Mr. Chairman and Members of the Senate Finance Committee,

I am pleased to appear before you this morning to present the views of the Internal Revenue Service on S. 850, the "Taxpayers' Bill of Rights Act." I am accompanied today by Taxpayer Ombudsman Harold Browning, Assistant Commissioner for Compliance Philip Coates, Assistant Commissioner for Taxpayer Service and Returns Processing Eddie Heironimus, and Acting Chief Counsel Jerome Sebastian.

The Service shares the concerns expressed in the title of this bill. We believe that taxpayers' rights must be protected and have provided numerous safeguards of those rights in the procedures we have established to collect taxes once liability is fixed. In introducing S. 850, Senator Baucus indicated that he was concerned over numerous "horror" stories describing alleged IRS harassment and unwarranted confiscation of property. The Service, too, would be very concerned if these supposed "horror" stories accurately reflected current Service practices. The fact is that rarely are these stories accurate. The Service, however, cannot publicly refute these stories since they involve tax return matters protected under section 6103 from public disclosure.

Concern has also been expressed that levies and seizures have increased significantly in recent years. In fact, the number of seizures, when compared to 1975 and 1976, has gone from an average of 18,000 per year to 9,400 in 1980. Moreover, the number of installment agreements entered into by the Service has been increasing. Thus, the percentage of collection cases disposed of by seizure has decreased significantly in recent years. A 1978 report by GAO entitled "IRS Seizure of Property: Effective, But Not Uniformly Applied," which examined seizures during 1975, found that while there was not always uniformity among IRS districts, uniformity should not be equated with fairness and that taxpayers, as a general rule, are treated fairly. We believe that this conclusion is equally valid today.

The procedures set out in S. 850 will not, we believe, eliminate those rare cases where a taxpayer may be treated harshly. The Service constantly is trying to improve its procedures. As this Subcommittee, in the exercises of its oversight jurisdiction, identifies problem areas, we will move to correct them. The existing administrative procedures and systems at the Internal Revenue Service provide taxpayers with a number of rights and, we believe, are sufficient to allow us to find solutions to collection problems as they arise.

I would now like to discuss the specific provisions of S. 850.

Taxpayer Service and Resolution of Taxpayer Problems

S. 850 would establish a Presidentially appointed Ombudsman within the Internal Revenue Service to act as a taxpayer advocate. The Ombudsman would report directly to the Commissioner.

The Internal Revenue Service has two major programs for providing taxpayer assistance:

(1) the Taxpayer Service Program and

(2) the Problem Resolution Program.

The Taxpayer Service Program, under the jurisdiction of the Assistant Commissioner (Taxpayer Service and Returns Processing) provides assistance to taxpayers in completing their tax returns and responds to inquiries from taxpayers requesting information about the tax system, their rights and obligations under it, and the tax benefits available. The Problem Resolution Program is headed by the Taxpayer Ombudsman, who functions as an advocate for the needs and concerns of the taxpaying public and reports directly to me.

A. Taxpayer Service

During 1982, the Taxpayer Service Program expects to handle about 33 million telephone calls through a nationwide telephone system, answers about 100,000 letters, and assists over 6 million taxpayers who walk into about 800 IRS offices located throughout the country. The taxpayer service programs also provide educational materials for schools and colleges, a volunteer program for low income and elderly taxpayers, special help for hearing-impaired and foreign language speaking taxpayers, special publications and workshops for small businesses, responses to technical inquiries, and widely used publications about tax law and the tax administration system.

B. Problem Resolution Program

In addition to the Service's general Taxpayer Service Program, we have established a Problem Resolution Program within the IRS. This program was established nationwide in 1977 to provide special attention for taxpayers' problems and complaints not promptly or properly resolved through normal procedures, or problems taxpayers believe have not received appropriate attention. In addition, problems handled by the Problem Resolution Program are analyzed to determine their underlying causes, so that corrective action can be taken Service wide to prevent their recurrence. The Problem Resolution Program has proven very successful, with a high level of taxpayer satisfaction reported through follow-up questionnaires. In 1979, the Service established a Taxpayer Ombudsman in the Office of the Commissioner. The Taxpayer Ombudsman reports directly to me and, therefore, has the authority to cut across organizational lines in order to quickly resolve individual taxpayer problems and systemic problems. The Ombudsman, which is a Senior Executive Service position, administers the nationwide Problem Resolution Program; represents taxpayer interests and concerns within the IRS decision-making process; reviews IRS policies and procedures for possible adverse effects on taxpayers; proposes ideas on tax administration that will benefit taxpayers; represents taxpayers' views in the design of tax forms and instructions; and suggests (as the taxpayers' advocate) changes to proposed or existing legislation.

