Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify on reforms to improve taxpayer rights. I represent the 200,000 members of the National Taxpayers Union who strongly support providing taxpayers with additional rights and protections during the tax audit and collection process.

We commend the Chairman for his proposal and for his outstanding work on behalf of taxpayers' rights. The IRS touches the lives of more American citizens than any other government agency. Because the IRS has more power than any other agency, it is especially important that Congress establish safeguards to protect the rights of taxpayers and to regularly maintain oversight of the tax collection power.

The National Taxpayers Union fully supports the proposed reforms Chairman Pryor has outlined in a summary of his proposed Taxpayers' Bill of Rights II (T2). It is a worthy sequel.

Taxpayers Can Still Lose Even When They Win.

Although the Taxpayers' Bill of Rights passed in 1988 offers important new protections for taxpayers, the job of protecting innocent taxpayers from ruin is far from complete. For example, I have serious doubts that it would have prevented the well-documented Council family tragedy.

The original Taxpayers' Bill of Rights would have allowed taxpayers to sue for damages if "any officer or employee of the Internal Revenue Service carelessly, recklessly or intentionally disregards any provision" of the tax laws. As the bill progressed through the Congress, the word "carelessly" was dropped from what became Section 7433 of the tax code.

Was the IRS treatment of the Council family careless and negligent? Absolutely. The Court's decision was clear on this point. Was it reckless or intentional? It might have been, but that is a very difficult standard to prove.

In the 1986 Tax Reform Act, Congress substantially liberalized the definition of negligent actions by individual taxpayers. During the 1980s, tax preparers have also been subject to increasing penalties for not exercising due diligence. Yet incredibly, Congress refuses to require the IRS to exercise reasonable caution in using its vast array of enforcement powers.

Taxpayers who have been financially harmed or devastated by IRS carelessness also should have the right to sue and recover damages. We strongly support the proposal in T2 to allow taxpayers to recover damages for negligent action by the IRS. We also strongly support eliminating the cap for damages.

If a U.S. corporation makes a product that injures a consumer, consumers don't have to prove that the corporation recklessly or intentionally harmed the consumer in order for the consumer to win an award. Neither should a taxpayer who falls victim to the negligence of the all-powerful Internal Revenue Service.

I would also like to note a flaw in Section 7432 of the tax law. While it appears to allow a lawsuit for damages for failure to release a lien, it only applies for a failure to release a lien under Section 6325, not the imposition of the lien under Section 6321 in the first place. We are pleased that T2 proposes to correct this flaw.

Attorney Fee Awards Are Woefully Inadequate.

As Kay Council's case showed, taxpayers can suffer enormous financial damages even when they win. Ray was fortunate to receive an award of attorneys' fees for her case. But the fee award didn't come close to paying her total costs. She still owed tens of thousands of dollars.

While her attorneys billed her at $135 per hour and $90 per hour, depending on the respective seniority of the attorney, the judge was restricted by the outdated $75 per hour cap in the current law. He therefore only allowed reimbursement at a rate of $75 per hour and $49 per hour, leaving Ray to pay the difference. Does Congress want to say to future Ray Councils that they'll have to pay through the nose for legal help to fight a careless, incompetent or abusive IRS?

It's very difficult to win attorneys' fees. Also, the courts are extraordinarily reluctant to award attorneys' fees in excess of the $75 per hour cap in the current law. Proving special factors is almost impossible.

Unlike the standard for award of attorneys' fees in the Equal Access to Justice Act, plaintiffs in tax cases must prove that the IRS "was not substantially justified," in pursuing the case. It would be much fairer to require that the government prove it was acting reasonably in order to prevent an award of attorneys' fees.

To protect taxpayers from enormous financial losses incurred while fighting the IRS, we strongly support the proposal in T2 to raise the outdated $75 per hour cap to $150 per hour, then index it to inflation. The court would still be limited to awarding only "reasonable fees," preventing excessive awards. The proposed change that would allow taxpayers to collect costs from the earlier of the date of the first notice of proposed deficiency or the date of the statutory notice of deficiency is also very important.

