Summary of Testimony (see below for the full text of the testimony)

• We believe the Taxpayer Ombudsman position should be elevated within the IRS organization.

• We support having the Taxpayer Ombudsman report to the Congress on a periodic basis.

• We believe that the Taxpayer Ombudsman and Problem Resolution Program would be enhanced by statutory protection of training funds and adequate funding of the IRS.

• We support legislation to expand the Taxpayer Ombudsman's authority to issue Taxpayer Assistance Orders beyond "significant" hardships.

• We believe the IRS should provide taxpayers with notification of its intention to offset a balance due on one account with a refund on another in order to avoid the unnecessary assessment of penalties and provide taxpayers with due process to address the situation.

• We encourage protections for taxpayers who try to comply with the law before final regulations are issued.

• We support a requirement for rounding to whole dollars on tax returns.

• We request that disclosure laws be reinterpreted to allow the IRS to work with tax preparers to resolve certain types of issues.

• We urge legislation to require the abatement of interest attributable to unreasonable IRS errors and delays.

• We urge Congress to pass legislation requiring comprehensive crediting procedures for the netting of overpayments and underpayments for the calculation of interest.

• We support extension of the interest-free period for payment of tax after notice and demand from ten to twenty-one days. American Institute of Certified Public Accountants Summary of Testimony

• We believe the IRS should automatically provide interest computations to taxpayers when adjustments are made involving interest above a de minimis amount.

• We support the non-assessment of the failure-to-pay penalty on installment agreement accounts.

• We endorse an administrative appeal of collection actions (including liens, levies, installment agreements, and seizure actions).

• We recommend expansion of the Secretary's authority to issue releases of lien and to return levied property.

• We support legislation to increase the amounts for property exempt from levy and include premiums on health benefits, life or disability insurance as wages exempt from levy.

• We support elimination of the requirement for Counsel's opinion for offers-in-compromise.

• We urge equal and fair pursuit of collection of payroll taxes from responsible parties. We believe the IRS should disclose the uncollected balance to any party from whom it is attempting collection and show how and from whom it has collected the tax.

• We propose at the initiation of an examination, an absent spouse must consent to the other spouse's representation of him or her.

• We consider legislation necessary to ensure the taxpayer's right to representation during an examination and the right to request the examination take place in a place other than the business location or home.

• We believe all notices of examinations should first be made in writing.

Introduction

Thank you, Madame Chairman, for the opportunity to offer recommendations for improving the federal tax administration process. I am Deborah Walker, Chair of the Tax Executive Committee of the American Institute of Certified Public Accountants (AICPA). The AICPA is the national professional organization of CPAs, with over 320,000 members. Many of our members are tax practitioners who are highly concerned with the Internal Revenue Service's standards of accuracy, timeliness, fairness, and consistency and how those standards are applied to taxpayers and practitioners. We also recognize the need for the IRS to administer the system on an efficient and effective basis. It is imperative, therefore, that any changes balance those sometimes competing needs.

Administration Improvements

1. The Taxpayer Ombudsman and Problem Resolution Officers

We believe that the Taxpayer Ombudsman and the Problem Resolution Officers (PRO) have done an outstanding job. The quality of service provided by this group ranks among the highest in the Internal Revenue Service. We see no need to disturb the PRO's reporting structure and risk hindering their ability to function effectively within their District by placing them in a position as "outsiders" to other District personnel. There are definite advantages to having the source of problem identification and correction within the IRS.

The Taxpayer Ombudsman and the Problem Resolution Officers are more effective because of their ability to investigate the problems, analyze the reasons for them, report them to the appropriate executives, and monitor solutions. The Taxpayer Ombudsman has brought to the Commissioner's attention identified problems and legislative corrections. We believe that there exists an opportunity to enhance the program by:

• Statutory protection of training funds,

• Adequate funding of the Internal Revenue Service,

• Expansion of statutory authority under section 7811,

• Elevation of the Taxpayer Ombudsman position, and

• Statutory provision for an administrative appeal of Collection Division's actions within the IRS.