During Fiscal Year 1980, 210,000 individual taxpayer problems were resolved through the Problem Resolution Program (PRP). Each problem, when received by PRP staff, is documented on a special form, given a control number, and entered on a control log. The problem is then sent to the IRS function responsible for that type of problem (i.e., Collection, Examination, Taxpayer Service). PRP cases are strictly monitored until the problem is resolved. The taxpayer is kept informed of the status of the case, and follow-up questionnaires are sent to a statistically valid sample of closed case taxpayers to measure the effectiveness of the program. Every effort is made to resolve PRP cases as expeditiously as possible. If a case cannot be resolved within five workdays, the taxpayer is contacted, advised of the status of the case, and provided the name and telephone number of the employee responsible for resolution of the problem. A PRP case is not considered closed until all actions have been taken to resolve the problem.

In addition to resolving individual taxpayer problems, the Problem Resolution Program analyzes the underlying causes of taxpayer problems so that systemic problems can be resolved. Since the beginning of the program, 139 systemic problems requiring National Office resolution have been identified; of these, 97 problems have been resolved and have resulted in systemic changes improving Service efficiency and responsiveness to the public. For example, a reduction in the criteria for examining amended individual income tax returns has eliminated a delay in receiving refunds for a significant number of taxpayers filing amended returns. Other examples of systemic changes resulting from the Problem Resolution Program are: a change in processing forms requesting missing return information in order to eliminate erroneous assessment of late filing penalties, and a revision in the Form 1040 instructions to prevent delays in issuing refunds to taxpayers who have changed their names or are filing joint returns with different last names.

We believe that the present IRS Problem Resolution Program and Taxpayer Ombudsman position largely accomplish what S. 850 would seek to accomplish through establishment of an "Ombudsman," with the exception of the proposed Ombudsman's authority to issue "stop action orders," which I will discuss shortly. With regard to S. 850's provision that the Ombudsman be appointed by the President and confirmed by the Senate, and report annually directly to the tax-writing committees of Congress, we are concerned that there may not be clear delineation between the Commissioner's responsibilities and the Ombudsman's responsibilities with regard to tax law administration; this is especially true with S. 850's provision for the Ombudsman to have the authority to issue "stop action orders."

As proposed by S. 850, the Ombudsman, even though located in the Office of the Commissioner, would be a political appointee whose job is to function as an advocate for taxpayers' rights and who would thus effectively have some independent power to administer the tax law. We are concerned that such independent power

(1) would not provide a balance between protecting the Government's and taxpayers' interests and

(2) would open up dangerous potential for political abuse of the tax system.

In addition, the Ombudsman, perceived as an independent authority, may be even less effective in working within the Service to resolve individual taxpayer problems and systemic problems.

"Stop Action Orders"

S. 850 provides that the proposed Ombudsman would have the authority to issue "stop action orders" in situations where the Ombudsman finds the taxpayer would suffer unusual, unnecessary, or irreparable loss as a result of "the manner in which the internal revenue laws are being administered" - a stop action order would delay for up to 60 days IRS action adverse to the taxpayer, except in jeopardy collection cases.

The meaning of this provision is not entirely clear. To the extent it is intended to provide the taxpayer with a right to challenge the unlawful application of internal revenue laws, appropriate channels of both pre- and post-payment action already exist. Taxpayers are accorded pre-payment administrative appeal rights and may challenge a final administrative determination in the Tax Court (in a deficiency proceeding) or in the Court of Claims or U.S. District Court (in a refund proceeding). We do not believe that it would be appropriate to divide the existing authority with respect to the determination of substantive legal rights.

To the extent the "stop action order" provision is intended to establish limited equitable powers within the IRS, these powers already exist. Under existing procedures, Service officials (e.g., District Directors, Regional Commissioners, and the Taxpayer Ombudsman) have the authority to stay administrative action in cases of severe hardship to particular taxpayers. In exercising this authority, Service officials are guided by Internal Revenue Service policy and procedures which provide an automatic stop action system, at the taxpayer's initiative. For example, assessment does not occur until the taxpayer has exhausted all examination, appeals, and where appropriate, Tax Court channels for resolving the tax liability issue. Also, after the tax liability has been determined and assessed, taxpayer claims creating reasonable doubt as to the validity of the assessment almost always result in freezing action on the account while the claim is being investigated. The law and Service policy and procedures governing the collection process contain numerous safeguards to protect taxpayers' rights during the process, as I shall discuss shortly in connection with S. 850's provisions relating to collection of taxes.

In exercising discretion to determine whether and when to take various tax enforcement actions, Service officials are responsible for protecting both the interests of the Government and of taxpayers. However, granting additional, independent authority to an Ombudsman to issue stop action orders in certain situations by considering only taxpayers' and not the Government's interests could seriously impair the Service's ability to collect revenue.

