Madame Chairman and Distinguished Members of the Subcommittee:

I appreciate the opportunity to testify today before this Subcommittee on the possible development of a Taxpayer Bill of Rights 2 (TBOR2) and on specific proposals in H.R. 11 from the 102nd Congress ("H.R. 11") and H.R. 390, H.R. 661, and S. 258 as introduced in this Congress. The issue we will be discussing today ensuring that the rights of American taxpayers are protected - is of the greatest importance to me, the internal Revenue Service, and American taxpayers. One of my most important responsibilities as Commissioner of internal Revenue is to ensure that, in dealings with the IRS, taxpayers are treated fairly, courteously, and with respect and dignity.

With me today is Lee Monks, the Taxpayer Ombudsman. The position of Ombudsman was created by the Internal Revenue Service in 1979. Since that time, the Ombudsman has served taxpayers well and has made countless improvements in the ways that the IRS interacts with taxpayers. The Ombudsman has also successfully carried out the purposes of the Taxpayer Bill of Rights since its enactment in 1988. Mr. Monks will speak to you today from his perspective as an advocate for taxpayers.

I want to begin today by assuring you that the internal Revenue Service is committed to respecting the rights of all taxpayers. I believe that we have the best tax administration system in the world, although that does not mean that we should not continue to improve it. Our tax system, with the rights afforded taxpayers under it, is the model to which other nations look both in planning their systems and in measuring their successes.

Since becoming Commissioner almost two years ago, I have had the opportunity to visit with many of our almost 115,000 employees. What has particularly impressed me has been their dedication to and concern for protecting taxpayers' rights and their commitment to reaching balanced, sensible solutions to the varied and often unique taxpayer situations with which they are confronted. Contrary to what is often, in my experience, a very distorted stereotype, the vast majority of our employees care very deeply about providing good customer service and protecting taxpayers' rights.

I realize that there will always be isolated instances in which individual IRS employees have made mistakes. I also realize that given the size of our organization, the volume of our business, and the number of contacts we have with taxpayers each year, the "giant" metaphors like the one in the Subcommittee's press release are simply irresistible. My hope, however, is that the overwhelming number of taxpayers who come in contact with us will come to know us as a genteel, Gulliver-like giant, rather than the Goliath referred to in the Subcommittee's press release.

Taxpayer Service and Taxpayer Rights

In recent years, the Service has made great strides in focusing on customer service. We have long recognized the interrelationship of taxpayer service and taxpayer rights. The better we serve taxpayers - the easier we make it for them to meet their filing responsibilities, the more helpful we are in assisting them with their questions, and the more quickly we can respond to an account inquiry or problem the more likely it is that they will feel their rights have been respected. Our commitment to providing quality service to every taxpayer runs deep in our organization. By breaking down functional barriers of the past, we are trying to ensure that every employee - not just those under the direction of the Assistant Commissioner (Taxpayer Services) - appreciates the importance we attach to both taxpayer service and taxpayer rights.

Our strong commitment to customer service and taxpayer rights is also evidenced by our Compliance 2000 program. Our Compliance 2000 philosophy recognizes that taxpayers cannot comply with the tax laws unless they understand their rights and obligations under those laws. This recognition of our need to serve taxpayers on the front end through education and outreach is intended to ensure that they have every opportunity to comply. Through this approach, enforcement efforts are reserved for only those cases where education and outreach are not successful. As with our other taxpayer service endeavors, to the extent we are successful in reaching out to taxpayers under our Compliance 2000 program, the more likely they will appreciate our commitment to the cause of taxpayer rights.

Common Ground and New Ideas

Despite the progress we have made in providing better customer service and enhancing taxpayers' rights, I believe that, by working together, we, Congress, the Treasury Department, and the IRS - can do still more to enhance taxpayers' rights. There are significant areas of agreement between the IRS and the H.R. 11, H.R. 661, and S. 258 sponsors about what provisions would further enhance taxpayers' rights. Proposals to extend the interest-free period for payment of tax after notice and demand from 10 to 21 days, permit disclosure of collection activities among spouses or former spouses who filed a joint return, permit joint return filings without full payment of tax after an initial filing of separate returns, and require information returns to include the telephone number of the payer's information contact, for example, all represent sound ideas that would help to make the tax system fairer and more administrable. (I have provided a more detailed discussion of these provisions and others in H.R. 661 and S. 258, in the attached Appendix.)

The Treasury Department and the IRS worked closely with Congress both toward the enactment of Taxpayer Bill of Rights legislation in 1988 and the development of the taxpayer protection provisions which were included in H.R. 11. In fact, many of the provisions in H.R. 11, H.R. 661, and S. 258 were suggested to Congress by the IRS. But I would like to share with you today several new proposals that we believe will further enhance the rights of taxpayers. The first proposal is one that addresses a concern that I have heard about in almost every meeting I have had with tax practitioners over the past two years. Under current law, taxpayers cannot have their representatives resolve issues presented in IRS notices without providing the IRS with written authorizations to disclose the taxpayers' return information to the representatives a time consuming process that delays the resolution of the taxpayers' issues.

Our proposal would eliminate such delays. It represents a careful balance between the security of taxpayer data and the need to be responsive to taxpayers' desires for quick resolution of their cases. Our proposal would provide taxpayers with an alternative to the written consent requirement. Instead, we propose that a unique identifying number be included on each IRS notice. A taxpayer could give that notice's unique identification number to its authorized representative, which would permit the representative to deal directly with the IRS without delay.

The second proposal would assist the IRS in safeguarding each taxpayer's right to privacy. I have made protecting taxpayers' rights of privacy a top priority for the IRS. I have repeatedly stated that the IRS will not tolerate any violation by employees of taxpayers' rights of privacy. Taxpayers' confidence that their privacy rights will be honored and that their tax return information will be kept confidential is one of the foundations of our voluntary compliance system. I have adopted more severe administrative sanctions, up to and including dismissal, for employees who violate our policy concerning confidentially and privacy. A basic tenet of that policy is a prohibition against employee access to (or use of) tax return information, except second proposal, which I request you support, provides specific criminal sanctions that would apply to employees who violate this policy.

Under our third proposal, the IRS would be required to abate a penalty assessed for the first time a taxpayer failed to make required deposits of payroll taxes if: (1) the failure occurred during the first quarter wages were paid; (2) the return was filed on time and appropriate payments were made; and (3) the taxpayer completes an IRS-approved education program that addresses filing and payment requirements. This relief is consistent with the Compliance 2000 philosophy that I outlined earlier and is aimed at new (typically small business) employers.

Finally, and consistent with our efforts to assist taxpayers in meeting their obligations, we propose a requirement that we issue annual reminders to taxpayers with outstanding delinquent accounts that are not in an active collection status (i.e., accounts for which we are no longer issuing collection notices and that we consider currently not collectible). These notices would remind taxpayers about the status of their accounts, the continued accrual of interest and penalties, and the continued possibility of having their refunds offset to pay the outstanding amounts.

Madame Chairman, I hope that these proposals for enhancing taxpayers' rights will be seriously considered by the Subcommittee. The IRS and the Treasury Department would like to assist the Subcommittee in making them a reality and in identifying appropriate offsets, as necessary, to ensure they are implemented in a deficit neutral manner.

Areas of Concern for Tax Administration

The IRS and the Treasury Department also would like to work closely with the Subcommittee as it considers H.R. 11, H.R. 661, S. 258, and H.R. 390 so that we can inform you about those provisions we believe would pose significant administrability issues. Some of the provisions raise issues that should be considered and balanced against the additional burden and appearance of inequity they could cause before the Subcommittee recommends legislation. One example is in section 5901 of H.R. 11 and section 1001 of H.R. 661 and S. 258. Those sections would require the income tax return instructions to contain information on installment agreements, extensions of time to pay, and offers in compromise.

