Mr. Chairman and Members of the Subcommittee,

I am pleased to be with you today for this oversight hearing into the Internal Revenue Service's systems for safeguarding taxpayers' rights. We appreciate this opportunity to put forth the service's position on such an important issue, and we hope to demonstrate to your satisfaction that the service gives a high priority and attention at all levels of the organization to safeguarding taxpayers' rights.

Accompanying me today are Harold Browning, the taxpayer ombudsman, who will have a separate statement to present at the conclusion of my testimony; Don Bergherm, associate commissioner for operations; and Bob Rebein, the assistant commissioner (inspection). Other service officials also are available for in-depth discussions of their specific program areas if necessary.

Role of Safeguards in Voluntary Compliance

Before going into the details of our safeguards, I would like to provide some background on the way the service views this area. This is important in order that we maintain an appropriate perspective on this issue.

No one is really going to disagree that collecting taxes is perhaps the most unpopular function of government. The annoyance felt by most people as they prepare and submit their tax returns, coupled with the sentiment that the taxes themselves are too high, combine to reinforce this unpopularity. At the same time, however, I think we can all agree that collecting taxes is perhaps the most important function of government. In fact, without the revenues so collected, all functions of government would ultimately grind to a halt.

Believe me when I tell you that the service knows full well how important voluntary compliance is to the success of our tax administration system. We simply cannot operate without it. We are well aware that the extent of that voluntary compliance -- and therefore the success of our system -- rests to a large degree on taxpayers perceptions of the fairness and equity of tax administration. In our role as the administrators of the system, we make every effort to insure the continual presence of that fairness and equity in all aspects of our operations, but particularly so in the area of taxpayers' rights. We will never knowingly take any action which would undermine taxpayers rights and the voluntary compliance system.

Of course, it would be foolish to say that mistakes do not occur. With total staffing of over 85,000 in fiscal year 1982, and anticipated personal contacts of all types with nearly 50 million taxpayers, the likelihood of occasional errors is obvious. The fact that personal judgment on the part of our employees is required in most, if not all, taxpayer contacts -- such as providing assistance, examining returns, collecting delinquent accounts, investigating possible criminal violations, etc. -- is certainly a factor present in the prospect for errors. Add to this the known complexity of the tax law, and the processing of nearly 167 million returns of all types in fiscal 1981, as well as issuing more than 71 million individual refunds, and the scope of our problem becomes clearer. This organization simply has too many contacts with the public -- too large a social presence, if you will -- to expect it to maintain a perfect record. I imagine large organizations in both the public and private sectors all share this problem.

None of this is meant as an excuse, however. The service has a commitment to all taxpayers to safeguard their rights in the system, and we constantly strive to improve our record in this respect.

Overview of IRS' Safeguards

We believe the system of safeguards currently in place is working well to protect taxpayers' rights. As I noted earlier, there will always be isolated instances of perceived abuse in an organization as large and diverse as this, but our system includes provisions for correcting these. We take it as an obligation to the taxpayers -- who pay our bills too -- to constantly monitor our system and improve upon it.

The first step in protecting taxpayers rights is to prevent abuse. For this reason, our system includes operating policies and procedures which establish both internal and external controls on operating units.

Perhaps the service's most visible safeguards are the existence of the taxpayer ombudsman and the problem resolution program. Mr. Browning will cover these areas in his testimony.

I would now like to briefly describe some of the most important procedural ways in which our systems are designed to prevent abuses. All the procedures I will note are contained in the internal revenue manual, the internal revenue code, or other official documents. Additionally, they are made known to taxpayers verbally and in a number of IRS publications, copies of which have been provided to the subcommittee staff.

1. Examination Division

In examining returns, the service makes every effort to correctly apply the tax laws enacted by the congress, to determine the reasonable meaning of various code provisions, and to perform audits in a fair and impartial manner with neither a government nor a taxpayer point of view.

By law taxpayers are required to produce records to substantiate amounts shown on their tax returns when requested. However, taxpayers have the right to expect that the time and place of the examination be reasonable. When we decide to examine a particular return, we notify the taxpayer in advance of the time and place of audit. Also we notify the taxpayer in writing or verbally what items on the return are being examined and/or what records need to be furnished. Should the taxpayer be unable to keep the scheduled appointment, we make every effort to work out another date or place convenient to the taxpayer.

In all examination proceedings, taxpayers have the right to have someone accompany them or legally represent them. Should taxpayers elect to have legal representation, we require that the taxpayers give their representatives a power-of-attorney covering the specific return(s) under examination. This requirement exists to protect the taxpayers rights during any service proceeding, and to protect against unauthorized disclosures of tax return information.

