Proposed legislation to restructure and reform the IRS.

On April 13, 1998, Tax Executives Institute submitted the following comments to the Senate Committee on Finance, supplementing the Institute's testimony at a January 29, 1998, hearing on proposals to restructure and reform the Internal Revenue Service. The comments took the form of a letter from TEI President Paul Cherecwich, Jr. to Senator William V. Roth, Chairman of the Finance Committee, and respond to a series of questions submitted by the Chairman following the hearing. Mr. Cherecwich's January testimony is reprinted in the January-February 1998 issue of The Tax Executive.

Mr. Chairman, TEI wishes to take this opportunity to commend the Senate Finance Committee on its efforts to restructure the IRS. The Nation will be well served by IRS that is better managed and subject to more consistent oversight, by both the Executive Branch and Congress, and by stronger taxpayer protections. Although TEI has residual concerns about the bill that the Finance Committee recently approved (and hopes that further changes will be made during the debate in the Senate and the deliberations of the House-Senate conference), we wish to underscore our strong belief that restructuring legislation should be enacted sooner rather than later. The keys to giving the American people the tax system they deserve are to remain focused on the future, to resist the temptation to micro-manage the IRS's day-to-day activities, and to complete the legislation as soon as possible so the IRS can get on with its work. Hence, although we appreciate the political and legislative exigencies might prompt various amendments to the restructuring bill, we urge Congress not to let the process of reforming and restructuring the IRS get bogged down.

Tax Executives Institute appreciates this opportunity to present its views on the proposals to restructure and reform the IRS. Questions about the Institute's views should be directed to Michael J. Murphy, TEI's Executive Director, or Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs. Both can be reached at [phone].

Background

Tax Executives Institute is the professional association of corporate tax executives. Our 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in North America; they are responsible for conducting the tax affairs of their companies and for ensuring their compliance with the tax laws. TEI members deal with the tax laws and with the Internal Revenue Service on almost a daily a basis, and the Institute believes that the professional training and experience of our members enable the Institute to bring an important, and balanced, perspective to the issues involved in efforts to restructure and reform the IRS.

Strengthening Oversight

1. One of the most important lessons learned for the Committee's oversight hearings last September is the need for greater oversight of the IRS. The Congress needs to do more oversight -- which we intend to do. But also there must be more oversight of the IRS in the Executive Branch. There are, at least, two ways we can improve that oversight. The first is to vest significant oversight responsibility with the Oversight Board that is created in the House-passed bill. The second way is to substantially increase the power of the Treasury Inspector General. What are your views on both of these ideas?

Tax Executives Institute believes that the House-passed version of the IRS Restructuring Bill strikes the proper balance in respect of enhancing Executive Branch oversight of the Internal Revenue Service. Although we agree that a strong inspection function is critical to an effective IRS, we also agree that an Oversight Board should be established that oversees the IRS in the administration, management, conduct, direction, and supervision of the execution and application of the tax laws. The Board should be more than an advisory body (such as the current Commissioner's Advisory Group). It should be involved in (1) reviewing and approving the IRS's strategic plans (including the establishment of its mission, objectives, and standards of performance), (2) reviewing operational functions of the IRS (including plans for modernization of the tax system, training, and education), (3) providing for review of the Commissioner's selection, evaluation, and compensation of senior managers, and (4) reviewing and approving the Commissioner's plans for major reorganizations. The Board should also review and approve the budget request prepared by the Commissioner (to ensure that it supports the IRS's annual and long-range strategic plans). In general, however, TEI does not believe the Board should become involved in day-to-day decision-making at the IRS.

TEI also believes that, regardless of whether the inspection function is part of the IRS or the Treasury Department, the Commissioner should be able to call upon, and use, Inspection personnel as a resource in identifying and resolving problems. The Institute is aware of no friction between the Treasury Inspector General and the IRS's Chief Inspector. We also think that internal audit reports should generally be shared with the Oversight Board (subject to appropriate safeguards to prevent improper disclosure of confidential taxpayer information).

Finally, TEI agrees with Chairman Roth that an essential ingredient to improving the management and operation of the IRS is enhanced congressional oversight and accountability. Responsible, focused legislative oversight is needed for effective government, and TEI supports steps to streamline congressional oversight activities (including those of the U.S. General Accounting Office) and to make it at once less reactive, more constructive, and more integrated. Accordingly, the Institute recommends that the provisions in the House-passed bill on streamlining congressional oversight be restored to the Restructuring Bill.

2. Is the Oversight Board created in the House bill an executive board, or merely advisory? Does the board have legal authority to direct actions taken by the Commissioner?