Offers in compromise, for example, represent a delicate balance between the need to ensure that taxpayers are treated consistently and fairly and the need to ensure that the government will be able to collect at least a portion of an insolvent (or close to insolvent) taxpayer's debt. By promoting the availability of offers in compromise before returns are filed and taxes are due through references in the income tax return instructions, there is a risk of undermining the confidence of the overwhelming majority of taxpayers who timely and fully pay their determined liabilities. Issues of this nature - balancing the rights of taxpayers who pay fully and on time against the rights of those who may make an offer to settle their liabilities for an amount significantly lower than the amount that they owe -- are ones we hope the Subcommittee will explore with us further as it considers the legislation. We also hope to work with you to give you an appreciation of some of the resource issues presented by the proposals, as well as some of the technological constraints that make some of the proposals infeasible under our current systems.

In the interest of time, I will only discuss a few of our administrative concerns with the H.R. 11, H.R. 661, S. 258, and H.R. 390 proposals today. The Appendix to my testimony, however, outlines each of the provisions about which we have concerns. I would like to focus on the following proposals: (1) changing the Taxpayer Ombudsman's organization and responsibilities; (2) granting installment agreements as a matter of right to non-corporate taxpayers and eliminating failure to pay penalties for taxpayers that request an installment agreement by the due date for payment of their taxes; (3) expanding the IRS' authority to abate interest assessments and requiring the IRS to abate interest to certain taxpayers; (4) requiring the IRS to give advance notification of an examination; (5) shifting the burden of proof to the government in certain information report matching cases; and (6) shifting the burden of proof to the government in all tax matters. I will defer to the testimony of Cynthia Beerbower, Deputy Assistant Secretary (Tax Policy), on the importance of ensuring that the Treasury Department and the IRS retain the ability to issue retroactive regulations where appropriate in the interest of sound tax administration.

Taxpayer Ombudsman and Taxpayer Assistance Orders

While Lee Monks, the Taxpayer Ombudsman will address the organization and responsibilities of the Taxpayer Ombudsman function and a proposal to expand its authority to issue Taxpayer Assistance Orders, I wanted to share with you how three Ombudsman and his organization have had a positive impact on the promotion of taxpayer rights within the IRS. Not only does the Ombudsman and his organization assist taxpayers individually through the problem resolution program, but the Ombudsman also provides recommendations to improve the quality of the IRS programs and systems that benefit all taxpayers. Through these recommendations for systemic changes, the Ombudsman has a much wider impact than if his only contribution were to address taxpayers' problem individually.

Currently, Problem Resolution Officers (PROs) in the Service Centers and District offices report to the heads of these offices. This organizational structure provides a strong incentive to these field offices to deliver quality services to taxpayers and promptly resolve taxpayer problems. It also allows problems that occur at the local level to be resolved at the local level. The current structure, by all accounts, is working well. Section 101 of H.R. 661 and S. 258, however, would remove PROs from the current management reporting lines and have them report to the Ombudsman in Washington, D.C. Madame Chairman, I encourage the Subcommittee to explore with the Ombudsman and his staff the effect that such a change would have on their ability to help taxpayers. Any change should be carefully considered and not be done just for the sake of change.

Installment Agreements and the Failure-to-Pay Penalty

H.R. 661 and S. 258 contain provisions that generally give non-corporate taxpayers the automatic right to installment agreements once every three years and eliminate failure-to-pay penalties for taxpayers who request installment agreements by the due dates for payment of their taxes. Rather than enhancing taxpayers' rights, this "automatic" installment agreement with no failure-to-pay penalties would be unfair to the vast majority of taxpayers who pay their taxes on time. Under the combined effects of these proposals: (1) all taxpayers would have every incentive not to timely pay and to borrow from the government at least once every three years at interest rates generally lower than prevailing market rates for unsecured debt; (2) the IRS would see a significant growth in its accounts receivable inventory (a topic of great concern to the IRS, Congress, and the GAO); (3) the IRS would have to shift substantial additional resources to intrusive, post-filing collection efforts; and (4) the revenue loss to the government would be substantial.

Abatement of Interest

Section 301 of H.R. 661 and S. 258 would expand the IRS' authority to abate interest assessments by replacing the "error or delay in performing a ministerial act" standard for abatement with an "unreasonable error or delay" standard. It would also require the IRS to abate interest assessments against small businesses and most individuals in cases of "unreasonable error or delay," but only until the date demand for payment is made. The apparent justification for this proposal - that a taxpayer who has an unpaid tax liability and is charged interest on that unpaid liability is somehow economically disadvantaged relative to a taxpayer who timely paid its liability without interest - is one with which we do not agree.

This broadening of the interest abatement standard would encourage taxpayers, particularly those with large liabilities, to seek routine relief from interest assessments, thereby imposing significant administrative costs, as well as controversy-related costs, on the IRS and the judicial system. These costs ultimately would be borne by all taxpayers. Additionally, the unreasonable error or delay standard is vague and, as such, would present significant challenges in ensuring consistent application of the law. Finally, "means testing" the requirement to abate interest by imposing a net worth requirement as the bill does is incompatible with the purpose of an interest charge and presents administrative complexity and additional burden on taxpayers if they are required to provide net worth data which would have to be verified.

Notification of Examination

Another section of H.R. 661 and S. 258 would require the IRS, prior to commencing an examination, to notify a taxpayer in writing of a planned examination and the examination procedures. Exceptions would apply for criminal investigations, collection jeopardy situations, national security needs, and confidential law enforcement or foreign counterintelligence activities. In many respects this provision is consistent with IRS' current procedures; for example, we generally provide written notice and a copy of Publication 1, "Your Rights as a Taxpayer," prior to commencing an examination. The provision requiring advance notice, however, would undermine some compliance efforts, including roadside inspections of highway vehicles to ensure they are not evading federal motor fuels excise taxes, compliance checks for currency transaction reporting, and unannounced visits to Electronic Return Originators to determine whether they are complying with IRS procedures.

Burden of Proof in Information Reporting Cases

Our current document matching program is an efficient, cost effective way to stop underreporting of income. We experience an overall compliance rate of over 95% in the areas for which we have information reporting. Under the document matching, we match information documents, such as Forms 1099 received from third parties, against filed income tax returns. Underreported amounts become subject to correspondence audits.

I am greatly concerned about the provision in H.R. 661 and S. 258 that would shift the burden of proof to the IRS for income reported on information returns. Taxpayers, without presenting any supporting evidence, could force the IRS to investigate the accuracy of information returns before issuing notices of deficiency. We believe this proposal would render the IRS' matching program inoperable. Without this program, the IRS would need substantial additional resources to reach the same level of compliance with the tax laws that we have today.

I believe that a proper balance is achieved under existing IRS standards, which were revised in 1993 to respond to the concern underlying this H.R. 661 and S. 258 provision. Under the revised standards found in the Internal Revenue Manual, if, in a court proceeding, a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return and the taxpayer has fully cooperated with the IRS, the government must present "reasonable and probative information" concerning this income in addition to presenting the information return. A fully cooperative taxpayer is one who provides, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within its control to the extent reasonably requested by the IRS.

An H.R. 11 proposal to reform the Service's information reporting procedures provided the same standards as those currently in the Internal Revenue Manual. The H.R. 11 proposal reflected the joint effort of the Service and Treasury working with Congress to respond to the concern underlying both that proposal and the H.R. 661 and S. 258 proposal. The H.R. 11 proposal is responsive to this concern. We believe that it strikes a reasonable and appropriate balance between the rights and obligations of both taxpayers and the government.

Burden of Proof

I would like to turn now to H.R. 390. H.R. 390 contains a provision that would shift the burden of proof to the IRS during any court proceeding. The bill provides:

Notwithstanding any other provision of this title, in the case of any court proceeding, the burden of proof with respect to all issues shall be on the Secretary.

Madame Chairman, that provision alone would undermine the Federal income tax system. Not only would it undermine the Federal tax system, but also the state tax systems that depend on Federal deficiency assessments -- assessments which would simply evaporate if this provision were enacted.