Sometimes, taxpayers do not appear for the examination and/or do not produce all the necessary records. When additional requests to appear and/or produce the records do not provide results, we have two alternatives. first, if an expense item is questioned, we may disallow unsubstantiated amounts and recompute the tax based upon the best available information. Or, if additional information is absolutely necessary to determine the additional tax, we may summon the records. When a summons is issued to a taxpayer or a third party and it is not complied with, a district court must rule on the enforceability of the summons, thus providing another safeguard.

In most instances, taxpayers do turn over the records necessary to complete the audit without the need for a summons. Proposed tax liability changes resulting from the examination are discussed with the taxpayer. In all cases, our procedures require that the taxpayer be informed about why the change is proposed and that he or she can appeal any unresolved examiner findings within IRS or to the courts. If the taxpayer and the service cannot agree, a formal notification of the proposed tax change is sent to the taxpayer. This notification informs the taxpayer of the specific changes in the liability and that he or she has 90 days to appeal to the court for a review of the findings.

2. Collection Division

In collecting taxes, the service makes every effort to be fair and impartial, and has several policies, procedures and controls in place to accomplish this. I would like to focus on IRS procedures for using levies and seizures because these tools can have the most substantial impact on the taxpayer.

"Levy" refers to attachment of a taxpayer's assets in the possession of third parties, such as bank accounts and wages."Seizure" refers to our seizure of a taxpayer's assets in his or her own possession, such as an automobile, business equipment, or building. During fiscal year 1981, the service in disposing of 2.2 million delinquent accounts used its levy power about 740,000 times and its seizure power about 8,800 times.

The service can levy or seize a delinquent taxpayer's property if assessed taxes are not paid within 10 days after notice and demand for payment. However, our procedures are designed to give the taxpayer a reasonable chance to voluntarily settle the tax liability before these more drastic enforcement actions are started. first, one of our service centers normally sends four notices to an individual taxpayer (three to businesses) over a 3-month period. After this, if payment has not been forthcoming, and we have had no other contact with the taxpayer, the account is sent to a district office where further attempts are made to contact the taxpayer. Publications explaining the collection process, as well as what the taxpayer's rights in the process are, are automatically mailed to the taxpayer along with the second tax delinquency notice.

We inform the taxpayer in the final mailing notice that if payment is not received within 10 days or if the taxpayer does not contact an IRS office, enforced collection -- levy or seizure -- may be taken. While some levy actions may be taken without further contact with taxpayers, we usually attempt to contact the taxpayers by telephone, field visits, or further correspondence to work out alternative ways to pay the tax delinquency before we levy taxpayers salaries or wages or seize their property. Also, when levies on wages and salaries and seizures are considered, procedures require us to attempt to notify the taxpayers in person that seizure will be the next action taken by IRS.

We have established more controls over the use of seizures than levies. Generally, we do not require written supervisory approval before levy; however, before the seizures are made we require written approval by at least a group manager. On a residence, the next highest level of management approval is required. Also, once seizure action is initiated, the cases are controlled and reviewed for procedural compliance by a special procedures staff within the collection division. Before our revenue officers can enter private premises, they must have either the written permission of the taxpayer or a writ of entry from a district court.

In addition to our employee making the seizure, another IRS employee or a law enforcement officer must be present when a seizure is made. This provides a witness to the propriety of the action. Further, the taxpayer is asked to be present when the seized property is inventoried.

If I may digress a minute, Mr. Chairman, I would like to point out one of the problems of public perception we have in the collection area. Many people have argued that the Internal Revenue Service is too tough in its collection practices. But that viewpoint is not universal. In fact, the general accounting office, in a November 5, 1981, report entitled "what IRS can do to collect more delinquent taxes," found that the service was not always taking enough action to collect delinquent taxes. In reviewing collection actions taken against 1,500 taxpayers in four districts, GAO concluded that the service was in essence allowing taxpayers to delay or even avoid paying their taxes because, among other things, of our concern for taxpayers rights. This same theory was advanced -- humorously -- in a recent article in a Portland, Oregon, newspaper. I have included that article with my statement for your information.

My point in mentioning this dilemma is to show how the service is often in the middle on such issues. We are either too harsh or too soft, depending on who you listen to. We have bent over backwards in many cases to assist taxpayers in meeting their obligations. For example, we frequently allow first-time delinquents to arrange installment payment agreements. However, this type of consideration was one of the points noted by GAO in their report. We are forced to balance the need to try and collect some $20 billion in accounts receivable with the need to respect the rights of the individuals who are delinquent. It is far from an easy job, but I assure you we do our best.

