate. We also would like to see a requirement that the taxpayer be informed at the onset that the audit will delve into lifestyle issues.

• There is a great deal of speculation among the practitioner community that one of the primary motivations of the Service in choosing to "audit" the lifestyles of taxpayers is that it provides a way to bypass the practitioner and get directly to the taxpayer thereby defeating one of the primary provisions of the Taxpayer Bill of Rights - the right of the taxpayer to secure representation and the right of the representative to "stand in the shoes" of the taxpayer. The IRS training manuals for economic reality auditing provide guidelines for auditors that suggest that only the taxpayer is able to respond to "lifestyle" issues and therefore their presence at the audit should be required. This viewpoint obviously has taxpayers and their representatives concerned about IRS intentions for these cases.

Again, the members of NAEA thank you for this opportunity to present their views to the Subcommittee on these important issues. We offer our assistance to provide any additional information raised by these comments or other areas of concern.

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