The current burden of proof rules have been in place for well over a century and are closely woven into the fabric of our system of voluntary compliance. While proposals to shift the burden of proof to the government have been advanced during this period, in each instance, these proposals have been rejected. The reasons for rejection were briefly stated by a member of the Board of Tax Appeals (predecessor to the current U.S. Tax Court) during a 1925 debate on a proposal that, like H.R. 390, would have placed the burden of proof on the government:

[Y]ou might as well repeal the income tax law and pass the hat, because you will be practically saying to the taxpayer, How much do you want to contribute toward the support of the government? [A]nd in that case they would have to decide for themselves.

The internal Revenue Code and the administrative policies of the IRS contain many procedures designed to foster the administrative settlement of civil tax disputes. Indeed, these procedures result in the successful resolution of the vast majority of the civil disputes that arise under the tax laws. Not all disputes can be resolved administratively, however, and the Code permits taxpayers dissatisfied with the outcome of these administrative proceedings to seek relief in court.

Throughout the history of tax litigation in this country, the taxpayer has been required to bear the burden of proof in tax disputes. This allocation of the burden of proof is in keeping with common law traditions, is sensible and fair, and reflects some of the fundamental principles that underlie our system of taxation.

How the Current Rules Work

Generally, in civil tax litigation, the burden of proof is on the taxpayer. Thus, in cases in which the government questions the reporting of income or deductions or credits of a taxpayer and has made an administrative determination that additional tax is due under the law, and the taxpayer has exhausted his or her rights in the examination and administrative appeals processes, the taxpayer may go to court and ask the court to redetermine his or her liability. The burden is on the taxpayer to persuade the court that the determination made by the Commissioner of internal Revenue is wrong and should be adjusted. Likewise, in those cases where the taxpayer contends that he or she has paid too much tax and wants the government to refund part or all of those payments, the burden is on the taxpayer. (In those situations where liability is imposed for civil fraud (the government seeks to impose the civil fraud penalty) or where there is alleged criminal liability (the government seeks to fine or incarcerate a person for violation of a criminal statute), the burden of proof is on the government a situation that for good reason should continue.)

Reasons to Leave the Current Rules in Place

There are good reasons not to change current law. First, the current rules are consistent with the voluntary self-assessment system, which presumes that taxpayers, and not the government, are best able to maintain and produce records that substantiate items on tax returns.

Second, placing the litigation burden of proof on taxpayers promotes administrative resolution of tax cases. Under the current system, taxpayers cannot prevail in court without marshaling and producing evidence in their favor. Knowledge of this ultimate burden provides an incentive for them voluntarily to produce information during audit and subsequent administrative proceedings. If this were not the case - as it surely would not be if the government had the burden of producing all records necessary to challenge taxpayer assertions that they owe little or no tax--taxpayers could "stonewall" auditors and examiners, playing a game of "catch me if you can."

Third, taxpayers, like other claimants, should bear the burden of proving their claims in court. Under the common law, parties challenging administratively proper determinations of government agencies are typically required to shoulder the burden of proof. The Code and current administrative practices of the Internal Revenue Service ensure that taxpayers have many opportunities to seek resolution of tax disputes short of litigation. Disputes that end up in court do so only after a thorough consideration of the issues by the government (or taxpayer neglect of the administrative process).

Finally, considerations of fairness and efficiency require that taxpayers bear the burden of proof. Common law generally places the burden of proof on the party with most ready access to the evidence necessary to adjudicate claims. This common law tradition is not only consistent with principles of fairness, it substantially lessens the need for court-supervised and intrusive discovery during both administrative and court proceedings.

It is, moreover, unrealistic to expect that the government has either the resources or the ability to prove that all taxpayer claims--no matter how outlandish - are false. For example, a taxpayer claiming $50,000 for business supplies, could readily show that the deductions were proper simply by producing records of what was purchased, for what amount, and for what business purpose. It would be nearly impossible, however, for the Service to show that a claimed deduction was improper.

Many Internal Revenue Code sections contain provisions with very specific requirements for favorable tax treatment. If the government were required to prove that taxpayers do not meet the requirements for favorable tax treatment, aggressive taxpayers would be encouraged to take unsupported positions. In the end, the changes produced by H.R. 390 would reward aggressive taxpayers at the expense of compliant ones.

Passage of H.R. 390 Is Not in the Best Interest of Tax Administration or Taxpayers

I believe H.R. 390, if enacted, would not serve the best interests of sound tax administration and the American taxpayer. Shifting the burden of proof would undermine the record-keeping requirements of the Code. There would be little incentive for taxpayers to maintain records of their business and income producing activities. Rather, taxpayers would be encouraged to keep or produce nothing about their tax affairs and require the government to disprove every item on their return. Indeed, the absence of records would preclude a government challenge to virtually any taxpayer claim. "Recordless" taxpayers, including those who earn income from illegal sources, would be rewarded.

Passage of H.R. 390 also would necessitate additional information gathering by and reporting to the government. Audits performed with the burden of proof on the Service would involve a much broader and more detailed inspection of the financial affairs of the taxpayer and third parties. Rather than simply choosing certain items of the taxpayer's return to review according to specific enforcement criteria the Service would of necessity need to challenge a greater number of items. The audits would be much more costly to taxpayers and the IRS because they would take longer and involve many more requests for information. They would also be more burdensome on third parties with whom the taxpayer has done business. Taxpayers would have no incentive to correct inadequacies in their records. Rather, the government would have to fill in the gaps by obtaining information from financial institutions, employers, employees, suppliers, contractors, etc., in order to "prove" that the taxpayer owed more taxes than reported. In summary, the Service's enforcement and collection activities would be infinitely more intrusive than they are today.

Additionally, not only would the government have to make extensive investigations of taxpayers, it would also be required to maintain extensive records about taxpayers. In order to carry its burden of proving that potential taxpayer claims were without merit, the government would have to obtain and retain substantially more information about all taxpayers than is currently the case. All of this activity would entail invasion of personal privacy of the taxpayer on a level not found in the current system.

Finally, court proceedings would be burdened by the rule change. The only response the government could make to a shifting of the burden is to increase the amount of discovery it conducts in litigation. Taxpayers would have no incentive to turn over tax information voluntarily in such proceedings. Extensive, intrusive, and expensive, discovery battles would become more common, and court dockets would swell because of the discovery logjam.

A few examples will illustrate how the passage of H.R. 390 would substantially increase the costs of administering the tax system and burden the courts. In a routine dispute over depreciation deductions, the government would have to prove the cost of assets, the dates of acquisition, and previous allowances for depreciation in order to obtain a court ruling on the question. If the government could not obtain the taxpayer's records or the records it could obtain were inadequate to prove any of these Hems, the taxpayer, no matter how meritless the claim, would be entitled to prevail.

Also, if H.R. 390 were enacted, in every case in which a tax protester claimed on its return that wages are not income, the government would have to come to court with the records to prove that the taxpayer had, in fact, been paid wages. In most cases, the government would have to obtain the records from the taxpayer's employer and require that one of the employer's bookkeepers or supervisors appear in court to authenticate records detailing wage payments and the fact of the protester's employment.

In practical effect, passage of H.R. 390 would virtually immunize from challenge many of the itemized deductions claimed on Schedule A, would require the government to examine substantially more records to fend off claims, and would compel the government to engage in costly searches for corroboration of facts that unfortunately not all taxpayers would willingly acknowledge. In the end, passage of H.R. 390 would substantially increase the costs of administering the revenue system, substantially reduce the revenues the government should properly collect under the laws the Congress has enacted, and disadvantage honest taxpayers who keep proper records. Madame Chairman, I believe, as I think you will hear from a number of sources who are interested in sound tax administration, that passage of H.R. 390 would destroy our voluntary compliance system.

TAX SYSTEMS MODERNIZATION

You have asked for my views as to how best to enhance taxpayer rights. In today's dynamic, service oriented, business environment, taxpayers have come to expect prompt access to information and assistance with account inquiries and problems - the type of access and assistance they receive in the private sector. Unfortunately, however, the IRS simply cannot deliver this level of service with our 30 year old technology. Only through modernization of our technologies will we be able to successfully meet the demands of taxpayers and provide taxpayer rights. Therefore, I am asking that you assist us in obtaining the tools we need to properly serve our customers by ensuring full and stable funding of our Tax Systems Modernization (TSM) program.

