Taxpayer Bill of Rights  

Testimony of Sheldon S. Cohen

Madam Chairman and Members of the Subcommittee on Oversight:

My name is Sheldon S. Cohen. I am a partner in the law firm of Morgan, Lewis & Bockius in the D.C. office. I am delighted to appear before your Subcommittee today to give you my personal views on a possible expansion of the Taxpayer Bill of Rights.

The Congress has visited this area -- of protecting the rights of taxpayers from real or perceived ills -- since the original Taxpayer Bill of Rights became law in 1988. Several members of this House and of the Senate have from time-to-time suggested changes to further expand the rights of individual taxpayers during audit or collection activities. H.R. 11 was included in the Revenue Act of 1992 but was vetoed by President Bush and thus never became law.

I would like to discuss a few of the provisions of H.R. 11 which I believe should be modified and one new idea which has been raised recently which would require the government to bear the burden of proof in all tax situations.

I would remind the Committee that I served in the Internal Revenue Service on several different occasions. During the period 1952-1956, I served as a legislative draftsperson during the drafting of the 1954 Code and Regulations. In the period January 1964 through January 1969, I served as Chief Counsel for one year and Commissioner of the Internal Revenue Service for four years. I have also served as a Trustee of the National Academy of Public Administration and have served as a panel member of several studies for the administrative aspects of the Internal Revenue Service. I also served as Co-Chair of a study of the collection and privacy portions of the Internal Revenue Code for the Administrative Conference of the U.S. (The changes recommended by that group, co-chaired by Justice Scala, were adopted by the Congress in 1976.)

The object of the Taxpayer Bill of Rights is salutary. Every taxpayer, in dealing with his government, should be treated fairly and courteously. There is no excuse for overbearing or harsh behavior on the part of any government official in dealing with any taxpayer. Most IRS employees do their jobs fairly. When I was Commissioner, I emphasized this -- that the good taxpayers deserve it and those that try to game the system will be confounded by fair treatment.

Nevertheless, as you can understand, the job of tax collection is tough and trying. There are many occasions where either or both the taxpayer and the IRS employee's nerves will be frayed, and they will annoy each other. Because an IRS employee occasionally annoys a taxpayer is no reason to give that taxpayer rights any better than any other taxpayer. To treat one taxpayer in a beneficial manner more favorably than another is to prefer one taxpayer over the other. This is unfair and creates hardship for other taxpayers.

Thus, I do not favor the waiving of interest as provided in H.R. 11 for "any assessment of a deficiency attributable in whole or in part to any error or delay by an officer or employee of the IRS..." may be abated. It is hard for me to see why a taxpayer should pay no interest even if the IRS unreasonably delays performing a managerial or ministerial act. The taxpayer had use of the money and could have had it in an interest-bearing account. Thus, I would use a fair interest rate. If you charge no interest, you benefit one taxpayer over the other.

I am troubled by the creation of a new Presidential appointee to serve as Taxpayer Advocate. Since the 1952 Reorganization of the IRS there has only been one Presidential appointee in the IRS, the Commissioner of the Internal Revenue ( The Chief Counsel is technically an Assistant General Counsel of Treasury assigned as Chief Counsel of IRS.). Prior to 1952 there were numerous Presidential appointees and each was appointed with the recommendation of the usual political sources. This lead to problems in the and lead to the so-called "Blue Ribbon" System we have now. If the Congress wishes to have a Taxpayer Advocate, this can be done, but there would appear to be no necessity to set up a position of such high rank which might become enmeshed in politics. I have enough confidence in this Committee's action over the years to believe it can properly monitor the role of the Taxpayer Advocate.

The Congress has from time-to-time criticized the IRS for its failure to collect all the taxes due. At other times the Congress has criticized the IRS for acting too harshly in collecting the taxes which are due. You must remember we are talking about taxes which are due or overdue and what is really necessary is determining whether the taxpayer has the capacity to pay more quickly or more slowly. Reasonable people may well disagree on these points. Reasonable notice by the government as to the change of an installment agreement may be required but not too much. Please remember the situation is very fluid and delay may cause failure to collect. That burdens the taxpayers who comply.