Many of the current problems of the IRS stem first from an excessive workload in the Collection Division and insufficient training of personnel in the realities of the business world. Additionally, the lack of emphasis on maintaining a current workload in the Examination Division has resulted in unnecessary hardships for those taxpayers who become involved in disagreements with the IRS.

We have consistently emphasized, in our prior testimony to the Congress, the need for improvement in the personnel recruiting and training programs of the IRS. IRS training programs are sometimes inadequately funded when resources are needed to maintain other programs. It is our belief, based on considerable experience, that many of the problems brought to the PROs are a result of IRS employees who are inadequately trained in IRS procedures and the basics of the tax law.

Further, we believe that the Taxpayer Ombudsman position should be elevated within the IRS organization. In order to accomplish this, we believe the Taxpayer Ombudsman must be a peer of the Deputy Commissioner or Chief Counsel.

We believe that the Problems Resolution Program operation would be strengthened by establishing a plan whereby the Taxpayer Ombudsman reports to the Congress on a periodic basis regarding:

• initiatives that the Taxpayer Ombudsman's office has taken,

• recommendations flowing in from the field,

• the inventory of open items on which no action has been taken,

• the inventory of items on which changes have been made and whether or not those changes resolve the underlying problem,

• recommended changes that have not been implemented with the reasons for not doing so, and the IRS official who made the final decision on each recommended change,

• Taxpayer Assistance Orders which were not honored by the IRS in a timely manner, and

• recommended legislative changes to mitigate problems taxpayers incur in dealing with the IRS.

We recommend that periodic reports be submitted directly to the Congress, without the perceived undue influence regarding prior review or comment from the Commissioner, the Secretary of the Treasury, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget. Additionally, we recommend a formal response to all of the Taxpayer Ombudsman's recommendations be submitted to the Congress by the Commissioner.

Further, we believe that expansion of the Taxpayer Ombudsman's statutory authority under section 7811 is essential to maintaining an efficient tax administration. Section 7811 authorizes the Taxpayer Ombudsman to issue a Taxpayer Assistance Order if the Taxpayer Ombudsman determines the taxpayer is suffering or about to suffer a significant hardship. Taxpayer Assistance Orders require certain actions such as the release of taxpayer property levied upon by the IRS, and may require the IRS to cease any action, or refrain from taking any action as a result of the manner in which the internal revenue laws are being administered. The Code, regulations and other administrative guidance set forth a standard of hardship requiring that the basis for seeking relief is "undue" or "significant" hardship. Therefore, we recommend the elimination of the qualifiers "undue", "significant", etc. thereby providing broader authority for the Taxpayer Ombudsman to take action so taxpayers do not unfairly suffer.

2. Awarding of Costs and Certain Fees

Under current law, as set forth in section 7430, administrative costs may be recovered from the IRS only if incurred on or after the earlier of (1) receipt of the final decision of Appeals or (2) receipt of the statutory notice of deficiency. However, generally no administrative costs are incurred after this period and thus, section 7430 is not effectively carrying out the intent of Congress. Further, the taxpayer is required to demonstrate that the IRS position was not "substantially justified."

We support legislation which would amend section 7430 to provide that any person who substantially prevails in an administrative proceeding can recover reasonable administrative costs if such costs are incurred after the earlier of (1) the date of the first notice of proposed deficiency that allows the person an opportunity for administrative review with Appeals or (2) the date of the notice of deficiency described in section 6212. To protect the government, the amendment to section 7430 could provide that administrative costs will not be recovered if the government can show that its position was substantially justified.

3. Notification of Intention to Offset

We believe the IRS should provide taxpayers with notification of its intention to offset a balance due on one account or module with a refund on another. We recognize the IRS's authority to credit amounts due the taxpayer to any other liability of the taxpayer in accordance with IRC section 6402. However, in such cases, the taxpayer is not notified of such credit application until after the action is taken. In many instances, the balance due is erroneously assessed or subsequently abated. Also, the credit application may have serious ramifications for the taxpayer, particularly an individual or a smaller business that cannot afford to engage a representative to deal with the IRS on such issues.