I would like to close with a simple yet poignant illustration of the types of things that TSM will enable us to do for the cause of taxpayer rights. Earlier in my testimony, I discussed several problems associated with section 301 of H.R. 661 and S. 258 - a proposal to expand the IRS' authority to abate interest assessments and to require the IRS to abate interest assessments in certain cases. But what K we eliminate the need for these interest assessments in the first place without exposing the tax system to the problems presented by the interest abatement proposal?

TSM holds the key to providing drastic reductions in the amounts of interest assessed to taxpayers. When TSM is fully implemented with its on-line capabilities, our goal is to match information documents at the time a return is filed, not almost two years later as they are today. This means that almost 2 years worth of interest assessments could be eliminated for every taxpayer with an unpaid tax balance that is detected through our information document matching programs.

TSM will also reduce errors, reduce the time it takes to begin and conduct examinations, speed up account problem resolution for taxpayers, and accelerate collection activities, thus providing further opportunities for reductions in the amount of interest assessments.

With TSM fully implemented, systemic improvements would be possible that would improve the efficiency of the government, benefit all taxpayers, and result in significant interest assessment reductions. The IRS and taxpayers are already reaping many of the benefits of TSM today. It is a reality - and we need your assistance to bring it to full and successful completion.

CONCLUSION

Madame Chairman, I am committed to an IRS that expects no less than that all its employees be taxpayer advocates while at the same time ensuring that taxpayers who are compliant with the tax laws are not disillusioned by those who use procedural loopholes to game the system. I would like to thank you and your colleagues for the opportunity to provide our views and comments in this important area and look forward to working with you to develop proposals that truly protect the rights of taxpayers and reduce their compliance burdens.

I would be happy to remain until after Lee Monks has finished his prepared statement to answer any questions you or the other Subcommittee members may have.

APPENDIX DISCUSSION OF H.R. 661 and S. 258

THE "TAXPAYER BILL OF RIGHTS 2"

This appendix provides a general discussion about the provisions of H.R. 661 and S. 258 (both cited as "Taxpayer Bill of Rights 2") and their effects on tax administration. This discussion is offered by the internal Revenue Service to assist the Subcommittee as it explores the development of legislation that would provide additional safeguards for taxpayers' rights.

The discussion provided in this appendix is based on an important assumption that where the provisions of H.R. 661 and S. 258 overlap with provisions contained in H.R. 11 of the 102d Congress, the legislative history reflected in H. Rep. No. 1034, 102d Cong., 2d Sess. (1992) would be adopted as the legislative history to both H.R. 661 and S. 258.

The Subcommittee should note that the discussion of provisions contained in this appendix represents only the views of the Commissioner of internal Revenue. Also, the staff of the Internal Revenue Service is continuing its analysis of the provisions and may have further technical comments to share with the Subcommittee staff in the future.

Nothing in the discussion of the provisions should be interpreted as constituting an official position of the Administration. The Administration would be pleased, however, to assist the Subcommittee with official positions, revenue estimates, and, where necessary, appropriate offsets to ensure deficit neutral implementation of any provisions of the bills that the Subcommittee decides to advance.

The following provisions would help to make the tax system fairer and more administrable:

Sec. 302. Extension of interest-free Period for payment of tax after notice and demand. The current law's 10-day interest-free period upon notice and demand would be extended to 21 days for tax liabilities (including interest and penalties) of less than $100,000. The shorter 10-day period would continue to apply to amounts of $100,000 or more. Conforming changes would also be made to the failure-to-pay penalty.

Sec. 401.Disclosure of joint return collection activities. If the IRS has assessed a deficiency for a joint return, the IRS would have the discretionary authority, upon the written request of one of the spouses (or former spouses), to disclose whether the IRS had attempted to collect the assessed deficiency from the other spouse (or former spouse), the general nature of any such collection activities, and the amount of the deficiency collected from the other spouse (or former spouse). Although it is believed that such disclosure already is authorized under current law, this proposal would make explicit the IRS' disclosure authority in cases relating to separated or divorced spouses.

Sec. 402. Joint return may be made after separate returns without full payment of tax. Under current law, married taxpayers who file separate returns for a taxable year in which they are entitled to file a joint return may elect to file a joint return after the time for filing the original return has expired. The election to refile on a joint basis may be made only if the entire amount of tax shown as due on the joint return is paid in full by the time the joint return is filed. The bills would repeal this requirement.

Sec. 601. Phone number of Person providing payee statements required to be shown on such statement. The bills would require that information returns include the telephone number of the payer's information contact, in addition to the currently required payer name and address.

Sec. 902. Treatment of substitute returns under section 6651. Under current law, if no return is filed by the taxpayer, the IRS may file a substitute return for the taxpayer. If the IRS files a substitute return for the taxpayer, the failure-to-pay penalty runs from ten days after the IRS sends the taxpayer a notice and demand for payment of the tax.

The bills would provide that the failure-to-pay penalty for substitute returns would apply in the same manner as for other returns. Thus, the penalty in each case would run from the due date of the return until the tax is paid.

If modified, the following provisions also would generally improve tax administration:

Sec. 203. Notification of reasons for termination or denial of installment agreement. Currently, the IRS is required to give a taxpayer 30-days notice before terminating an installment agreement due to a change in the taxpayer's financial condition. The bills would extend the 30-day installment agreement notification and explanation requirement to all cases in which the IRS may deny, alter, modify, or terminate an installment agreement (other than cases in which the IRS believes the collection of the tax to which the installment agreement relates is in jeopardy).

Through recently issued final regulations, the IRS already has adopted and implemented procedures requiring it to notify taxpayers 30 days prior to altering, modifying or terminating installment agreements, unless doing so would jeopardize collection. Modifications necessary to facilitate tax administration: A notification requirement should not be imposed for denials of installment agreements, because this would permit taxpayers to stay collection during the notice period by merely requesting an installment agreement. During the 30-day period after notification of denial, a taxpayer that wished to evade collection enforcement actions could transfer assets to related persons, sell non-liquid assets and conceal its possession of the liquid asset proceeds, shift assets outside of the country, etc.

Sec. 204. Administrative Review of Denial of Request for. or Termination of. Installment Agreement. Under current law, the IRS is authorized to enter into written installment agreements with taxpayers to facilitate the collection of tax liabilities. In general, the IRS has the right to terminate (or in some instances, alter or modify) such agreements if the taxpayer provided inaccurate or incomplete information before the agreement was entered into, the taxpayer fails to make a timely payment of an installment or another tax liability, the taxpayer fails to provide the IRS with a requested update of financial condition, the IRS determines that the financial condition of the taxpayer has changed significantly, or the IRS believes collection of the tax liability is in jeopardy. Except in cases where the collection of the tax liability is in jeopardy, regulations require the IRS to provide the taxpayer with a written notice that explains the IRS determination at least 30 days before altering, modifying or terminating the installment agreement.

The bills would permit a taxpayer whose request for an installment agreement is denied, or whose installment agreement is terminated, to seek an independent review of the decision.

Modifications necessary to facilitate tax administration:

Denials of installment agreements should not be subject to appeal because this would permit taxpayers to stay collection during the notice period. See additional analysis and examples of concerns in section 203. The IRS has recently completed an eighteen-month pilot program for independent review of all collection activities (including enforcement actions) and is in the process of evaluating the pilot. The IRS would be happy to work with the Subcommittee to review the results of the pilot program. The Subcommittee may find such an approach helpful in evaluating the need for a statutory change in this area.

Sec. 501. Modifications to lien and levy Provisions. To protect the priority of a tax lien, the IRS must file a notice of lien in the public record. Under current law, the IRS has discretion in filing such a notice, but once a notice is filed, the IRS may release it only if the notice was erroneously filed or if the underlying liability has been paid, bonded or become unenforceable. If a notice has been improvidently filed, it can not be released because release would extinguish the underlying lien. The IRS is authorized to return levied-upon property to a taxpayer only when the taxpayer has overpaid its liability for tax, interest, and penalty. In any event, certain property of a taxpayer is exempt from levy. The exempted property includes personal property with a value of up to $1,650 and books and tools necessary for the taxpayer's trade, business or profession with a value of up to $1,100.