Taxpayers Rights Review.

The proposal in T2 to create "an independent administrative appeal [procedure] for a binding determination on certain issues unrelated to the determination of tax liability" is an excellent ideal. Had this proposal been in effect years ago, it may have prevented the Council family tragedy. It will certainly help ensure fair treatment during the tax collection process.

Taxpayers who are being treated unfairly by the IRS often don't have financial means to mount an expensive court fight. This is new administrative appeal procedure can help ensure fair treatment for taxpayers of modest means.

The Berlin Wall Stopping Taxpayers' Rights.

In the rare cases when the IRS goes out of control, federal law largely prevents the courts from allowing taxpayers to enforce their rights. The Federal Tort Claims Act allows the government to be sued in certain instances but specifically excludes "any claim arising in respect of the assessment or collection of any tax or custom duty." Of course, the new Taxpayers' Bill of Rights granted two very limited exceptions to that rule.

Another unnecessarily restrictive law is the Anti-Injunction Act, the law that we call the Berlin Wall against taxpayers' rights. Mr. Chairman, it's past time to tear down this wall.

Under Section 7421 of the Internal Revenue Code, no lawsuit can be brought by any person in any court for the purpose of restraining the assessment or collection of any tax, except in limited circumstances.

The case law around the Anti-Injunction Act indicates many problems in obtaining injunctions to restrain the collection of the tax. It is clear that injunctions will be granted where the failure to grant relief would result in irreparable damage to the taxpayer. But an injunction will only be allowed where it is clear that under no circumstances would the government prevail (or the taxpayer would not owe the tax). Otherwise only two remedies are available to the taxpayer: 1) pay the tax, file a claim for refund, and sue for recovery if the claim is rejected; 2) file a petition in Tax Court before assessment and within the short period of time allowed for filing such a petition.

We think that the Anti-Injunction Act should be amended to give taxpayers the ability to enforce their rights if necessary. Taxpayers should be allowed to file suit in a federal district court to enjoin the IRS from enforcement action because: the deficiency assessment was made without knowledge of the taxpayer and without benefit of the appeal procedures provided by law; there has been an improper or illegal assessment; there has been an action in violation of the law or tax laws or regulations providing for procedural safeguards for taxpayers; the IRS has made an unlawful determination that collection of the tax was in jeopardy; the value of seized property is out of proportion to the amount of the liability if other collection remedies are available; or the IRS will not release the seized property upon an offer of payment of the U.S. interest in the property.

Then, there's also the Declaratory Relief Act. This law says that citizens can file suit to get a court to declare their rights "except with respect to federal taxes."

In author David Burnham's excellent book, A Law Unto Itself, he quotes California tax attorney Montie Day and his views on these laws that prevent taxpayers from enforcing their rights. He says that allowing such limited lawsuits would make "the IRS more accountable... and make the agency more likely to operate in a lawful fashion."

As long as taxpayers are largely banned from suing to enforce their rights, taxpayers will continue to be at risk of financial ruin and emotional devastation from the IRS. It is completely unfair for the IRS to have all the powers and for taxpayers to have few rights that can only be enforced with great legal difficulty. We must ensure fair treatment of innocent taxpayers to continue respect for our Constitutional system of government.

Congress Should Safeguard the Right to be Self-Supporting.

The Taxpayers' Bill of Rights made the very necessary improvement of exempting a larger amount of a taxpayer's weekly salary from levy. But it made little change in the amount of property exempt from seizure.

The law lifted the amounts from a paltry $1,500 for personal property to $1,650 and from $1,000 for equipment and property for a trade, business or profession to $1,100. That's hardly any change, and it is far from sufficient to allow a taxpayer to be self-supporting.

What self-employed plumber could maintain his self-employment with just $1,100 in tools, equipment and a truck? What computer programmer or author could do so? Very few, if any.

