On behalf of the National Association for the Self-Employed, I appreciate the opportunity to testify before the House Ways and Means Subcommittee on Oversight. My name is Bennie L. Thayer, the NASE's President; and I am pleased to testify today on the Taxpayer Bill of Rights and other proposals to improve the rights of taxpayers in their dealings with the Internal Revenue Service.

Taxpayer rights proposals are extremely important to the over 320,000 members of the NASE, individuals who operate businesses throughout the United States. Over 85 percent of the NASE members are business owners with 5 or fewer employees. The membership represents a very wide range of businesses, notably in the consulting and retail fields. If you ask the average NASE members which federal agency creates the greatest number of administrative burdens and headaches for their business, the answer will usually be the IRS.

According to a recent NASE survey, 82.4 percent of the respondents stated that the IRS imposed the greatest regulatory burdens on businesses when compared to other agencies. It is for this reason that the NASE welcomes the opportunity to comment on taxpayer rights proposals. We strongly support efforts to improve the privacy rights of taxpayers and ensure a more even-handed approach to enforcement of the tax laws. The NASE believes such efforts should lead to an increase in the respect taxpayers have for the tax administration process and thus, result in a meaningful increase in taxpayer compliance rates overall.

The History of Efforts to Improve Taxpayer Rights

The House Ways and Means Committee has an excellent track record of supporting efforts to improve taxpayer rights. We clearly appreciate and recognize the committee's long-standing tradition of fighting for taxpayer rights, including its involvement in the final passage of the Taxpayer Bill of Rights in 1988. The NASE also commends the committee for its active involvement in the passage by Congress of the Taxpayer Bill of Rights II ("T2") in 1992; however, it did not become law because the proposal was included in two broader tax bills which President Bush vetoed in 1992 for reasons unrelated to T2.

The 1988 Taxpayer Bill of Rights made a number of improvements to the tax administration process, as well as created a number of new rights for taxpayers overall. As a result of the 1988 law, the IRS is now required to disclose in simple and nontechnical terms, the rights of a taxpayer in his or her dealings with the IRS, including with respect to an audit or tax collection matter. The IRS fulfills this requirement through the issuance of Publication 1, entitled, "Your Rights as a Taxpayer." Also, the 1988 law mandates the IRS abate any penalties or additions to tax attributable to erroneous written advice provided by the agency. The Taxpayer Bill of Rights further requires the Service to issue all temporary regulations as proposed regulations -- with the proviso that any regulation that remains in temporary form for a 3 year period shall expire at the end of such time period.

Other beneficial provisions of the 1988 law include (among others) the right of the IRS Office of Taxpayer Ombudsman to issue taxpayer assistance orders, improvements in the standards regarding when a taxpayer may interview a client, legislative authorization that the IRS may enter into written installment agreements with a taxpayer for the payment of taxes, and the establishment of an IRS Office of Taxpayer Services.

The Beneficial Pro Taxpayer Provisions of the Taxpayer Bill of Rights II

The NASE believes there are a number of beneficial pro taxpayer provisions contained in the 1992 Taxpayer Bill of Rights II and therefore, we recommend that the House Ways and Means Committee include these specific provision in any final taxpayer rights initiative acted upon during 1995 or 1996.

1. IRS Office of Taxpayer Advocate

We believe T2 was a carefully crafted initiative which balanced the interests of the IRS and the tax administration process with a taxpayer's privacy and due process rights. First, we strongly support the provision contained in the 1992 legislation which called for changes to the structure of the IRS Office of Taxpayer Ombudsman. IRS Commissioner Jerome Kurtz established the Ombudsman position in 1980, a position which currently has civil service status and currently reports directly to the Commissioner. The office was established because Kurtz wanted to help taxpayers who believed they were not getting their problems addressed through traditional IRS channels (Zeidner, Rita L., "Taxpayer Rights and Collecting Taxes: Striking a Delicate Balance", Tax Notes, November 12, 1992, page 832). In 1988, with the passage of Taxpayer Bill of Rights I, the Ombudsman's office was given statutory sanction and authority.

The 1992 legislation restructured the Office of Taxpayer Ombudsman and in its place, established the Office of Taxpayer Advocate. T2 made the new Taxpayer Advocate a political appointee and accountable to Congress. That is, T2 made the Taxpayer Advocate independent of the Commissioner's direct line of authority. The NASE strongly supports inclusion of this proposal in any 1995 legislative initiative. While the NASE appreciates the IRS' stated purposes regarding the current Office of Ombudsman, we strongly believe an independent Taxpayer Advocate will greatly contribute to a more taxpayer friendly atmosphere among IRS auditors.

We reject any arguments that an independent Taxpayer Advocate will result in a "politicized" office. The IRS currently has two positions subject to political appointment -- and these are the offices of IRS Commissioner and Chief Counsel. Previous Presidents and Congresses have nominated and confirmed people of outstanding abilities and reputations for these two positions, and we believe future Presidents and Congresses will continue to act in a similarly "good government" fashion. We have immense confidence that the federal government's dire need for revenues will act as a brake on any serious attempts to politicize the Office of Taxpayer Advocate.

The duties and responsibilities of the current Office of Taxpayer Ombudsman are (under the current IRS administrative structure) carried out at the local level by the Problem Resolution Offices located in the IRS district offices and service centers. The Problem Resolution Program is very beneficial to taxpayers in that the program has been set up to help taxpayers who are unable to resolve their problems through normal IRS channels. Unfortunately, the Ombudsman's role can potentially be undercut at the local level since the Problem Resolution Officers are hired and supervised by the local IRS District Director. Therefore, in order to mitigate the potential for any resistance to helping a taxpayer with a significant problem at the IRS local level, we recommend that the Problem Resolution Officers report directly to a newly created Office of Taxpayer Advocate.