Under the bills, the IRS would have the authority to withdraw a notice of federal tax lien if (1) the filing of the notice was premature or was not in accordance with the administrative procedures of the IRS; (2) the taxpayer has entered into an installment agreement for the payment of tax liability with respect to the tax on which the lien is imposed; (3) the withdrawal of the notice would facilitate the collection of the tax liability; or (4) the withdrawal of the notice would be in the best interest of the government and the taxpayer. If the taxpayer so requests in writing, the IRS would be required to notify credit reporting bureaus and financial institutions that the notice has been withdrawn. In addition, the IRS would be allowed to return levied-upon property to the taxpayer in the same four circumstances. Finally, the exemption amounts under the levy rules would be increased to $1,750 for personal property and $1,250 for books and tools. Both these amounts would be indexed for inflation.

Modifications necessary to facilitate tax administration:

The IRS is concerned with only one of the four situations under which the IRS would be authorized to withdraw a notice of federal tax lien (i.e., the situation in which a taxpayer has entered into an installment agreement for the payment of tax liability with respect to the tax on which the lien is imposed). Situations (1), (3), and (4) would give the Service the latitude to withdraw a notice of federal tax lien where taxpayers have entered into installment agreements, without the necessity of citing situation (2) as a candidate for potential relief. Citing situation (2) as a candidate for potential relief might permit less scrupulous taxpayers to enter into an installment agreement, convince the IRS to withdraw the notice of federal tax lien, and then default on the installment agreement after having disposed of assets that could be used to satisfy the liability.

Sec. 502. Offers-in-compromise Under current law, the IRS may compromise any assessed tax if there is sufficient doubt about whether the tax is owed or is collectible. However, if the compromised amount is $500 or more, a written opinion of the Chief Counsel is required. Under the bills, the IRS would be authorized to compromise an assessed tax if doing so would be in the best interest of the government A written supporting opinion of the Chief Counsel would be required only if the unpaid amount were $50,000 or more. The IRS would be required to subject these offers-in-compromise to continuing IRS quality review.

Modifications necessary to facilitate tax administration:

Congressional concerns could be even better addressed by increasing the threshold for Chief Counsel review from $50,000 to $100,000. The IRS is concerned, however, that the proposed "best interest of the government" standard would be difficult to administer. The IRS now believes that its current interpretations of the existing standards for offer-in-compromise eligibility provide adequate flexibility to ensure that the program is fairly administered.

Sec. 702. Disclosure of certain information where more than 1 Person subject to penalty. Under current law, the IRS may not disclose to a responsible person the IRS' efforts to collect unpaid trust fund taxes from other responsible persons who may be liable for the same tax. Under the bills, the IRS would be required to disclose to a person considered by the IRS to be a responsible person, if requested in writing by that person, the name of any other person the IRS has determined to be a responsible person with respect to the tax liability. The IRS also would be required to disclose whether it has attempted to collect this penalty from other responsible persons, the general nature of those collection activities, and the amount (if any) collected. Failure by the IRS to follow this provision does not absolve any individual of any liability for penalty.

Privacy-Related modifications:

To better protect taxpayers, the proposal should be modified to preclude recipients of the disclosed information from improperly re-disclosing it. Additionally, the statute or legislative history should clearly provide that if the IRS' determination as to whether a person is considered a responsible person is judicially overturned, the Service would not be considered to have violated the requirements of section 6103 of the Internal Revenue Code.

Sec.703.Penalties Under Section 6672. Under current law, a "responsible person" is subject to a penalty equal to 100 percent of trust fund taxes that are not collected and paid to the IRS in a timely manner. The rules for determining whether a person is a "responsible person" are the same for taxable and tax exempt organizations. The IRS is not required to promptly notify taxpayers who fall behind in depositing trust fund taxes.

There are three components to the bills. First, the IRS would be required to take appropriate action to ensure that employees are aware of their responsibilities under the Federal tax depository system, the circumstances under which employees may be liable for the penalty, and the responsibility to promptly report failures in payments to the IRS. These actions would include printing warnings on payroll tax deposit coupon books and appropriate tax returns indicating that employees may be liable for this penalty, and developing a special information packet relating to this penalty.

Second, the section 6672 penalty would not apply to volunteer, unpaid members of any board of trustees or directors of a tax-exempt organization to the extent such members are solely serving in an honorary capacity and are not participating in the day-to-day or financial activities of the organization. This exception for unpaid volunteers would not apply if the volunteers had actual knowledge of the failure to pay or collect or if this proposal resulted in no person being held liable for the penalty.

Third, the IRS would be required, to the maximum extent practicable, to notify all persons who have failed to make timely deposits of trust fund taxes within 30 days after the return was filed reflecting such failure or after the date on which the IRS is first aware of such failure. If the person failing to make the deposit is not an individual, the IRS must notify the entity. The entity, in turn, would have 15 days from receipt of the IRS notice to notify all of its officers, general partners, trustees, or other managers. Failure of the IRS to provide notice under this proposal would not absolve any individual of any liability for a penalty.

Modifications necessary to facilitate tax administration:

These bills' provisions generally would complement IRS efforts to inform taxpayers about their responsibilities for trust fund taxes. However, the first part of the proposal raises some problems. As the IRS shifts both to alternative (non-paper) forms of making tax deposits and filing payroll tax returns, the use of the coupon booklets and forms to inform taxpayers about their responsibilities for trust fund taxes makes less sense. Fewer taxpayers will be using the coupon booklets and the forms in the future as these alternative payment and filing options grow. (The North America Free Trade Agreement, for example, requires use of electronic funds transfer for depository taxes. With this movement toward electronic payments, the use of paper coupons containing any written notification will substantially diminish or be eliminated.)

Additionally, the Service is concerned that with its current information systems, it could not meet the 30-day notification requirement. A 60-day notification requirement is more realistic. Future improvements in IRS information systems under Tax Systems Modernization would facilitate meeting a 30-day requirement.

Sec. 803. Failure to agree to extension not taken into account. Under current law, to qualify for an award of attorney's fees, the taxpayer must have exhausted the administrative remedies available within the IRS. The bills provide that any failure to agree to an extension of the statute of limitations could not be taken into account in determining whether a taxpayer had exhausted administrative remedies for purposes of determining eligibility for an award of attorney's fees.

Modifications necessary to facilitate tax administration:

This provision generally reflects current law. However, the provision should not apply to taxpayers who fail to fully respond to IRS requests for information on a timely basis.

Sec. 904. Required notice of certain payments Under current law, if the IRS receives a payment without sufficient information to credit it to a taxpayer's account, the IRS may attempt to contact the taxpayer. If contact cannot be made, the IRS places the payment in an unidentified remittance file.

The IRS would be required by the bills to make reasonable efforts to notify, within 60 days of receipt, taxpayers that have made payments which the IRS cannot associate with any outstanding tax liability. Such a requirement is consistent with current IRS practices.

Modifications necessary to facilitate tax administration:

While this requirement is reasonable and consistent with current IRS practices, a minor technical modification is necessary to accommodate situations in which a taxpayer will deposit an amount toward a liability that technically is yet to arise (e.g., an estimated tax payment toward a current year's liability that technically is not yet an •outstanding tax liability ). When a taxpayer makes such a deposit, with or without specific instructions, the IRS generally credits the deposit to the current year's liability. In such situations, a requirement to notify the taxpayer of application of the deposit to its current liability would be unnecessary and potentially burdensome to the taxpayer. Either the statute or the legislative history should make it clear that routine deposits toward future liabilities are not intended to be affected by the provision. Perhaps this could be accomplished by substituting "identifiable tax liability" for "outstanding tax liability" in the statutory language and legislative history.

