Mr. Chairman, and members of the Subcommittee, thank you for the Opportunity to present testimony on S. 203, a national tax amnesty plan. The National Taxpayers Union represents 150,000 taxpayers nationwide and has long been concerned with the tax burden and taxpayers' rights.

We support the concept of a national tax amnesty plan, but have several recommendations on how to improve S. 203.

Appearing with me is Jack W. Wade, Jr., an advisor to the National Taxpayers Union. He worked as a revenue officer for the Internal Revenue Service for eight years and wrote more than 12 IRS manuals on tax collection and enforcement. He is author of the book "When You Owe the IRS", published in 1983 by Macmillan Publishing Company.

There is evidently a de-facto voluntary disclosure amnesty policy which is known to sophisticated attorneys who specialize in tax fraud cases. But it is doubtful that the typical citizen is aware of such an IRS policy, or if aware, capable of taking advantage of it. Instituting an amnesty program would end this double-standard.

I hope the Congress will seriously consider instituting a taxpayer amnesty program as part of a tax reform package. This would probably be the best time to institute an amnesty program. The publicity which will accompany institution of the new tax reform system would also help bring attention to its amnesty provisions.

An amnesty program could generate $7 billion or more in tax revenues per year. It could help insure against a possible loss tax revenues from an inaccurate estimate of the revenues generated under a tax reform plan. Alternatively, some of these additional revenues may also be used to reduce tax rates further.

An amnesty program could benefit both the IRS and taxpayers. A carefully designed amnesty program would benefit the IRS by bringing in untold billions of dollars from the underground economy into the light. The non-filer problem could be significantly reduced.

In the book "When You Owe the IRS," Mr. Wade gives an example of a taxpayer who had not filed his returns for 11 years. Once the first filing deadline had passed, the taxpayer became too frightened to file in the following years.

Even so, he would have been owed refunds for a total of $700 for the first six years. Then for the next three years, he owed money while in the last two years he was again due for a refund, which in this case was large enough to pay all the back taxes. That year he came in and filed the return with Wade, who was then an IRS employee. The taxpayer "admitted that this problem had been bothering him for all 11 years. He had suffered two heart attacks, an ulcer, a nervous breakdown and countless sleepless nights worrying about what would ever happen if he got caught."

No doubt there are many taxpayers who might surface but are scared about what the IRS might do to them. An amnesty program would allow taxpayers to voluntarily disclose past due taxes without worrying about criminal prosecution and jail.

Some people have suggested that no legislation is necessary. We disagree. A key element for success of an amnesty program is assurance that no criminal prosecution will result. Without legislation, taxpayers may fear that the IRS will retroactively revoke an amnesty policy. But a statute would replace that beyond the power of the IRS.

Let's look at the provisions of S. 203, the Federal Tax Delinquency Act of 1985.

The proposal provides for a six month amnesty period which would begin the first July after the date of enactment of the bill. Six months should give taxpayers plenty of time to come forward. The six months which cover July 1 to December 31 of each year are typically not as busy for the IRS, and would be the best time of the year for IRS personnel to administer such a program.

The bill would allow amnesty for all open tax years ending by December 31, 1983.

It would be better to extend the amnesty to all tax years ending December 31, 1984. Otherwise, someone who has been out of the tax system for many years prior to and including 1984 could still be subject to criminal prosecution for tax evasion or tax fraud in 1984. Ideally, the amnesty should cover tax years which end by December 31 of the tax year which ended prior to the date of enactment of the bill.

The bill provides amnesty from criminal and civil penalties and 50% of the interest penalty owed. We think that this amnesty is reasonable, but it may not be enough. Why? Taxpayers probably won't ask for amnesty if their back taxes are impossible to pay.