As stated previously, the 1988 Taxpayer Bill of Rights gave the Ombudsman the authority to issue Taxpayer Assistance Orders (TAO). A taxpayer can apply to the Ombudsman and ask him to issue a TAO based on the fact the taxpayer is suffering significant hardship due to an IRS collections effort. If warranted, the TAO can require the IRS to stop certain collection efforts, such as removal of a levy on the taxpayer's property. Although the TAO program is pro taxpayer on its face, only a limited number of TAOs have been issued over the years. Therefore, the NASE strongly recommends that the authority of the current Ombudsman (or in the alternative, a newly created Taxpayer Advocate program) be expanded and broadened to ensure more effective utilization of TAOs on behalf of legitimate cases of taxpayer hardship.

2. Prohibition on Retroactive Regulations

The NASE strongly supports the measure contained in the 1992 version of T2 which prohibited (except under certain limited circumstances) the Treasury and IRS from issuing regulations which have a "retroactive" impact on taxpayers. According to proponents of the 1992 legislation, this measure was a direct reaction of widespread practices by Treasury during the 1980s, in which the agency offered "temporary regulations which became effective immediately upon their publication (Kirchheimer, Barbara, "ABA Panel Examines Problem Areas in Taxpayer Bill of Rights", Tax Notes, September 7, 1992, page 1263)."

To the average small business person, it does not matter whether a federal agency has meritorious technical and/or substantive reasons for issuing a regulation which has a retroactive impact on a taxpayer's affairs. Retroactive regulations -- rightly or wrongly -- create perception problems for the federal government which are viewed by a small business person as being arbitrary on their face. A taxpayer should not be penalized for his or her good faith reliance on a tax law or regulation which was the "law of the land" one day and changed the next. We wholeheartedly support an effort to prohibit retroactive tax regulations. The NASE believes that a prohibition on retroactive tax regulations will increase the average taxpayer's faith in the tax administration process and thus, should result in an improvement in tax compliance by the public.

3. Make IRS Employees Personally Liable for Clearly Abusive Acts

Although not included in a final House-Senate conference report in 1992, the House version of T2 included a measure which made IRS employees personally liable in situations of clear abuse. The NASE strongly supports this proposal. We reject arguments that such a measure would change the "balance of persuasion" between taxpayers and IRS employees in an audit situation. The NASE does not agree with arguments that this type of proposal is likely to result in taxpayers intimidating IRS auditors into readily agreeing with the taxpayer's position on audit. In fact, when a small business person faces an IRS audit, we firmly contend it is the IRS agent which has the power to intimidate -- not the taxpayer.

Even with enactment of a measure which makes IRS employees personally liable for any egregious acts of misconduct, the NASE strongly contends that the power to intimidate the taxpayer will still remain with the IRS auditor. If nothing else, this kind of proposal would serve to curb to a modest degree the most outrageous acts of misconduct by an IRS employee.

If it is not politically feasible to make IRS employees personally liable for egregious acts of misconduct, we recommend that Congress increase the limits on civil damage awards. Internal Revenue Code Section 7433 permits a taxpayer to bring a civil action in district court against the United States if an IRS officer or employee has "recklessly or intentionally disregarded" the tax law with respect to a collection matter. The current statutory limit for such civil actions is $100,000. We strongly recommend that this threshold for taxpayer civil causes of action against the U.S. be raised to $1 million. The NASE believes that a $1 million threshold will send a strong message to IRS employees and help deter egregious acts of misconduct.

4. Expanding the Ability of Taxpayers to Recover Reasonable Costs

Section 7430 of the Internal Revenue Code permits a court to award a judgment to a taxpayer for reasonable costs associated with an IRS administrative proceeding or tax litigation case. Such an award can be made to a taxpayer who establishes to the court that the government's position in the tax case was not substantially justified. The Code requires the taxpayer to exhaust all the administrative remedies available to him or her before the court can make an award of reasonable administrative or litigation costs regarding the tax dispute.

Senators David Pryor, Charles E. Grassley and others this year introduced S. 258, a very positive, pro-taxpayer initiative. Among other provisions, S. 258 permits a taxpayer -- once he or she has substantially prevailed in his or her case with the IRS -- to file a petition in court for disclosure of all information and copies of relevant records in the possession of the IRS associated with the case. Also, S. 258 increases the level of attorney fees that a taxpayer may recover from the government under Code Section 7430. In general, this particular provision increases the level of reasonable attorneys fee from $75 per hour to $110 per hour, and indexes the amount to inflation.

The NASE views Section 7430 as a powerful measure which is designed to dissuade the IRS from bringing unwarranted and egregious collection cases against U.S. taxpayers. Therefore, we are particularly supportive of the above provisions contained in S. 258. These provisions should provide taxpayers with improved privacy protections, as well as help level the playing field for taxpayers when faced with an unwarranted IRS position in a tax dispute.

5. Other Positive Initiatives Under T2

There are a number of other pro-taxpayer proposals found in the 1992 version of T2 and in bills introduced in 1995 that the NASE strongly supports. First, we endorse an expansion of the rights and circumstances when small taxpayers may use installment agreements to pay a tax deficiency. Last, we urge that any final 1995 legislation protecting taxpayer rights include a requirement that the IRS abate interest when the agency is responsible for an unreasonable error or delay with respect to the agency's tax administration functions.