Sec. 1001. Explanation of Certain Provisions. Under current law, the IRS may enter into installment agreements, accept offers in compromise, and extend the time for paying tax. The bills would require the IRS to take appropriate actions to ensure that taxpayers are aware of the availability of installment agreements, offers in compromise, and extensions of time to pay tax. The IRS would have to do so in both instructions for income tax returns and collection notices.

Modifications necessary to facilitate tax administration:

The IRS already informs taxpayers of their right to enter into an installment agreement in both instructions to income tax returns and collection notices. Although the IRS has no objection to including information on offers in compromise and extensions of time to pay tax in collection notices, inclusion of this information on the instructions to tax returns could cause some taxpayers not to pay their determined liabilities, even where they have the ability to pay. In evaluating the desirability of this provision, adequate consideration must be given to the rights of the majority of taxpayers who make timely and full payment of their determined liabilities.

Sec. 1011. Pilot Program for Appeal of Enforcement Actions. Under current law, a taxpayer who disagrees with an IRS collection action generally may appeal to successively higher levels of management with Collection.

The bills would require the IRS to establish a one-year pilot program allowing taxpayers to appeal enforcement actions (including lien, levy, and seizure) to the Appeals Division. This would be permitted where the deficiency was assessed without the actual knowledge of the taxpayer, where the deficiency was assessed without an opportunity for administrative appeal, and in other appropriate eases. The IRS would have to report to the tax-writing committees on the effectiveness of the pilot program.

Modifications necessary to prevent duplication of efforts:

The IRS has recently completed an eighteen-month pilot program for independent review of all collection activities (including enforcement actions) and is in the process of evaluating the pilot. It seems likely that this proposal was carried over from H.R. 11 (which was debated prior to completion of this pilot program), without recognition of the fact that the IRS had already completed its pilot program. The Subcommittee may find it helpful to discuss the results of the pilot program with the IRS before proceeding with a statutory change.

Other provisions that would either codify current IRS practices or assist taxpayers In ways that would not undermine the administrative process are highlighted below.

For certain provisions, minor modifications are provided to ensure that the administrative process is not compromised.

Sec. 505. Safeguards relating to designated summons. In general, current law provides that if the IRS issues a designated summons to a corporation at least 60 days prior to the expiration of the statute of limitations for the assessment of tax, the statute of limitations is suspended either until a court determines that compliance is not required or until 120 days after the corporation complies with the summons pursuant to a court's determination.

Consistent with current IRS practices, the bills would provide that no designated summons could be issued with respect to a corporation's tax return unless the summons first was reviewed by the IRS Regional Counsel for the Region in which the examination of the corporation's return was being conducted. The IRS also would have to promptly notify in writing any corporation the return of which is in issue of any designated summons (or another summons, the litigation over which suspends the running of the assessment period under the designated summons procedure) issued to a third party.

Sec. 602. Civil Damages for Fraudulent Filing of Information Returns. Current federal law provides no cause of action to a taxpayer who is injured because a false or fraudulent information return has been filed with the IRS by another person asserting that the other person made payments to the taxpayer. It does, however, provide for criminal sanctions that apply to the intentional filing of false information returns.

The bills would provide that if a person willfully files a false or fraudulent information return, the affected person may bring a suit to recover damages from the person who filed the return. A $5,000 damage floor is provided.

Modifications:

If this provision is advanced, the legislative history should provide that the outcome of the parties' civil litigation on the issue as to whether a person willfully filed a false or fraudulent information return should have no effect on an independent action taken by the government with respect to the payor for the intentional filing of a false information return.

Sec. 701. Preliminary notice requirement. Under current law, a "responsible person" is subject to a penalty equal to 100 percent of trust fund taxes that are not collected and paid to the government on a timely basis. If the IRS determines that an individual is a responsible person, he or she may appeal that determination administratively.

As is current practice, the bills would require the IRS to issue a notice to any individual the IRS had determined to be a responsible person with respect to unpaid trust fund taxes at least 60 days prior to issuing a notice and demand for the penalty. The statute of limitations for the assessment of the penalty would not expire before the date that is 90 days after the notice was mailed. The proposal would not apply if the Secretary determined that the collection of the penalty was in jeopardy.

Sec. 801. Motion for Disclosure of Information. Under current law, a taxpayer that successfully challenges a deficiency may recover attorney's fees and other administrative and litigation costs if the taxpayer qualifies as a prevailing party . A taxpayer qualifies as a prevailing party if it (i) establishes that the position of the United States was not substantially justified; (ii) substantially prevails with respect to the amount in controversy or the most significant issue or set of issues presented; and (iii) meets certain net worth and (if the taxpayer is a business) size requirements.

The bills would provide that once a taxpayer had substantially prevailed in court, it could file a motion for the court to order the IRS to disclose all information and records in its possession with respect to the taxpayer's case.

Sec.802.Increased limit on attorney fees. The maximum base rate for attorney's fees would be increased from $75 to $110 per hour and would be indexed for inflation.

Sec. 905. Unauthorized Enticement of Information Disclosure. The internal Revenue Code currently contains no provision prohibiting a tax professional from disclosing information about his or her clients to the IRS in exchange for forgiveness of the professional's tax liability.

The bills would create a civil cause of action if a government employee intentionally offers to compromise the tax liability of a professional tax advisor in exchange for information from that advisor about its client. The cause of action would permit the taxpayer to sue the government in district court without regard to the amount in controversy. Damages would equal the lesser of $500,000 or the sum of (i) actual economic damages sustained by the taxpayer as a proximate result of the information disclosure, and (ii) the costs of the action. The provision would not apply to information conveyed to a professional for the purpose of perpetrating a fraud or crime. The provision is not intended to apply to examination and collection activities of the IRS done in the ordinary course of its determination or collection of tax.

Sec. 1002. Improved Procedures for Notifying Service of Change of Address or Name. Generally, under current law, the IRS posts the new address of a taxpayer only when the taxpayer files a subsequent return or Change of Address form. If the taxpayer notifies the IRS of a new address on a return, this information is recorded on the IRS master file immediately. If the IRS is notified, in other ways, the change of address information is recorded by the IRS only after it processes refunds and returns that show a balance due.

The bills would require the IRS to provide improved procedures for address changes and to institute procedures for timely updating all IRS records with change-of-address information provided by taxpayers. The proposal is generally consistent with the spirit of current IRS initiatives to improve IRS procedures regarding name and address change notification.

Sec.1003. Rights and Responsibilities of Divorced Individuals. Although the IRS provides information on the rights and responsibilities of divorced individuals, this subject is not discussed in Publication 1, "Your Rights As a Taxpayer." The bills would require the IRS to include a section on the rights and responsibilities of divorced individuals in Publication 1.

Modifications:

This type of information is not generally consistent with the other information discussed in Publication 1 and there may be better ways of communicating these rights and responsibilities to divorced individuals. It may be more helpful to taxpayers, for example, to include a cross-reference in Publication 1 to our Publication 504, "Divorced or Separated Individuals."

Sec. 1012. Study on Taxpayers With Special Needs. The bills would require the IRS to conduct a study of ways to assist needy persons in complying with the tax laws. These persons would consist of the elderly, physically impaired, foreign-language speaking, and other taxpayers with special needs.

This proposal is generally consistent with the substantial efforts exerted by the Service in reaching out to needy groups to assist them in understanding and carrying out their obligations under the Federal tax laws. Examples of these initiatives include (i) the Volunteer Income Tax Assistance (VITA) program for low income, disabled and non-English speaking individuals; (ii) the Tax Counseling for the Elderly (TCE) program; (iii) videotaped instructions for completing returns in English and Spanish; (iv) materials in Braille and large print forms and instructions for the seeing-impaired; and (v) telephone assistance for the hearing-impaired.

Sec.1013. Reports on Taxpayer Rights Education Programs. The bills would require the IRS to report to the tax-writing committees on the scope and content of its taxpayer rights education program.

Sec. 1014. Biennial Reports on Misconduct of IRS Employees The bills would require the IRS to report to the tax-writing committees on employee misconduct cases.