For example, a taxpayer may elect to apply an overpayment of income tax from one year to the next as an estimated tax payment. This overpayment is sufficient to cover the taxpayer's first quarter estimate for the subsequent year. The taxpayer, a sole proprietor, may have been assessed an employment tax penalty on a given quarter. The penalty is due to the fact that a proper liability breakdown was not included with the Form 941. Once this information is supplied by the taxpayer, the penalty will be abated.

Under the IRS's current system, the taxpayer's overpayment of income tax will be applied to the outstanding employment tax assessment. The amount applied to the first quarter of the subsequent tax year as an estimated tax payment may be insufficient to cover the liability and the taxpayer is subject to an estimated tax penalty on the subsequent year. If the employment tax penalty is subsequently abated, the amount credited against such assessment will be refunded to the taxpayer from the employment tax account. However, the estimated tax penalty will not be abated automatically.

The taxpayer should be notified prior to the application of overpayments to other balances of such taxpayer. There may be other actions in progress to rectify such accounts or significant mitigating factors under consideration by another area within the IRS. The application of such overpayments, without providing the taxpayer an opportunity to address the situation, is a denial of "due process" and may create unnecessary complications and frustrations for both the IRS and taxpayers.

4. Protection from Retroactivity-Prospective Effective Dates for Treasury Regulations

We urge the Subcommittee to consider legislation that would provide protection for taxpayers who make "good faith" efforts to comply with the tax laws during the period between enactment of the law and issuance of clear guidelines and final regulations. The AICPA supports the qualifications for protection from retroactivity as set forth in S. 258, Taxpayer Bill of Rights 2, introduced January 23, 1995. Such reforms would recognize taxpayers' needs for early guidance in complex areas of the tax law, while at the same time stimulate the IRS and the Treasury to accelerate issuance of such guidance.

5. Rounding

The AICPA believes requiring the rounding of numbers on most tax returns would decrease the number of errors in tax return preparation and administration. It could greatly enhance efficiency in processing tax returns and does not affect the rights of individual taxpayers. We strongly encourage the Congress to pass legislation requiring the rounding of numbers on most tax returns.

6. Disclosure Changes

IRS statistics indicate approximately 50 percent of all returns are prepared by commercial preparers. We believe, especially because of the complex nature of the law, that taxpayers have a right to expect that the hiring of a preparer will avoid personal inconvenience and unnecessary loss of their own productive time in having their return accepted in the processing phases by the IRS. Our experience and IRS records show the processing of notices during the return perfection and processing phase is a significant workload factor. Many practitioners and taxpayers, unaware of the strict enforcement of the disclosure rules, attempt to resolve these notices by having the preparer "do what the preparer is being paid to do"- prepare the return, solve compliance problems, and appropriately interface with the Service.

We believe changes in the disclosure rules would reduce taxpayer burden, reduce IRS correspondence in dealing with abortive contacts by preparers without a power of attorney, and support the taxpayer's right to be represented. Specifically, we suggest section 6103 be amended to allow for taxpayer representatives to request and receive a taxpayer identification number on the telephone without a power of attorney being filed and to allow IRS personnel to contact a preparer who has signed the return, or accept contacts by such a preparer on behalf of the taxpayer who has received a notice from the IRS with respect to that return. This would reduce the cost of tax administration for the IRS, taxpayers, and preparers. Such communications would be allowed solely for the purpose of perfecting or processing the return for a limited period (e.g., twelve or eighteen months) after the due date of the return or the date the return is filed.

Interest

7. Abatement of Interest for Unreasonable IRS Delays

Section 6404(e)(1) provides "...the Secretary may (emphasis added) abate" interest on "any deficiency in whole or in part to [due to] any error or delay by an officer or employee of the IRS (acting in his official capacity) in performing a ministerial act."