Taxpayers' Rights in Collection Actions

S. 850 provides that the IRS could levy only after obtaining a court order (except where collection is in jeopardy) and that administrative systems for taxpayer appeals of liens and levies would have to be established within the IRS.

These provisions, if enacted, would severely impair the Service's ability to collect revenue and are, we believe, unnecessary in view of existing statutory and Service procedural requirements governing the collection of taxes.

Assessment of tax occurs when the tax liability has been determined. This determination can be made, for example, by the taxpayer's filing the return, by the taxpayer's agreement with IRS findings, by Tax Court determination, or by IRS findings with regard to taxes not under Tax Court jurisdiction.

The collection process begins after the assessment of tax - i.e., after the tax liability has been determined. Collection issues do not involve questions of whether the tax is owed, but of whether and how the taxpayer will pay.

Internal Revenue Code section 6321 provides that if any person liable for tax neglects or refuses to pay the tax after demand, a lien for the unpaid amount arises in favor of the Government on all of the taxpayer's property. (S. 850 would not affect the occurrence of the lien itself.) Section 6322 provides that this lien arises upon assessment. After the lien arises, the Government can file a notice of lien, which becomes a matter of public record and is an important means of safeguarding the Government's interest against other creditors.

A determination to file a notice of lien must be made within 120 days from the date the taxpayer delinquent account is received in the district, with an additional 45 days for individual accounts and 60 days for business accounts allowed if the case is assigned to a revenue officer. (The taxpayer will have been sent four computer notices before the case is sent to the district.) An Internal Revenue Service policy statement provides that: "A notice of lien shall not be filed ... until reasonable efforts have been made to contact the taxpayer in person or by telephone and afford him/her the opportunity to make payment." After talking to the taxpayer, a determination may be made to not file the notice of lien. In the few instances where lien notices are filed improvidently or erroneously, the Service sends a letter to the taxpayer apologizing for the filing of the notice of lien and suggesting that the taxpayer might want to furnish a copy of the letter to creditors or other persons.

The Service may also levy upon or seize taxpayers' property. The law and Service policy and procedures provide safeguards to protect the interests of the taxpayer or other persons in connection with Service levies and seizures. For example, Internal Revenue Code section 6334 exempts certain property from levy; section 6335 contains requirements to protect the taxpayer in connection with the sale of seized property; section 6343 provides authority for the Service to release levy and return property; section 6337 provides for taxpayer redemption of property; and section 7426 provides for several civil actions by persons other than taxpayers in connection with levy and sale.

A unanimous Supreme Court in 1977 (G.M. Leasing Corp. v. United States, 435 U.S. 923 (1977).) generally upheld the Service's power to levy or seize without a court order while requiring a court order where a search or entry of private property was necessary to effect the seizure. Our procedures scrupulously adhere to the requirement for obtaining court orders as required by the Court's ruling.

Service policies and procedures once a taxpayer delinquent account is issued also provide the taxpayer with protections. For example, we have encouraged the use of installment agreements. First-time individual income tax delinquents automatically qualify for an installment agreement, without regard to their financial circumstances.

Other taxpayers who qualify financially may also be offered installment agreements. For example, if a business taxpayer is keeping current and not incurring further delinquencies with respect to trust fund taxes, our personnel are encouraged to consider installment agreements. Other policies and procedures require our personnel to consider other alternatives and to seek supervisory approval before taking certain forms of collection action.

Providing for an administrative appeal of a Federal tax lien notice or levy would unduly and unnecessarily delay the securing of the Government's interest in property; it is also unclear what the issue of the appeal would be, since the tax liability has already been determined prior to the collection process.

S. 850's proposal for obtaining a court order prior to levy would create an extreme administrative burden on the Service. Under this provision, the Service, to levy, would have to obtain from a Federal or State court (If the proposed levy order were to encompass the merits of the assessment, we would question the legality of State court jurisdiction. However, as explained earlier, collection issues do not involve questions of whether the tax is owed, but of whether and how payment will be made.), an order based on the court's findings that the taxpayer has exhausted administrative remedies and that statutory requirements for levying have been met. During fiscal year 1980, the Service issued 611,000 notices of levy and effected 9,421 seizures. We believe the additional drain on collection resources that would be imposed by the court order requirement is unnecessary in light of current law and Service procedures providing protection for taxpayers prior to levy action.

The Internal Revenue Service shares the concern of the sponsors of S. 850 for protecting the rights of taxpayers in the collection process. However, we believe the collection provisions in S. 850 present several administrative problems while not providing taxpayer protection beyond what current law and Service policy and procedures provide.