To some extent, this reporting requirement duplicates other efforts. The IRS is already required by the Inspector General Act to report information on Inspection's investigative activities, including employee misconduct, to the Treasury Department Inspector General every six months. The Inspector General prepares a semiannual report to the Congress. The report includes summary information, statistics, and descriptions of significant investigative activities within the Department. The report is sent to the Senate Governmental Affairs and Finance Committees and the House Government Reform & Oversight and Ways & Means Committees. These reports are available to the public.

Modification:

The provision should be clarified to provide that it is not intended to require information, by employee name, on complaints, allegations, and investigations. Without such clarification, the provision would have the potential to invade the privacy of employees. Irreparable harm could be done to an employee's reputation if allegations against the employee were later proved unfounded or frivolous.

Sec.1015. Study of Notices of Deficiency The bills would require the GAO to study the effectiveness of IRS efforts to notify taxpayers about tax deficiencies.

Sec.1016. Notice and Form Accuracy Study. The bills would require the GAO to conduct annual studies of the accuracy of the 25 most commonly used IRS forms, notices and publications. In their current form, the following provisions would pose serious administrative problems.

Sec.101. Establishment of Position of taxpayer advocate within IRS. Under current law, the Taxpayer Ombudsman is appointed by and reports to the Commissioner. The Ombudsman's responsibilities are to bring the viewpoint of the taxpayer to IRS' policy and planning formulation. In addition, the Ombudsman oversees the operation of two programs to assist taxpayers. The first is the Taxpayer Assistance Order Program, under which the Ombudsman is authorized to issue a Taxpayer Assistance Order ("TAO") to assist taxpayers who otherwise would suffer significant hardship as a result of the manner in which the IRS is administering the tax laws. A TAO can require the IRS to release property of the taxpayer levied upon by the IRS or to cease action or refrain from taking action against the taxpayer. The second Ombudsman program is the Problem Resolution Program (PRP), which deals with cases in which IRS systems do not properly or timely handle the taxpayer's case or inquiry. Under this program, taxpayers receive special attention until their issue has been resolved.

Under the bill, the Ombudsman's title would be changed to the Taxpayer Advocate. As under current law, the Taxpayer Advocate would head an office in the IRS that reported directly to the Commissioner and would have responsibility for all aspects of the PRP Program, including Taxpayer Assistance Orders. Instead of reporting to the head of office, which is the current IRS practice, IRS employees in the field participating in the problem resolution program would report directly to the Taxpayer Advocate. In addition to the currently mandated annual report on taxpayer services prepared by the Ombudsman and Taxpayer Services, the Taxpayer Advocate would issue two reports each year to the tax-writing committees on past activities and future objectives of the office. The reports would include legislative recommendations. The IRS would be required to establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the Taxpayer Advocate.

The Office of the Ombudsman has successfully carried out the directives of the Taxpayer Bill of Rights 1. Requiring field personnel to report directly to the Taxpayer Advocate would undermine grassroots accountability of the Ombudsman. A procedural modification under which TAO decisions of the problem resolution officers could be appealed only to the Ombudsman (rather than to the District Directors as under current IRS procedures) could address Congressional concerns over the independence of the Ombudsman.

Sec.102. Expansion of authority to issue taxpayer assistance orders. Taxpayer Assistance Orders under current law include the power to release taxpayer property levied upon by the IRS and to require the IRS "to cease any action, or refrain from taking any action" against a taxpayer that will otherwise suffer "significant hardship" as a result of the manner in which the IRS is administering the tax laws. A TAO may be modified or rescinded by the Ombudsman, a district director, a service center director, a compliance center director, a regional director of appeals or any of their superiors.

Under the bills, the authority to issue TAOs would be expanded to permit the IRS to affirmatively 'take any action" with respect to taxpayers who otherwise would suffer a significant hardship as a result of the manner in which the IRS is administering the tax laws. The persons who could modify or rescind a TAO would be narrowed to consist only of the Taxpayer Advocate, the Commissioner, or a superior of the Taxpayer Advocate or the Commissioner. The provision would clarify that the Taxpayer Advocate could not determine the substantive tax treatment of any item.

The bills would also authorize TAOs for taxpayer "hardship," rather than "significant hardship." Eliminating the "significant hardship" requirement is troubling in that it would make the special relief provided by TAOs effectively available to all taxpayers other than the very small group of taxpayers for whom the timely payment of tax does not pose any hardship. This TAO expansion could present significant revenue consequences. Also, given resource constraints, the significant increase in the number of applications for TAOs that could be expected to result from expansion of the TAO standard could seriously undermine the Service's ability to serve those taxpayers whose needs are most pressing.

Other portions of this provision that expand the Ombudsman's TAO authority are also unnecessary. By delegation order, the Commissioner already has expanded the Ombudsman's TAO authority. This expanded authority includes the authority to take those affirmative actions, in addition to the current authority to cause the IRS to cease any actions, that appear to be the focus of Congress' concern (e.g., to issue TAOs to abate assessments, expedite refunds, and stay collection activity).

Finally, the bills' provision narrowing the number of individuals who could modify or rescind a TAO to only the Taxpayer Advocate or his delegate, the Commissioner, or a superior of the Taxpayer Advocate or the Commissioner is generally consistent with one of the Service's preferred alternatives to section 101 of the bills (i.e., ensuring that problem resolution officer's decisions on TAOs are appealable only to the Taxpayer Advocate). The Service's suggested statutory language here, however, would (1) clarify that, for purposes of section 7811 (concerning TAOs), Taxpayer Advocate includes those individuals that are part of the Office of Taxpayer Advocate and all problem resolution officers, and (2) limit those individuals that could modify or rescind a TAO to only the Taxpayer Advocate (as defined above) or the Commissioner.

Sec.201. Taxpayer's right to installment agreement. Under current IRS procedures, an individual who owes less than $10,000 of income tax and can pay within a short time period generally will be granted an installment agreement for the payment of that tax upon request without providing financial information to the IRS. The request will not be granted, however, if the taxpayer has delinquencies other than those that are the subject of the request. For other situations, case resolution depends on the taxpayer's financial condition. In all taxpayer interviews, the IRS first looks for sources of full payment.

Under the bills, non-corporate taxpayers would have an automatic right to an installment payment of income tax liabilities if (1) they request an installment agreement, (2) their tax liability is less than $10,000, and (3) they timely paid tax liabilities for the 3 preceding taxable years.

Permitting taxpayers to enter into installment agreements as a matter of right would undermine a major tenet of our system -- that taxes should be paid on time. It would provide a windfall to taxpayers with liquid assets in excess of those needed to pay taxes and result in substantial revenue losses. The IRS' accounts receivable inventory would balloon and substantial resources would have to be reassigned to intrusive, after-the-fact enforcement efforts.

Sec.202. Running of Failure-to-Pay Penalty Suspended. Under current law, taxpayers pay both interest and a failure-to-pay penalty on amounts paid after the due date for payment of taxes. Therefore, amounts paid under an installment agreement are subject to both interest and the failure-to-pay penalty.

For any taxpayer that enters into an installment agreement that is requested on or before the return due date, the bills would provide that the failure-to-pay penalty is suspended during the period the agreement is in effect.

This proposal would have a severe negative effect on both revenues and collections. Taxpayers who otherwise could pay taxes on time would be encouraged to pay in installments, because the interest owed the government would be less than either the return taxpayers could earn by investing the delayed payments or the general market lending rates for unsecured borrowings.

Sec.301. Expansion of authority to abate interest. Under current law, the IRS has the authority to abate interest assessed with respect to a deficiency or payment that is attributable to the error by or delay of an IRS employee performing a "ministerial" act.

The bills would replace the error or delay in performing a ministerial act" criteria for the abatement of interest by the IRS with a unreasonable error or delay" criteria. Therefore, the bills would authorize the IRS to refund or abate interest attributable to "unreasonable" IRS errors or delays, in cases in which a taxpayer's net worth or size exceeded applicable thresholds (generally a $2 million threshold for individuals and a $7 million or 500 employee threshold for businesses or organizations). For taxpayers for which net worth or size do not exceed applicable thresholds, the IRS would be required to refund or abate interest attributable to unreasonable IRS errors or delays, but only until the date demand for payment is made.