The ministerial act requirement too narrowly limits the possibility of relief to the taxpayer with the result that the IRS will not abate interest even if it is the IRS's fault. To add a managerial standard only further complicates the statute by providing another unclear standard for interest abatement. Further, IRS rejection of a taxpayer request to abate interest is consistently denied by the courts because section 6404(e)(1) provides no requirement for abatement.

We believe that the statute must be changed to provide that the Secretary must abate or refund interest attributable to unreasonable IRS errors and delays. The ministerial act limitation should be deleted from the statute, and courts should use "unreasonable error or delay" as the appropriate standard of review.

8. Netting of Overpayments and Underpayments for the Calculation of Interest

In 1986, Congress enacted a differential between the interest owed to taxpayers on overpayments and the interest owed to the government on underpayments. Recognizing the inequity created, Congress included specific guidance that "the Secretary should implement the most comprehensive crediting procedures under section 6402 that are consistent with sound administrative practice..." However, the IRS has not responded to Congress' guidance which appeared in the legislative history to the 1986 Tax Reform Act, the 1990 Omnibus Budget Reconciliation Act, and the 1994 General Agreement on Tariffs and Trade. Consequently, we urge Congress to pass legislation requiring "comprehensive crediting procedures under section 6402."

9. Extension of Interest-Free Period for Payment of Tax After Notice and Demand

Taxpayers generally must pay interest on late payments of tax. However, a ten day interest-free period is provided for taxpayers who pay the tax due within ten days of the date of the notice and demand for payment. Often times, the taxpayer does not even receive the notice and demand until after the ten days have expired. Even if the taxpayer received the notice and demand on the date of the notice, ten days often is not adequate time for the taxpayer to gather data for a response, mail a response, and for the IRS to receive it, open it, and route it to the correct area. Therefore, we believe a reasonable extension of the ten day interest-free period to a twenty-one day period should be legislated. We do not support any dollar limitations on this increased interest-free period as is currently proposed in S. 258, Taxpayer Bill of Rights 2.

10. Detailed Interest Computations

We believe the IRS should provide interest computations, as a matter of course, to taxpayers when adjustments involving interest are made. Currently the taxpayer only receives a notice showing the amount of tax and the interest due on such amount. IRC section 7522, which is applicable for notices mailed on or after January 1, 1990, requires that such notices describe the "basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties included in such notice." At the present time, the starting date for the interest, the principal amount upon which such interest is based and the rate charged on such amount are not provided to the taxpayer as a part of the notice procedure.

We believe the "basis for" description in the notice should apply to interest computations and should include interest rates and the dates for which the interest applied, the dates and amounts of payments and credits and the interest compounding method. With this information, taxpayers and practitioners will be able to verify the accuracy of interest computations and expeditiously resolve any discrepancies. We recognize that detailed interest computations could result in a burden to the IRS. Therefore, an exception could be made for de minimis interest amounts such as $50 or $100.

Collection Improvements

11. Application for Extension of Time to Pay (Form 2911) and Installment Agreements

The IRS's Consolidated Penalty Handbook stresses that the purpose of penalties is to "encourage compliant conduct." We support legislative and administrative efforts that the IRS no longer assert the failure to pay penalty when an installment agreement is in effect. We suggest the following expansion of the Taxpayer Ombudsman's recommendation:

When there has been an application for extension of time to pay or a request for an installment agreement which is made in good faith, in proper form, and evidences a reasonable basis for the application, then the penalty should not be applied, beginning on the date of said application until denial or the termination of the extension or installment agreement, whichever occurs later.

12. Taxpayer Rights Review-Administrative Appeal of Collection Actions

We recommend the creation of an administrative appeal of collection actions (including liens, levies, installment agreements and seizure actions) to resolve issues on matters not related to the determination of tax. This procedure could be an additional function of the Appeals Division and should apply to actions where the deficiency was assessed without the taxpayer's actual knowledge or without an opportunity for an administrative appeal.