Who can provide the basic essentials of clothing and furnishings for a family with only a $1,600 exemption?

The bankruptcy laws provide far more protection than this.

We would like to see the exemption amounts lifted to $10,000. The current levels are ridiculously low.

Installment Agreements.

An early version of Senator Pryor's Taxpayers' Bill of Rights contained an important provision for individual taxpayers - the right to an installment agreement if the taxpayer had not been delinquent in the previous three years and the liability was under $20,000. The provision was dropped because of concern about the $20,000 liability. We are pleased to see this provision in T2.

We think the concept was a good one, especially if it is limited to individual Form 1040 taxes after an unexpected audit. More taxpayers would be willing to concede if they knew they would have time to pay this unexpected bill. Currently, taxpayers have an incentive to stall if they can't pay. A liability cap of a smaller amount, say $10,000, might also make the concept more acceptable. Of course, any interest in penalties that would normally be owed would still continue to accrue.

Marriage, Divorce, and the IRS.

One of the most common complaints I hear comes from taxpayers who have divorced and one spouse has disappeared. Perhaps following a tendency in human nature, the IRS often goes after the spouse it finds first, whose name and address the IRS readily has on its computer, even though that spouse may be innocent.

Of course, in some cases, taxpayers can be relieved of the tax liability on a joint return under the so-called "innocent spouse" rule. However, its provisions are so complicated that it should be known as the "lucky spouse" rule for the few people who can meet all of its tests.

Much more needs to be done to protect divorced spouses.

Administration of the Federal Tax Deposit System.

If an employer does not report and deposit withheld income and Social Security taxes, then certain responsible officers can be held personally responsible for the taxes plus a one hundred percent penalty. This is an area ripe for reform.

The reforms proposed in Taxpayer's Bill of Rights II would certainly help improve the chances of fair enforcement.

When the IRS seeks to collect these trust fund taxes, it often assesses liabilities on everyone in sight (including bookkeepers, accountants, bank officers, inactive directors, inactive or resigned corporate officers and family members), whether they are truly a responsible officer or not. Inside the agency, this is called the shotgun penalty approach. A lot of innocent people get hurt.

Unfortunately, the burden of proof is on the taxpayer to prove that he or she was not responsible for the lack of payment. You might as well ask the taxpayer "When did you stop beating your spouse?" Proving a negative is a difficult proposition at best.

The burden should be on the IRS to prove the taxpayer was responsible.

Why can't the tax laws define the responsible parties as the chief executive officer, the chief and senior financial officers, those who serve on the board of directors and own a significant stake in a privately held corporation, and other responsible parties designated on a schedule that could be attached to the corporation's last quarterly 941 tax return of each year? The attached schedule would clearly state the serious responsibilities to remit trust fund taxes and require the signature of each named responsible person to indicate their knowledge of and consent to these rules.

If the IRS had the names and addresses of such persons in its computer, then these responsible persons could be immediately notified when a payment has been missed. It would allow these officers and other responsible persons to immediately investigate why these taxes have not been remitted on time, protecting the Treasury and innocent taxpayers.

Taxpayer Assistance Orders and the Problem Resolution Program.

While the Problem Resolution Program has undoubtedly achieved a great deal of success in helping taxpayers, we think there is still room for improvement. Reports have surfaced about problem resolution officers (PROS) who have not been helping taxpayers even though the circumstances appear to warrant intervention. Bob Kamman, an attorney in Phoenix, who is a contributing writer to our Tax Savings Report newsletter, has written that after a form 911 is filed with a PRO, "that person refers it to the branch of the agency where the difficulty originated. The response quite often is made by the person who caused the problem in the first place. It's not easy to tell co-workers down the hall, who may eat at the same cafeteria table, ride in the same carpool and bowl in the same league, that they screwed up. Sometimes the PRO does it, but often he won't. That's what happened to my client ..."