The broadening of the standard would encourage taxpayers, particularly large taxpayers with large amounts of interest at stake, to seek relief from interest assessments as a matter of course, thereby imposing significant administrative costs, as well as controversy-related costs, on the IRS. These costs ultimately would be borne by all taxpayers. Moreover, even during delays in the resolution of an issue, taxpayers do have the use of government money on which they could earn interest. Since interest (unlike a penalty) is compensation for the use of money, the provision would represent an economic windfall to taxpayers in many cases. Additionally, "means testing" the authority to abate by imposing a net worth requirement is incompatible with the purpose of the interest charge. It also is unnecessary, as the taxpayer will receive all interest paid if the taxpayer is found to owe no tax.

The vague "unreasonable error or delay" standard for abating interest also would present significant challenges in ensuring consistent application of the law. This could undermine taxpayer confidence in the fairness of the tax system. Furthermore, because net worth is not an item that is currently reported to the IRS, the net worth requirement could not be administered without great difficulty for the IRS and taxpayers.

The expansion of authority to abate interest also is unnecessary, because the cycles for tax audits (i.e., the time from initial taxpayer contact to resolution of the audits) are very reasonable. For example, the cycle times for office (i.e., generally correspondence) and revenue agent (i.e., generally person-to-person) audits of Form 1040 are 225 days and 364 days, respectively. The cycle time for revenue agent audits of Form 1120 (other than for large corporate taxpayers in the Coordinated Examination Program) is 371 days. Within these cycle times, 120 days is "built-in," because it is represented by the time necessary for 30-day and 90-day letters. The Service cannot significantly shorten the time it takes to select a taxpayer for an audit, because of systems limitations in its current matching programs.

Sec. 503. Notification of examination. In general, the IRS notifies taxpayers in writing prior to commencing an examination and encloses a copy of Publication 1, "Your Rights as a Taxpayer," with the notice.

The bills would provide that, prior to commencing any examination, the IRS would be required to notify the taxpayer in writing of the examination and examination procedures. These requirements would not have to be followed if:

(i) the examination was in connection with a criminal investigation,

(ii) the collection of the tax was in jeopardy,

(iii) the requirements were inconsistent with national security needs, or

(iv) the requirements would interfere with the effective conduct of a confidential law enforcement or foreign counterintelligence activity.

In many respects this provision is consistent with IRS' current procedures; for example, we generally provide written notice and a copy of Publication 1, "Your Rights as a Taxpayer," prior to commencing an examination. The provision requiring advance notice, however, would undermine some compliance efforts, including roadside inspections of highway vehicles to ensure they are not evading federal motor fuels excise taxes, compliance checks for currency transaction reporting, and unannounced visits to Electronic Return Originators to determine whether they are complying with IRS procedures.

Sec.504. Increase in limit on recovery of civil damages for unauthorized collection actions. Current law provides that if an officer or employee of the IRS recklessly or intentionally disregards a provision of the internal Revenue Code or Treasury regulations, the affected taxpayer may sue the United States for the lesser of (i) $100,000 or (ii) direct economic damages plus costs.

The bills would increase from $100,000 to $1,000,000 the damage cap for reckless or intentional disregard of the law by IRS employees. Increasing this cap would encourage lawsuits, consume IRS resources, and disproportionately benefit large taxpayers.

Sec. 603. Requirement to conduct reasonable investigations of information returns. Under current law, deficiencies determined by the IRS generally are afforded a presumption of correctness.

The bills would provide that if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the IRS by a third party, the IRS, when making a determination of a deficiency based on such information return, shall have the burden of proof with respect to such determination unless the IRS has conducted a reasonable investigation to corroborate the accuracy of the information return.

Shifting the burden of proof on income reported on information returns to the IRS would render the IRS' matching program inoperable. Taxpayers, without presenting any supporting evidence, could force the IRS to investigate the accuracy of information returns before issuing notices of deficiency. Without the IRS document matching program, the IRS would need substantial additional resources to reach the same level of compliance with the tax laws that is achieved today.

A proper balance is achieved under existing standards. The IRS presumption of correctness does not outweigh credible evidence presented by the taxpayer. To prevail, the IRS must counter the taxpayer's evidence with credible evidence establishing the accuracy of the return. Any law change that prevents the IRS from asserting deficiencies on the basis of information returns could have devastating effects on the tax compliance system and profoundly increase the resource needs of the Service. The biggest component of the tax gap is unreported income. The only practicable way to reduce that component is through computerized matching of information returns. Legislation of this nature would undermine that process and result in substantial revenue loss.

IRS internal Revenue Manual procedures have already been updated to track a H.R. 11 provision that strikes an acceptable balance between taxpayer and Government burdens. Under the H.R. 11 provision, if a taxpayer, in a court proceeding, asserts a reasonable dispute with respect to any item of income reported on an information return filed by a third party and the taxpayer has fully cooperated with the IRS, the Government, in presenting evidence of the deficiency based on the information return, must present "reasonable and probative information" concerning the deficiency in addition to the information return. In order to fully cooperate, the taxpayer must provide, within a reasonable period of time, access to and inspection of, all witnesses, information, and documents within its control to the extent reasonably requested by the IRS.

Sec.804. Authority for Court to Award Reasonable Administrative Costs. Under current law, a "prevailing" party in an administrative or judicial proceeding is entitled to reasonable costs.

Though the intent of the bills' provision is not clear, it appears to provide that administrative costs could be awarded from the first action by the IRS (instead of from the Appeals office decision or notice of deficiency as under current law). Cost recoveries, however, should only be allowed after the U.S. has adopted a litigating position. The position of the U.S. during the early administrative stages cannot be judged against the "substantial justification" standard used to determine if one is a prevailing party because examining agents pursue fact finding investigations that do not consider the hazards of litigation.

Sec. 901. Required Content of Certain Notices. Under current law, tax deficiency and similar notices are required to "describe the basis for, and identify" the amounts of tax, interest, additions to tax, and penalties. An inadequate description does not invalidate the notice. The bills would require that tax deficiency and similar notices instead "set forth the adjustments which are the basis for, and identify" the amounts of tax, interest, additions to tax and penalties.

The IRS already provides details of adjustments which are the basis for proposed tax assessments in notices of proposed adjustments and statutory notices of deficiency issued by the examination function. Further, the IRS is engaged in a significant ongoing effort to clarify its notices to taxpayers in a manner that is compatible with its computer capabilities. Without modernization of IRS tax systems, however, it is not practical to provide details of adjustments and related interest, additions to tax, and penalty amounts on computer generated notices. Only with full implementation of Tax Systems Modernization would such additional disclosures be feasible.

Sec. 903. Relief from retroactive application of Treasury Department regulations. Under current law, a taxpayer may rely on Treasury regulations and revenue rulings that accord with the taxpayer's particular facts. In addition, penalties are abated for taxpayers who rely on other written guidance of the IRS. The Secretary may exercise his discretion to issue tax regulations prospectively or retroactively.

The bills would generally ban the issuance of retroactive Treasury regulations. Such an unnecessary limitation would encourage aggressive taxpayer behavior and cause serious administrative problems. The New York State Bar Association and American Bar Association are of the view that, on balance, Treasury has exercised its discretion under current law intelligently and responsibly. Thus, there is no pattern of misuse or other emergency justifying the type of fundamental change contemplated by the proposal.

The prohibition would encourage aggressive return positions in the "window" between the date of change in the statute and the date of issuance of regulations interpreting that change. In addition, the exception for retroactive regulations to curb abuse of a statute would not cover regulations addressing judicial decisions or substantive defects in prior regulations. The absence of an exception for regulations issued within twelve months of the related statutory provision (as provided in H.R. 11) would encourage the issuance of vague proposed regulations or notices that provide less guidance to taxpayers.

Additionally, the retroactive effective date of the proposal is counterproductive. By applying to regulations filed on or after January 5, 1993, the proposal would undercut legitimate reliance on regulations issued after that date.