13. Expansion of Authority to Release Liens

The IRS currently may only withdraw a filed notice of lien if the notice was erroneously filed or if the lien has been paid, bonded, or became unenforceable. In many instances, taxpayers suffer severe hardships when a lien is filed against them. It is especially difficult for small business owners to carry on business because creditors are unwilling to do business with the taxpayer because of the IRS lien. We recommend expansion of the Secretary's authority to issue a certificate of release of lien and expansion of the IRS's authority to return levied property to a taxpayer when the taxpayer has overpaid their liability if it is determined that:

• filing of the notice was premature or not in accordance with IRS administrative procedures,

• the taxpayer has entered into an installment agreement to satisfy the tax liability,

• withdrawal of the lien will facilitate collection of the liability, or

• withdrawal of the lien would be in the best interests of the taxpayer and the Government

Further, at the taxpayer's request, the IRS should be required to make reasonable efforts to give notice of the release of lien to the taxpayer's creditors and to credit reporting agencies.

14. Increase Levy Exemption Amount

We support legislation to increase the exemption amounts for property exempt from levy and the indexing of that amount for inflation. In addition, the exemptions permitted to an employee whose salary is levied upon by the IRS should include premiums on health benefits, life, or disability insurance. Thus, a wage earner would be protected from losing his or her health benefits coverage as a result of the IRS's levy. Also, there appears to be an inequity in the statute in that the statutory exemptions do not apply to wages which are direct deposited into a bank account.

15. Damages for Wrongful Liens

We support legislation for a cause of action against the IRS for wrongful liens. Additionally, we would like to have included a similar cause of action on liens in violation of the automatic stay provisions in bankruptcy proceedings.

16. Offers-in-Compromise

We support legislation which would eliminate the requirement of an opinion of Counsel in an instance where taxes are being compromised based upon doubt as to collectibility. Absent this change, we support legislation for a significant increase in the amount requiring a written opinion of Counsel for an offer-in-compromise.

17. Information Return Reporting

Where the taxpayer asserts a nonfrivolous dispute with respect to any item of income reported to the IRS on an information return, then the IRS-not the taxpayer-should bear the burden of proof in any deficiency or refund proceeding absent a showing that the IRS conducted a reasonable investigation of the facts and physically examined the taxpayer's return.

18. Payroll Tax Collection

The procedure for assessment against and collection of unpaid payroll taxes from the owners, officers, directors and/or anyone with the authority and control over payroll funds, "responsible party," helps ensure that "trust" funds are paid when due. However, the "fairness" of collecting all the tax from only one party when many may be involved is questionable. The statute actually permits the IRS to collect the full amount from each party; however, the administration has stated that it does not collect more than the actual liability. Because no party is allowed to know what has been assessed and collected from each of the other responsible parties and how any payment was applied, procedures should be established to show how, and from whom, the IRS has collected the tax and whether civil recovery from others is possible in a post-collection context.

Since collection efforts are directed against the person residing in the area of the IRS office assigned the case rather than against the person most liable for the failure to pay the taxes, or the person who actually benefitted from the failure to pay the taxes, such efforts are often unfair. We urge you to consider changes in this section of the law that would require an equal and fair pursuit of collection from all parties involved. We believe the law should require the IRS to disclose the "uncollected balance" (by tax period) remaining on the assessment to any party from whom it is attempting collection, as well as the identities of other parties against whom the assessment is made or to be made.

Further, we support a requirement that the IRS issue a preliminary notice which will give the taxpayer the right to an administrative appeals hearing for the failure to collect and pay trust fund taxes, or attempt to evade or defeat such taxes provided in section 6672. Also, we support legislative efforts to prevent the IRS from collecting more than 100% of the trust fund taxes owed. We believe legislation should be enacted to prohibit the IRS from attempting to collect the 100% penalty from any alleged responsible persons during the pendency of any administrative proceeding or judicial action brought to contest the merits of a 100% penalty liability.