I have heard some complaints that some PROs feel that they are not technically qualified to pass judgment on a particular taxpayer's complaint and temporarily overrule the IRS action. If this is indeed a problem, it would account for the dearth of Taxpayer Assistance Orders (TADs) that have been granted.

The IRS will undoubtedly say that the reason for the dearth of Taos is that the mere threat of a TAO often will accomplish the task. Mr. Kamman makes the excellent point that "we don't evaluate the effectiveness of police carrying guns by the number of times they shoot them." But the TAO is hardly the equivalent of a bullet, and I'm concerned about why so few have been issued.

The Standard of Hardship is Unnecessarily High for a TAO.

One other potential explanation is that the IRS is using a standard of hardship that is too high. we strongly support the T2 provision to reduce the hardship requirement.

If the IRS is violating its internal policies or procedures or the tax code and regulations, the Ombudsman should have the power to issue a TAO. This is altogether reasonable. After all, why should the taxpayer have to bear significant hardships in order to qualify for a TAO?

It's Time to Make the Ombudsman More Independent.

Under T2, the Ombudsman would be a political appointee and not a career IRS employee. As a political appointee the Ombudsman would be free to be a true taxpayer advocate without worry for his career aspirations within the IRS. He would not have to worry about how other IRS managers feel about his input into their areas of responsibility. Also, a political appointee would come to the job independent of the restrictive mission-oriented mentality that besets many career agency executives. He would be more perceptive to the needs of taxpayers and more receptive to changing the old ways of doing things. Instead of going under the bureaucratic name of Ombudsman, let's rename the office "Taxpayers Advocate." A four-year term would enable each new administration to replace the Ombudsman.

Notice of Deficiency Safeguard.

We strongly support the provision in T2 to "amend section 6212(a) to provide that a 'determination' must be 'a thoughtful and considerate determination that the United States is entitled to an amount not yet paid.'" This is standard was used in the case of Portillo v. Commissioner, and is worth putting in the tax code. The IRS should not be permitted to rely on information returns that have been seriously challenged. It is only reasonable that the IRS investigate an information return to ensure its accuracy before relying on such an information return before issuing a Notice of Deficiency.

Deductibility of Tax Preparation Fees.

We also strongly support allowing a deduction on Schedule C or Schedule F for the cost of preparing these tax schedules as an ordinary and necessary business expense. It is only fair that self-employed or unincorporated taxpayers are subject to the same tax rules that apply to corporations.

Congress Should Require Equitable Use of the Levy Power.

Burnham's book present's an impressive array of statistics that the levy power is not applied equally across the united States. Burnham reports that in 1988 "for every 1,000 tax delinquent accounts, 892 levies [occurred] in the Western Region; 860 in the Mid-Atlantic; 735 in the Southwest; 714 in the North Atlantic and the Central; 708 in the Mid-West; and 532 for the Southeast."

There's even more variation in the seizure rate. Burnham reports that in 1988 "the seizure rates in the most active districts were 30 to 40 times higher than the rates in the districts with the least. The IRS has no explanation for the variations."

This is nothing new. As far back as 1976, the Administrative Conference of the United States issued a report titled "Collection of Delinquent Taxes" that said the IRS had no clear guidelines specifying when levy action was to be taken. The report said "lacking guidance, revenue officers vary in their criteria for seizure of assets of individual taxpayers... So long as the Internal Revenue Service fails to delineate clear purposes for the use of summary powers, we believe that these divergent criteria will continue to exist. The variations in practice may lead to the appearance of arbitrariness and caprice in some actions, thus undermining the taxpaying public's confidence in (and compliance with) the taxing system."

These random variations have continued year after year. The guidelines that exist only in Internal Revenue Manuals are not enforceable. Therefore, Congress should require that the IRS issue regulations specifying the circumstances, conditions and situations under which a levy will be made.

Conclusion.

Mr. Chairman, the job of protecting taxpayer rights will never end. Much progress has been made, but more legal protections are necessary. We thank the Chairman and the members of this committee for their diligent efforts on behalf of taxpayer rights.