A statute of limitations on owing tax should be considered. Some taxpayers may find it financially impossible to come forward voluntarily and pay their back due taxes. There is currently a statute of limitations of six years on prosecution for failure to file a return but no limitation on owing taxes. It may be worthwhile to put a statute of limitations which would limit tax liability to the six most recent years of liability or net worth, whichever is larger. This would still enable the IRS to collect a large sum of monies owed, while not proving to be an impossible amount of tax to pay.

Taxpayers who come forward under the amnesty program should be allowed to enter into a liberal installment agreement to pay their back due taxes, and if appropriate, be eligible to have their tax liability waived if it is judged that it would be impossible to pay.

It would be a shame if many taxpayers did not take advantage of the amnesty program because they thought they would have to pay all the taxes due in one lump sum. An installment agreement which is binding on the IRS would certainly be an appropriate addition to the bill.

Any individual or corporation would be eligible for the amnesty program, with exceptions for those currently involved in administrative or judicial proceedings, those under criminal investigations where the IRS has referred the matter to the Justice Department before the amnesty period begins and those who make false or fraudulent representations in attempting to take advantage of the amnesty. The amnesty would also cover all federal taxes. We agree with the eligibility criteria for the proposed amnesty as well as allowing amnesty to cover all federal taxes.

There are other significant omissions from this bill. The IRS should not share amnesty tax returns with any other federal government agency for the purpose of discovering other violations of law. Why would any taxpayer come forward to the IRS if he could be prosecuted on other federal grounds.

The IRS should not share amnesty tax return information with any state or local tax revenue authority which has not instituted an amnesty program. Otherwise, because of the exchange program between the IRS and state tax collection agencies, taxpayers may be subject to prosecution at the state and local level by disclosing federal violations to the IRS. State and local authorities should be given time to implement programs. If the states do not develop similar programs, they should not have access to this new data unless the taxpayer agrees with the disclosure.

The bill provides for 50% across-the-board increase in tax penalties. We strongly disagree with this across-the-board approach. Recent tax law changes have already substantially increased penalties, interest charges, and reporting requirements. At the same time, little has been done to protect taxpayers from unreasonable IRS actions or to provide for redress for unfair IRS actions.

At the very least, any penalty which has been changed since 1981 should be exempt from the 50% increase. There is no need to revisit the already increased penalties provided for by recent tax laws.

We strongly recommend that Congress pass S. 453, the Taxpayers Procedural Safeguards Act which has been introduced by Senator Charles Grassley. It would be a serious mistake to allow the IRS to impose much higher penalties on taxpayers without building additional safeguards into the system. Potential for serious IRS abuse already exists and does not need to be exacerbated by a dramatic increase in tax penalties.

No doubt, supporters of increased penalties will say that penalties are a necessary part of the amnesty program, providing the complementary "stick" to the amnesty "carrot". They will note that state programs have in many cases increased the penalties. But some of these states had low penalties for tax evasion or revenue enforcing departments which had no respect. Certainly, this is not the case with the IRS.

It would be better for the IRS to emphasize that failure to take advantage of an amnesty program would substantially add to the likelihood of successful prosecution of tax evasion because of the additional proof of willfulness on the part of the taxpayer. Emphasis could also be placed on the vast increase in information the IRS receives, and its computer modernization program (although this year the IRS made their computers appear to be a weakness, not the strength that they are).

The bill also authorizes money to administer and publicize the amnesty program. This is very important. A special legislative report by the National Conference of State Legislatures noted the importance of publicity, calling it "a key to success... Press releases and public announcements are usually not enough. Paid advertisement in major newspapers, magazines, billboards, television spots or free brochures are utilized ..." in the more successful amnesty programs.

Mr. Chairman, we hope the Subcommittee and the U.S. Congress will approve an amnesty plan. We would be happy to assist you, other members of the Subcommittee, and staff on this important issue.

National Taxpayers Union
A Nonpartisan, Nonprofit Organization Dedicated to the Public Interest
The American Taxpayer Acts Through NTU
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Telephone: (202) 543-1300