3. Criminal Investigation Division

In enforcing the criminal provisions of the tax laws, we attempt to identify and investigate suspected criminal violations and recommend any warranted criminal and civil sanctions. The most frequently prosecuted violations of these provisions are willful attempts to evade tax and failure to file tax returns. We have policies and procedures in place to assure that the individual rights of taxpayers are adequately protected in our criminal investigations. For instance, taxpayers are specifically advised upon the first official contact by special agents that they are under criminal investigation and are provided advice regarding their constitutional rights at that time. The service policy in this area exceeds the requirements of established case law. In addition, the recommendations for criminal prosecution are independently reviewed by attorneys in both the IRS and the department of justice before they are presented in court.

Our criminal investigations division receives information on potential tax fraud from three basic sources -- referrals from the examination and collection divisions, its own information gathering efforts, and information leads from other individuals and organizations.

Because examination and collection division employees are involved in auditing tax returns, locating persons who do not file tax returns, and collecting delinquent taxes, they are in a unique position to spot indications of fraud. Their referrals and case records generally provide criminal investigation division special agents enough detailed information to determine if a criminal investigation should be initiated. Special agents augment this information referral program by obtaining information from other sources, such as their own information gathering activities and leads from other "information items."

An information item is a tax-related communication received by us alleging or indicating that a particular individual or business may have violated the tax law. We receive many of these communications from varied sources, such as other federal agencies, the general public, informants, and other services employees. The bulk of these items are first screened at our ten service centers to determine their potential for a criminal tax violation, and those having such potential are sent to the districts for further evaluation by special agents.

In December 1979, we revised our guidelines for information gathering activities to include more specific information on the scope of these activities, and required that authorization requests have sufficient information to enable the authorizing official to determine whether the project is justified. Specific written authorization is required before special agents can initiate information gathering efforts designed to determine whether a particular individual, business, or group has violated a tax law. The district's criminal investigation division chief must approve requests in writing to conduct information gathering on individuals, and the request must specify the known or assumed name of the taxpayer and the reason the information gathering should be authorized. Investigations, known as information gathering projects, in areas of suspected noncompliance must be approved in writing by a district director or a higher level IRS official. The authorization must state the investigation purpose, define the scope, and specify the estimated length of the effort and the type of information to be gathered.

4. Internal Audit/Internal Security

Internal Audit reviews all IRS activities to determine whether normal management controls are operating properly and whether taxpayers are treated fairly and equitably. Internal Audit performs independent reviews and appraisals of all IRS operations to assure that operations are efficient, effective and in accordance with laws and regulations. This responsibility includes periodic testing and reporting on the effectiveness of internal controls to prevent IRS abuse of authority or taxpayer rights violations.

During fiscal years 1980 and 1981, Internal Audit completed 20 audits addressing issues that impact on taxpayer rights. These audits covered such IRS activities as management controls to avoid unnecessary repetitive audits, service centers responsiveness to taxpayer complaints, and the propriety of enforced collection actions. The audit of enforced collection actions covered the increasing use of and alleged abuses involving liens, levies, and seizures, and the impact of these actions on small business taxpayers. Based on the evaluation of 840 randomly selected business tax delinquencies, Internal Audit concluded that the enforced collection actions were warranted, and that reasonable opportunity was given the taxpayers to pay their taxes voluntarily.

Internal Audit also works closely with Internal Security in developing and implementing a preventive program to review internal controls, to determine if material fraud exists and to evaluate the effectiveness of these controls in deterring and detecting material fraud. The audits concentrate on IRS programs determined to be most susceptible to breakdown in control and breaches of integrity. In some cases, these audits directly impact on taxpayer rights, such as audits of IRS actions in the collecting and depositing of delinquent taxes and securing delinquent tax returns, suspending accounts from active collection activity, and determining and assessing tax deficiencies.

The Internal Security division is responsible for administering programs to protect the integrity of IRS. To carry out this responsibility, Internal Security conducts background investigations of current and prospective employees and performs anti-corruption tests to identify possible integrity violations. Internal Security also makes presentations to IRS employees on our integrity awareness program, their conduct responsibilities, and the consequences of not meeting those responsibilities. However, its major efforts in safeguarding taxpayer rights are in investigating allegations of serious employee misconduct. Such allegations may come from taxpayer complaints; referrals by other government agencies, IRS divisions, or employees; or from self-initiated integrity investigation projects.