As stated in our response to Question 1, TEI does not believe that the Oversight Board should become involved in day-to-day management of the IRS; rather, the Board should be involved in developing and overseeing the implementation of the agency's strategic plans (including the development of balanced performance measures). We also believe that, strictly speaking, the Board should not have legal authority to direct the Commissioner to take particular actions. At the same time, the Board should and will have considerable influence, through its access to the Secretary of the Treasury, the reports it files with Congress, and most significantly, the expertise and experiences of its members.

3. If the Oversight Board is created and Commissioner Rossotti is able to turn the agency around, should the board be sunsetted?

Enhanced oversight of the Internal Revenue Service (by the Executive Branch as well as by Congress) cannot be a passing fad. It must be ongoing and consistent. Because the need for strategic guidance is continual, we do not believe the Restructuring Bill should provide for an automatic "sunsetting" of' the Oversight Board. We do believe, however, that the Board should not be retained if, after a period of years, it becomes an empty vessel. In other words, there should not be an Oversight Board just to have an Oversight Board. If Congress determines that the appropriate cultural and management changes have been effected at the Internal Revenue Service and further determines that Congress itself is providing consistent, credible oversight of the agency, then it should consider abolishing the Board. We do not anticipate that occurring for some time.

Protecting the Taxpayer

4. What are your thoughts on changes the committee ought to consider in the area of interest and penalties?

TEI agrees that significant changes in the Internal Revenue Code's interest and penalty provisions should be considered, and we applaud the decision of the House of Representatives and the Senate Finance Committee to include ameliorating provisions in the Restructuring Bill. For example, we strongly support the proposal to eliminate the so-called interest rate differential pursuant to which a higher interest rate is imposed on tax deficiencies than is paid on tax refunds. (Indeed, we believe the proposal should be broadened to reach all types of taxes and all open years.) We also support the call for a comprehensive study of the Code's interest and penalty pro visions. As the process moves forward, we recommend that Congress keep in mind the following general principles:

* The Code's interest provisions should operate not to penalize but rather only to compensate for the use or forbearance of money.

* Penalties generally should not be imposed for "foot faults" or for violations that involve non-purposeful behavior. Given the horrendous complexity of the Internal Revenue Code, taxpayers who strive in good faith to comply should not be penalized.

* Taxpayers who do not strive in good faith to comply should not be given a "pass" in respect of interest charges or penalties. To be sure, the Code's current interest and penalty provisions can sometimes operate to create inequitable (or at least highly sympathetic) situations. In seeking to enhance the rights of noncompliant taxpayers in lien and levy situations, however, Congress should take care not to send the wrong signal to the overwhelming majority of taxpayers who fully comply with the law.

* Congress should abjure the enactment of new (and onerous) interest and penalty provisions to raise revenue. Indeed, just as the Senate Finance Committee has rightly urged the IRS not to use penalty assessments in evaluating the success of its compliance programs, it is unseemly for Congress or the Administration to attempt to "pay for" other provisions by imposing higher penalties or interest rates out of all proportion to the market rate.

5. Should the Taxpayer Advocate and problems resolution officers be independent from the IRS? What are the advantages and disadvantages of separating the Taxpayer Advocate from the IRS?

TEI believes that the Problem Resolution Program represents one of the IRS's success stories and that Problem Resolution Officers (PROs) are some of the unsung heroes in the tax system. We acknowledge that our members (as tax professionals) are more tax-savvy than most taxpayers, but nevertheless believe their generally satisfactory experiences with PROs are reflective of those of the taxpaying public as a whole. This is not to say that the Office of Taxpayer Advocate or the Problem Resolution Program cannot or should not be improved. As Commissioner Rossotti has acknowledged, all IRS employees should become taxpayer advocates. We do not believe, however, that the Taxpayer Advocate and PROs should be wholly independent of the IRS. Indeed, the Taxpayer Advocate and PROs need to be intimately familiar with the IRS and its functions. Yes, they need to exercise independent judgment, but they also need to know how to cut through the procedures and protocols that might otherwise hinder their ability to resolve particular problems. We believe the necessary knowledge and experience will only come if the Taxpayer Advocate and PROs are part of the agency. If the Taxpayer Advocate were separated from the IRS, his or her ability to do the job could well be imperiled. Finally, although we believe that the Taxpayer Advocate should be appointed by, and report to, the Commissioner, we believe it would be appropriate for the Oversight Board to play a role in the Taxpayer Advocate's selection.

a. The current offer in compromise program does not seem to work. In too many instances, people go into the program, nothing gets resolved, and by the time they get out they are socked with horrendous interest and penalties. Is this program broken? How would you improve it?