In regard to the provision regarding possible personal liability by an IRS employee, the House has earlier proposed such a provision. The Senate did not. The Bill as passed had no such provision. I would hope that you would go along with the Senate version again. Otherwise, you will inhibit IRS employees from acting on their best judgment on the threat of possible personal liability. The liability may not be real, but it will inhibit reasonable action out of fear. This will not be constructive for the administration of the tax laws. Likewise, it will not benefit the taxpayer as the law already gives him/her a right of reimbursement against the government.

In regard to retroactive regulations, taxpayers like them when they are favorable but violently disagree with them when they may be tighter than they want. The interpretive regulation is different from the legislative regulation. Assume the Congress passes a new provision and the Treasury issues a notice of rule making a year later -- then waits a year to complete the final regulation. The interpretive regulations merely interpret the law; it should be effective from the date of enactment assuming the courts find it to be a reasonable interpretation. In most instances where the regulation takes a sharp departure from a prior position of the IRS, the regulations are prospective only. Likewise, most legislative regulations are prospective.

There are problems when a notice has been issued and the regulation. are finalized years later. In such cases, then taxpayers often complain that they are harmed by the retroactivity of the regulation. How about the majority of taxpayers who go along with the Treasury's proposed position -- Are they harmed if you had a rule of no retroactivity. I think the compliant taxpayer would be hurt. He has followed the rule the Treasury suggested as right, but the person who pushes the edges gets the benefit of delay. I would not go for such a rule. Regulation can be fair even when applied retroactively. I don't think you can write a statute which gets it exactly right. There is too much judgment involved.

The area of the erroneous 1099, K-1 or the like is troubling. It would be good to work out a system to test these; however, it seems difficult to me to allow any taxpayer to contest the correctness of a 1099 by bringing in other taxpayers. Some system of allowing a taxpayer to prove to the IRS that the information return is in error should be allowed. I am not sure this is a prevalent problem. Certainly, the filing of a fraudulent 1099, K-1 or the like is now subject to penalty under the criminal sector of the law. I'm not sure you need more.

Another item should be raised. Some people have suggested it is inappropriate to have the taxpayer bear the-burden of proof in a tax case. They assert that the government shall bear the burden of proof in all tax matters. This suggestion, while sounding-nice, is quite illogical. In our self-assessment system, the taxpayer has the records and makes a self-assessment; that is, he asserts his position on his return. If the government disagrees with that position, it asserts a deficiency which the taxpayer can litigate in the courts. Historically, the first right to litigate was by way of refund. That is the taxpayer was required to pay the tax and sue for a refund. The taxpayer, being the moving party, therefore bore the burden of proof. Next with the introduction of The Board of Tax Appeal and later the Tax Court, the taxpayer was allowed to litigate before paying, but the burden of proof stayed with the taxpayer. Thus since the inception of the first income tax in 1862 (proposed by President Lincoln), the burden has been on the taxpayer.

Now I can tell you as a litigating lawyer in private practice, I would love it if the government always had the burden of proof. But that is not fair nor is it practical. If you enact such a rule, it will dramatically effect the efficiency of the system and will result in lower collections. Think of a system where the taxpayer has all the records and the government has to prove the case. If the government has access to the records, it will demand them all (more than it really needs) just to protect itself. That would be costly and ineffective on both taxpayers and the government. On the other hand, perhaps this rule would deny to the government the records altogether. Then the-tax system would be a shambles.

Although I have a personal interest in making it tough for the government (after all, I represent taxpayers now), I do not believe a change in the burden of proof would help the system in terms of fairness or effectiveness.

I have not discussed all the provisions of H.R. 11 If you would like my views on any specific provisions I have not covered, I would be pleased to address them.

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