During fiscal years 1979 through 1981, Internal Security investigated 1,687 cases of alleged employee misconduct. As a result of these investigations, 244 employees were separated from IRS, 431 were suspended or reprimanded, and 113 were convicted for criminal activities. These investigations included complaints of extortion, bribery, conflicts of interest, and disclosure of tax information by IRS employees, and resulted in the prosecution of, and/or adverse personnel action being taken against, IRS employees. We believe that Internal Security investigations are of high quality and that case dispositions are appropriate in light of the evidence developed.

Although taxpayers can complain directly to our Internal Security division, some misconduct allegations also come from our own managers and employees. These managers and employees are made aware of their responsibilities to report certain types of misconduct cases to Internal Security through the IRS handbook on employee responsibilities and conduct, and Internal Security's integrity awareness program. During fiscal years 1980 and 1981, Internal Security made 1,821 integrity awareness presentations to about 47,000 employees.

Generally, supervisors and managers are expected to handle employee problems of an administrative nature such as not following prescribed procedures or treating taxpayers discourteously, while Internal Security handles cases such as extortion, bribery, and conflicts of interest. Also, if after initial evaluation of an allegation, Internal Security determines that employee misconduct does not warrant an Internal Security investigation, the facts of the case will be sent to IRS management for any needed administrative action.

In addition to investigating allegations reported to it, Internal Security does some searching on its own. During fiscal years 1980 and 1981, Internal Security spent considerable time on integrity projects to assess the extent of criminal conduct occurring due to internal control weaknesses or through circumvention of controls, and identified 281 cases requiring investigations. For example, in one project Internal Security identified an employee who was selling confidential tax information. After a full investigation, the employee was dismissed and prosecuted, and was sentenced to one year in prison and fined $1,000.

Role of Training in Safeguard System

The procedures that I have just discussed are designed to protect taxpayer rights. However, they will be effective only to the degree that our employees have the knowledge and ability to carry them out. In this respect, the service has an extensive training program, offering over 500 courses in fiscal year 1981.

The amount of required classroom training is substantial. For example, during their first five years, revenue agents receive about 24 weeks of training, and revenue officers receive about 12 weeks. In January 1982, the training for our special agents was redesigned, and increased from 17 to 30 weeks of formal training during these employees first few years. In addition to the classroom training, our employees receive structured on-the-job training. We also have a formal program for continuing professional education.

Safeguarding taxpayer rights is an integral part of our activities. Therefore, instead of providing a specific training course on the subject, points on safeguarding taxpayer rights are included where needed in all training programs. For example, in the revenue officers' initial 7-week training program, one section deals with safeguarding taxpayer rights and, in addition to listing examples of those rights, stresses that taxpayers should receive prompt, courteous, and impartial treatment. The training also teaches that, when dealing with taxpayers, revenue officers should empathize with the taxpayer and initially assume that the taxpayer wants to comply.

Internal and External Controls

Devising policies, procedures, and training is not enough; service management must also have information on how well the system is actually safeguarding taxpayer rights. Recognizing this, we have devised controls both internal and external to our operating divisions to assure that policies and procedures are being properly implemented and are providing adequate protection of taxpayer rights.

One example of a primary internal control is supervisory review of work performed by subordinates. In our collection division, group managers provide first-line supervision of collection activities and employees. Collection cases are assigned to different-graded employees on the basis of case difficulty. Group managers receive monthly listings of cases to assist them in controlling and reviewing their groups workload. In addition, our procedures require group managers to review and analyze case files, as well as to accompany their employees on field visits and observe office interviews. The reviews and analyses may be unannounced, and can take place as often as the group manager feels is necessary. The objectives of these reviews and field visits are to assure that revenue officers are following service policies and procedures, and to help revenue officers improve their collection techniques.

External controls include post reviews and Internal Audits. Our regional offices periodically review districts activities. During these reviews, regional offices have evaluated the districts use of such tools as levies and seizures, including the appropriateness of that use, as well as all district activities, including how well district employees safeguard taxpayer rights.

Conclusion

Mr. Chairman, I think my testimony here has covered the service's systems for safeguarding taxpayers rights in sufficient detail to show that we are sensitive to these rights and we are constantly striving to improve our methods of protecting them. We welcome constructive suggestions from all quarters on ways to improve them even more.

My colleagues and I will be pleased to try and answer any questions you and the other members may have.