As an organization whose members work for large corporations, TEI does not have significant experience with the offer-in-compromise pro gram, which is intended to give taxpayers who fail to meet their obligations to the tax system (through inadvertence, volitional noncompliance, or pure happenstance) a second chance. Based on our limited experience, we believe it is inaccurate to conclude that the program "does not work" or is "broken" and that "nothing gets resolved." To be sure, improvements are possible (and TEI is pleased that efforts are underway to improve the program), but not all the complaints that have been lodged against the program are well founded.

b. The IRS has the power to label a taxpayer as an "illegal tax protester." Such a label is important for the IRS in its efforts to protect its agents. But such a label also brings serious consequences for the labeled taxpayer. It is important to protect IRS employees. However, our investigation has revealed that some taxpayers may have been labeled as illegal tax protestors merely because they wrote an article in a newspaper. Should there be a review of such labeling to prevent abuse of the labeling system to the detriment of law-abiding taxpayers?

TEI agrees that care must be taken in labeling a taxpayer an "illegal protester" or as "noncooperative." Clearly, the IRS must respect taxpayers' right to free speech and not unfairly impugn the integrity of particular taxpayers while striving to safeguard its own employees. This is an area where there must be a balancing of competing interests. Accordingly, we recommend that the Taxpayer Advocate be charged with reviewing the IRS's procedures for labeling taxpayers as "illegal tax protesters" or "noncooperative" and establishing a mechanism to guard against abuses. This subject would be an appropriate one for the Taxpayer Advocate to report on in his or her annual report to Congress.

c. In our September hearings, we heard from Father Ballweg who indicated to all of us the importance of a system that is customer friendly. Shouldn't most correspondence be signed so that agency personnel are accountable?At some stage in the process, where a problem arises, should the taxpayer be given an employee to whom the taxpayer may turn to resolve the case?

TEI agrees that the IRS must be more taxpayer friendly, and we applaud efforts by Commissioner Rossotti and others to move the agency in that direction. We also agree that IRS correspondence should generally contain the name and telephone number of a person who can be contacted about the taxpayer's situation. It should be recognized, however, that given the broad range of topics that IRS correspondence might address, the high volume of correspondence, varying work hours, and myriad other issues, it may not always be possible for each notice (especially computer-generated notices or math errors) to contain the name of a specific individual to be contacted. The key is to ensure that whomever the taxpayer contacts is able to access the pertinent information and either handle the taxpayer's case or immediately refer the taxpayer to someone who can.

Oversight Board Questions

6. The House bill establishes a board "to oversee" the IRS in its "administration, management, conduct, direction, and supervision" of the administration of the tax laws. What does "oversee" mean to you? What should be the relationship between the Commissioner and the board?

See response to Question 1.

7. I am troubled that the bill prohibits the board from exercising any authority over "law enforcement activities" such as collections -- an area which our hearings have shown to be rife with taxpayer abuse. Should the Board have oversight authority over law enforcement activities to prevent taxpayer abuse?

Although TEI agrees that one case of abuse (in the collection function or elsewhere) is one too many, we caution against overreaction in respect of involving the Oversight Board in law enforcement activities. To be sure, if the Inspection function identifies an area of systemic concern relating to the IRS's collection activities or other law enforcement activities, the Board should likely be informed of the problem and become involved for both oversight and strategic planning purposes. In our view, however, the Board should not become involved in individual cases, which could distract the Board from its primary mission -- strategic over sight and long-term planning. In addition, we believe that providing members of the Board with access to confidential taxpayer information (especially on a non-aggregated basis) is fraught with danger, not only to the privacy interests of particular taxpayers but also the members of the Board, who may find themselves confronting conflicts of interests.

8. If an IRS Oversight Board is established with Treasury, should board members be part-time or full-time employees?

TEI believes that members of the Board should be considered as part-time employees of the government. We also believe that the majority of the Board should come from outside the Treasury Department and the IRS.

Changing the Culture

9. Improving oversight and protecting the taxpayer are not the only things we need to be doing to respond to the problems uncovered at the IRS. We need to change the very culture of the agency itself That will require a complete new look at its organizational structure, its managerial rules, its performance measures, and its training programs.

a. One of the surprises of the Committee's investigation into the IRS is how fearful many employees are at how they are managed. They paint a picture of the IRS as a vindictive and unhappy place to work. What changes would you like to see in personnel rules and other procedures to change the culture of this organization?

b. There are a considerable number of people who feel that it is not possible to reform the culture of the IRS without dismantling the agency. For these people a whole new tax system that isn't dependent on a collection agency is the way to go. What is your response to people who, because of their experiences with IRS, believe this agency beyond saving?

c. During the September hearings employee witnesses testified that many IRS employees ignore the Internal Revenue Manual and other official procedures with impunity. Should IRS employees be required to follow the Internal Revenue Manual and other official procedures?