Issuance of Regulations within prescribed time limit

S. 850 would require "initial final regulations necessary to implement the Internal Revenue Code provisions" to be issued within 18 months after enactment of the Code provisions.

In addition, it would require any initial final regulations "necessary to implement" Code amendments or additions enacted after 1969 but before 6 months from the date of enactment of S. 850 to be issued within 36 months of enactment of S. 850.

If a regulation is not issued within the prescribed period, then the effective date of the regulation cannot be earlier than the date of publication of the regulation in the Federal Register and any reasonable position taken by a taxpayer with respect to an issue for which regulations have not been promulgated on time shall apply to that taxpayer, notwithstanding any subsequent regulations. (This would not apply to recurrences of the issue after the date on which regulations are published.)

This provision is of great concern to both Treasury and the Service because we share the responsibility for issuing tax regulations. We both believe that the enactment of this inflexible deadline provision would be highly detrimental to the tax regulations process.

We are very concerned that the 18-month deadline proposed by S. 850 would affect adversely the quality of tax regulations by taking away from the Service and Treasury the flexibility to issue regulations within time frames that take into account the complexity of the issues involved and the need for more prompt guidance in certain areas. Normally, at least one major piece of tax legislation is enacted every two years. There are often more than 50 regulations projects with respect to each major piece of tax legislation. An arbitrary time limit with respect to these and other regulations projects will force the Service and Treasury to devote time to regulations projects without regard to the relative importance of the projects. This may result in delays in the issuance of some regulations that should be issued in much less than 18 months as resources are diverted to the issuance of other regulations which could be delayed beyond 18 months without significantly harming tax administration. For example, the extreme complexity of the recently enacted windfall profit tax statute and the fact that the statute generally left to regulations the design of the system for administration of the tax required the Service to issue regulations covering the administration of the tax immediately. Accordingly, these regulations were issued on the day the windfall profit tax was enacted. Had there been a statutory deadline for issuance of all regulations, it might not have been possible to promptly issue the windfall profit tax regulations because of the diversion of resources to other projects.

With regard to the provision that, if regulations are not issued within the prescribed time frame, they must be prospective, it is the present practice to make legislative and administrative regulations prospective because such regulations present new rules of which the taxpayer has no previous notice. However, interpretative tax regulations are generally made effective as of the effective date of the underlying statute in order that administrative interpretations of the statute may be uniform and subject to the notice and comments procedures. We believe the present system for interpretative regulations is preferable to requiring an interpretative gap for the period between the enactment of the statute and the issuance of final interpretative regulations. There would be a great deal of confusion for both the taxpayer and the Service about how a Code section should be interpreted during this "gap".

We are extremely concerned about the other penalty for failure to issue regulations on time, i.e., that the taxpayer will prevail if he can establish that he has a reasonable basis for a position concerning an issue not covered by timely regulations. This could bestow substantial windfalls on aggressive taxpayers who are willing to gamble that regulations will not be issued in 18 months.

We are also concerned with the idea that nonretroactivity and giving credence to all "reasonable" interpretations is an appropriate sanction if regulations are not issued timely. The "penalty" that results does not apply to either the Service or Treasury but to all other taxpayers. Requiring them to suffer the consequence of a delay in the issuance of a regulation will not improve the rights of all taxpayers. Thus, we feel it would be a serious mistake to institute these "penalties" for regulations not issued on the prescribed schedule.

Reduction of "Redtape" for individuals and small business

S. 850 proposes that the present statutory requirement for filing declarations of estimated tax by individuals be eliminated. Under the proposal in S. 850, individuals would be required to make installment payments of tax in situations where they are now required to file declarations of estimated tax. Under current law, the declaration and installment payments of estimated tax for individuals are two separate requirements. We agree that elimination of the estimated tax declarations for individuals would simplify the administrative burden for taxpayers and the Service. We also agree with S. 850's proposal to raise the $100 floor in present law before a declaration is required to $300 before installment payments are required. The Service has recommended both of these estimated tax legislative changes in the past, as tax simplification measures, and we are pleased to see congressional support for these changes.

With regard to S. 850's proposal that employers not be required to furnish employees W-2 forms when employment is terminated in the middle of the calendar year, existing regulations under Internal Revenue Code section 6051 accomplish this. Those regulations provide that, if an employee terminates employment before the close of the calendar year, the employer shall furnish the W-2 at any time, but no later than January 31 of the next year; the regulations further provide that, if the terminating employee requests that a W-2 be furnished before January 31 of the next year, the employer must do so within 30 days of that request or 30 days of the last salary payment, whichever is later. This amendment to the regulations was made in 1979. We would, of course, have no objection to the proposed statutory requirement.

Mr. Chairman, this concludes my prepared testimony. I would be most pleased to answer any questions you or other members of the subcommittee may have.