19. Safeguard for Divorced or Separated Spouses and Married Persons in Community Property States

We believe additional reforms are needed to ensure the equal and fair treatment of spouses who are separated, divorced and/or have community property issues compounding their tax problems. We are especially concerned with the collection procedures applicable in these situations. Often, a divorced spouse is not aware that a liability has been created in an examination process where the other party was the party examined, as in a situation where one taxpayer has a Schedule C, Profit or Loss from Business (Sole Proprietor). Yet, after the assessment is made, the IRS will attempt to collect the tax from either party. If the taxpayers are divorced or separated and now live in different regions, or even different districts, the IRS tends to only make collection efforts against the spouse living in the area of the IRS office assigned the collection case, even though the distant spouse may have more funds available to pay the bill (and maybe even be the source of the liability).

The root of this problem is in the examination procedures that do not require both spouses to be involved in an audit. We support legislative procedures that require, at the initiation of an examination, the absent spouse to acknowledge by signature whether the other spouse may, or may not, represent the absent spouse. If both parties are aware of, or participate in, the examination, then no one should be caught unaware of the liability and the resulting collection process. Additionally, legislation may be required to ensure that disclosure laws are changed to provide adequate information to the divorced spouse in community property states.

Examination Improvements

20. Taxpayer Interviews

Section 7521 specifically states that "if the taxpayer clearly states to an officer or employee of the IRS at any time during any interview ...that the taxpayer wishes to consult with an attorney, certified public accountant, enrolled agent, enrolled actuary, ...such officer or employee shall suspend such interview regardless of whether the taxpayer may have answered one or more questions." The AICPA is aware of many instances where the IRS appeared to demand that a taxpayer personally appear alone at the initial examination meeting and the taxpayer was not informed of the right to have a representative appear on his or her behalf. In most instances, an examination can be completely handled by a representative and we believe stronger legislation is needed to ensure the taxpayer is notified of his or her rights and allowed that representation.

21. Place of Examination

We believe that section 7605(a) should be amended to say that the "time and place of examination...shall be such time and place as requested by the taxpayer and as are reasonable under the circumstances." Currently, section 7605(a) provides that the "time and place of examination...shall be such time and place as may be fixed by the Secretary and as are reasonable under the circumstances." Treasury Reg. section 301.7605-1 provides general criteria for the IRS to apply in determining whether a particular time and place for an examination are reasonable under the circumstances. The regulation also instructs that sound judgment should be exercised in applying these criteria and that there should be a balancing of convenience of the taxpayer with the requirements of sound and efficient tax administration. Unfortunately, the IRS placed unnecessary limitations on field personnel by instituting IRM 4235, section 320(1) and (2).

This IRM guidance provides that the place of examination will be established consistent with the regulation and with few exceptions, the examination of the records should be made at the taxpayer's place of business. Also, this guidance indicates that consideration should be given to conducting the examination at the IRS office or the representative's office only if the taxpayer's place of business falls short in some respect relevant to conducting an examination. These guidelines are inadequate and should, therefore, be clarified legislatively.

22. Notice of Examination

The Internal Revenue Service initially contacts taxpayers either by telephone or letter to inform them of an upcoming examination. When the initial contact is made by telephone, it is followed up by letter in order to present the taxpayers' rights in written form. However, the process of allowing initial contacts to be made by telephone creates many problems in assuring taxpayers of their rights. The revenue agent, however, may request an appointment with the taxpayer in that initial call.

Sometimes the taxpayer believes that he or she must personally be at the appointment and the taxpayer does not understand that they have a right to representation.

In order to protect the rights of the taxpayer, the AICPA believes that section 7605 should be amended to require that the initial notification of an examination be made in writing. This requirement should be for all examinations. When the taxpayer receives a notice of examination, the rights accorded a taxpayer under section 7521 (explanation of examination process, right to be represented by an attorney, certified public accountant, etc.) shall attach at that time.

Conclusion

In conclusion, the AICPA wants to again thank you for the opportunity to present our comments and recommendations for more efficient administration of the tax system and improvements to the rights of the taxpayer. We will be glad to assist you or your staff with any questions or concerns.

American Institute of Certified Public Accountants
1455 Pennsylvania Avenue, NW
Washington, DC 20004-1081
(202) 737-6600