The task confronting the IRS is a daunting one -- enforcing the tax laws, processing 200 million tax returns annual, and collecting the $1.5 trillion revenues necessary to run the federal government in an efficient, fair, and evenhanded manner. Most people pay their fair share of taxes voluntarily, without problems -- indeed, without even coming into contact with an IRS employee. Other taxpayers, however, for a variety of reasons do not. The Senate Finance Committee's hearings last fall demonstrated that the IRS has not always succeeded in its dealings with those other taxpayers. Although TEI and its members have experienced the same frustration that has prompted calls to "abolish the IRS" or "tear the tax system out by the roots," we regret that the "easy" solution to what ails the IRS -- dismantling the agency -- would likely be the wrong one. Some type of organization is necessary to collect the taxes Congress imposes, and it would be unwise to assume that a new agency could avoid all the shortcomings of the IRS simply because it is a new agency. The key, again, is to focus on particular problems, to attack and resolve them, and to move forward.

There is no magic cure for what troubles the IRS, no panacea. For IRS reform to be successful, the agency must address training, operations, technology, culture, and taxpayer education. These issues are interrelated. TEI agrees that the culture of the IRS must be changed. Granting the Commissioner greater discretion in recruiting, rewarding, and retaining the agency's top managers is critical to fulfilling one of the objectives of IRS restructuring and reform -- ensuring that taxpayers deal only with IRS employees who are trained adequately and possess the skills and tools necessary to do their jobs well. Continuity among the IRS's senior managers -- assuming they are qualified to do their jobs -- is essential if the IRS is to operate efficiently and regain the trust of Congress and the American people. Stated simply, employees must be given the training, tools, and resources necessary to do their job, they must be rewarded for doing it well, and they should be held accountable for failing to do so.

In any large organization, there will likely be disenchanted employees, and their legitimate concerns must be addressed (and not blithely dismissed as coming from malcontents). At the same time, the agency's organizational standards -- whether set forth in the Internal Revenue Code, the Internal Revenue Manual, or elsewhere -- should not be compromised. In this regard, we note that the type of guidance provided in the Internal Revenue Manual is varied: some provisions are mandatory in nature, and others are intended only to be advisory, with the affected employees having discretion to use their own judgment in applying general standards to particular situations. Clearly, mandatory procedures should be followed, and employees should be held accountable for violating the Manual's dictates. We also believe that, in appropriate cases, Congress should consider codifying certain provisions in the Manual (as it has in the past).

Simplifying the Code

10. I think that we would probably all agree that a significant part of taxpayers' problems with the IRS stem from the complexity of the code. What parts of the code do you think are prime candidates for simplification?

Congress itself bears a full measure of responsibility for the problems that plague the tax law and its administration. TEI respectfully submits that the biggest steps Congress can take toward meaningful reform are, first, to resist the temptation to use the tax system to address every social or economic ill that confronts the Nation and, second, to work to simplify the tax laws already on the books. Without a doubt, the taxpayer rights title of the IRS Restructuring Bill is important and TEI agrees that many of the proposed protections are laudable and merit enactment. We submit, however, that the biggest abuses come not from excessive actions by IRS personnel but from the highly complicated laws and onerous administrative procedures that Congress enacts and the President signs into law.

TEI believes that the complexity of current law is a primary impediment to the effective operation of the tax system and the efficient management of the Internal Revenue Service. Stated simply, if the law is unadministrable, how can the IRS be expected to administer it in an efficient manner? Accordingly, TEI supports the provisions of the bill that would require Congress to focus more finely on the complexity of tax law proposals, for example, by requiring the Joint Committee on Taxation to prepare a "tax complexity analysis" for legislation reported out of the tax-writing committees and for all conference reports that would amend the Internal Revenue Code. By requiring that some attention be paid to exploring the relative complexity of tax law proposals and less complex alternatives, the IRS Restructuring Bill may enable Congress to make meaningful incremental changes. Among the areas of the law that we believe deserve attention are the following: the alternative minimum tax, the provisions dealing with the taxation of international operations, and the employee benefit provisions. In addressing these provisions, we believe it important for Congress to receive testimony from front-line IRS technical experts on the administrability of pending changes.

Tax Executives Institute appreciates this opportunity to respond to Chairman Roth's questions. We should be pleased to respond to additional requests for assistance.